A landmark Eu750m long five year Italian covered bond for UniCredit that was priced 100bp inside BTPs yesterday (Tuesday) carries a positive message for Italy, said a funding official at the bank, while syndicate officials focused on the encouraging outlook for supply.

“This is one of the most important deals that I have ever been involved in,” said Philipp Waldstein, head of group strategic funding and portfolio at UniCredit.

“It is great for Italy,” he told The Covered Bond Report. “It is a very strong political statement for the Italian economy because it demonstrates there is still high quality, low credit risk in Italy.”

UniCredit was confident that it could successfully get a deal away during the summer season, partly thanks to it having come to market in August last year, with its and Italy’s last benchmark covered bond. The new transaction also came after UniCredit announced results for the first half of the year on 3 August.

“We had been working on this deal for weeks and months, and we have been backed by some strategic investors that had been looking to buy the product for quite a while,” added Waldstein. “Rates had moved up slightly – not massively, but this helped to achieve a 4% coupon, which was a key driver for some of the accounts we spoke to.

“Finally, the combination of a calm market and achieving an agreement on the spread side led to the deal flying. We were surprised by the incredible response from the market because it closed in 20 minutes – had we kept the book open for longer we would have had even bigger problems allocating.”

Leads Crédit Agricole, Natixis, Société Générale and UniCredit opened books at 1030 CET with guidance of 290bp-295bp over mid-swaps, with the issue size capped at Eu750m from the outset. According to UniCredit, more than Eu2.2bn of orders from over 110 accounts were placed within an hour.

The spread for the January 2018 issue was fixed at 290bp over mid-swaps, which the leads said was equivalent to 97.5bp through the underlying 4.5% February 2018 BTP.

“To my knowledge, there has never been a covered bond printed below its respective government curve,” said Waldstein. “And here we are not talking about a couple of basis points – this is 100bp below.

“It’s only possible in this awkward and particular situation where on the one side you have the indebted Italian government trading at wide levels and on the other side granular residential mortgages with exposure to a non-leveraged, very stable private sector in one of the wealthiest regions of Europe.”

A syndicate official at one of the leads said that, with OBGs already trading well inside BTPs in the secondary market, the spread inside the Italian government did not come as a complete surprise.

“The pricing level and level of interest demonstrated that Italian residential mortgages originated by a national champion are much better perceived than the domestic sovereign,” he said. “The timing was also decisive as the deal was launched in the context of a lack of supply and a much better market backdrop and investor mood after Draghi’s supportive comments in early August.

“Clearly, there is a decreasing correlation between peripheral sovereigns and domestic covered bond spreads when it comes to national champions and bank sponsors like UniCredit. The covered bond squeeze in the secondary market, the level of redemptions in covered bonds, as well as the overall lack of investment alternatives also made this deal possible at this level.”

According to UniCredit, Italy accounted for 61% of placement, Germany/Austria 16%, the UK/Ireland 7%, Iberia 5%, France 4%, Switzerland 4%, the Benelux 2%, and the Nordics 1%. Funds were allocated 82%, insurance companies 12%, central banks 3%, and banks 3%.

“The high order quality and the non-existent price sensitivity is outlined by an over 95% allocation to real money accounts, namely, funds, central banks and insurance companies,” said UniCredit.

“The result is a strong reflection of the high class cover pool quality, consistent investor communication and confirms UniCredit’s leading position in the covered bond market,” it added.

A banker at one of the leads said that the deal was quoted 15bp tighter on the break.

Syndicate officials said that other issuers will now be looking to issue sooner rather than later.

“The Nordics are back and there is also interest from France, so a pipeline is building up and mandates are being awarded,” said one. “With the success of UniCredit, all the issuers are aware that the market is there.

“This puts them in a position where they do not have to wait too long and face a queue in September.”

Italy and Bavaria are among parts of Europe with public holidays today, and while the launch of a new issue tomorrow (Thursday) was not ruled out, next week is considered a more likely time for further supply.

Whether or not a Spanish issuer will follow Italy’s UniCredit is a question that is being discussed by syndicate officials, particularly given the relative level versus the sovereign.

“Will this type of spread differential between core cédulas and Bonos be possible?” asked one. “Future will tell, but UniCredit has certainly paved the way for that.

“We can now wait and see the reaction of Santander and BBVA.”