Italy’s UniCredit made its first capital markets foray of 2013 via a new covered bond issue yesterday (Monday), lured to the market in part by a strong rally in Italian government bonds, according to an official at the issuer, who said the bank may not necessarily sell another OBG this year.

Waleed El Amir

The obbligazioni bancarie garantite (OBG) issue, a Eu1bn no-grow seven year deal, was highly sought after by investors, with leads Banca IMI, Lloyds, Natixis, RBS and UniCredit building an order book of around Eu6.5bn and 302 investors participating.

The transaction was only the second benchmark covered bond this year, following a Eu1bn 12 year for France’s Caisse de Refinancement de l’Habitat on Friday. The level of activity contrasts sharply with a frenzied start to the new year in 2012 for covered bonds and a more active senior unsecured FIG market so far this year, taking into account the US dollar and sterling market as well as euros.

Waleed El Amir, head of strategic funding and portfolio at UniCredit, told The Covered Bond Report that the issuer opted for a covered bond in part because of senior unsecured issuance plans by other UniCredit group entities.

“We wanted to stagger the deals so that the covered bond wouldn’t compete with other group supply,” he said.

UniCredit’s group-wide borrowing requirement for 2013 has not been officially published yet, but El Amir said that it is lower than the previous two years’ and that the group last year raised more funding than earmarked in its 2012 plan, and that UniCredit SpA may not necessarily tap the benchmark covered bond market again this year.

“The problem for many banks is a lack of underlying assets given declining residential mortgage origination in Europe,” he said.

“We will be a rarer issuer in the market this year, with some senior unsecured to do and some capital, but with the focus likely to be on capital, which I expect will be a trend for banks.”

The CBR understands that there was no link between the new covered bond issue and possible repayment of LTRO funds, which market participants have said could prompt supply early this year.

In coming to the covered bond market yesterday UniCredit was taking advantage of a technical imbalance between supply and demand in favour of issuers, said El Amir, and a strong rally in Italian government bonds.

“We do not like the word ‘periphery’ because we are a pan-European bank, but after a very significant rally in the BTP curve over the past 10 days or so the periphery was very much in favour,” he said. “Also, more investors were back at their desks, and those are some of the main drivers for why we chose to come to market yesterday.”

The issuer is “extremely happy” with the transaction, according to El Amir, given strong demand, a well diversified and granular order book, and pricing in line with its target. Out of 302 orders, 142 were for less than Eu10m, 78 for Eu10m-Eu20m, and 82 for more than Eu20m, with the average ticket size standing at Eu21.65m, according to lead syndicate official.

The deal was priced at 150bp over mid-swaps, 10bp-15bp tighter than initial spread indications of 160bp-165bp over, with guidance thereafter having been set at 160bp over and then revised to 155bp over. The OBG came 94.6bp through Italian government bonds maturing in February 2020.

“Our aim was to print at 150bp over,” said El Amir, “and given where comparables were trading the price talk of 160bp-165bp over was on the generous side, but we preferred to take this approach and build momentum rather than go out too tight and risk pushback.”

At 150bp over the pricing did not incorporate a new issue premium, but this was generally the case in what is a “hot market”, he added.

“We are extremely happy with the trade,” he said. “It was priced fairly, but with the deal having tightened by around 7bp yesterday investors are also benefitting.”

Some bankers away from the leads said that the spread could have been set tighter at the outset of the trade, but that the final pricing was appropriate, although some felt the re-offer spread was cheap.

A lead syndicate official said that initial spread thoughts took into account trading levels for comparables such as an October 2021 issue, seen at around 158bp over, and BTP levels, and that the transaction worked very well.

“Having more than 300 investors show confidence in the transaction is fantastic,” he said, “and everyone is happy.”

“If it opens the door for other Italian issuers then that’s even better.”

Funds took 54% of the bonds, banks 30%, insurance companies 12%, central banks 3%, and others 1%. Germany and Austria were allocated 37%, Italy 18%, France 15%, the UK and Ireland 11%, the Benelux 6%, Asia 4%, Nordics 3%, Switzerland 3%, Spain 2%, and others 1%.

“We had the Who’s Who of accounts,” said UniCredit’s El Amir, “even a few from the Middle East, so there was very diversified investor base involved, showing a real appreciation of our credit and our covered bond programme.”