Pbb got benchmark covered bond supply off to an early start this week today (Monday), meeting with nearly Eu600m of demand for a “solid” Eu500m no-grow seven year deal, with bankers expecting more issuers to hit a generally supportive market despite uncertainty over Italy.

Italy's parliament holds its first post-election session on Friday

Leads Commerzbank, DZ Bank, Goldman Sachs, LBBW and UniCredit took indications of interest on the basis of the mid to high 20s over mid-swaps for the mortgage Pfandbrief this morning, and then set guidance at 25bp-27bp. Around 15 minutes before they were due to close the order books they fixed the re-offer spread at 25bp over.

Orders totalled nearly Eu600m, according to a lead syndicate official, who said that the order book was of high quality, with more than 70 accounts participating and good international distribution in addition to domestic demand.

“Pbb is a name that tends to attract a lot of orders, but of relatively small size,” he said, “and the size of the order book is line with recent deals for the issuer.

“It was a very solid trade.”

At 25bp over the pricing incorporates a small new issue premium of 2bp-3bp, he added.

Syndicate bankers away from the leads said the level on pbb’s deal looked appropriate, with one comparing it with secondary market levels of 8bp over and 18bp over, mid, for January 2017s and June 2019s.

“The level looks good,” he said. “Some people might point to the October 2019s, but they’re old bonds, have a high cash price and are public sector backed so I would ignore that point in the curve.”

The January 2017 issue is a Eu500m four year deal that was priced at 8bp over on 23 January, and was pbb’s most recent benchmark covered bond before today’s transaction.

Another syndicate banker put pbb June 2019s at 20bp over and said the issuer’s new deal was offering a small pick-up.

“It looks very fair,” he said. “I don’t think it will price through the curve although you could argue that 25bp over would be flat.”

Another said he had the impression that pbb’s deal was slow to build, but that the spread met expectations and that the market is not easy for Pfandbriefe – “getting more and more difficult” given tight spreads and low yields.

Pbb’s deal comes after the issuer on Thursday announced 2012 results, including a pre-tax profit of Eu124m, and launched an online retail deposit-taking service in a bid to broaden its funding base. (Click here for more.)

There are no covered bonds in the public deal pipeline, although syndicate bankers said that there can be a quick turnaround if a decision to proceed is made, and that broader market conditions are generally supportive, though tricky to negotiate.

“The market is in pretty decent shape, said one, “but the only question is whether people question current valuations at these current yields, spreads, especially in the periphery, because the Italy situation is far from unresolved.”

Bankers said that they were not expecting a rush of deals, but that they would be surprised if there wasn’t more issuance this week.

“The market seems pretty quiet,” said a syndicate official, “although we’re encouraging people to look at the market and things can materialise pretty quickly.”

Other German issuers are eyeing the market and covered bond supply from a Spanish issuer is rumoured, according to some syndicate officials. One said that market conditions are good, but that issuers should not expect “exploding order books”.

The last cédulas benchmark was a Eu500m five year for Bankinter on 24 January, the issuer’s second new issue of the year and one that met with lacklustre demand after a spate of Spanish deals, but syndicate officials said that the market is open for cédulas issuance.

“I’ve been refreshing pricing for Spain and I suspect that a lot of them will be looking,” said one. “With Italy you would hold off, but for Spain the market is there, there is no issue over execution.”

They highlighted as a positive sign the presence of Spanish agency FADE in the market, with a five year deal, and Spanish government bonds’ recent outperformance versus Italy and tightening versus Germany.

FADE’s primary market move comes after Spain’s ICO sold a Eu1bn five year last Monday (4 March), which is said to have gone well. BBVA sold a Eu1.5bn three year senior unsecured issue at 273bp over mid-swaps last Tuesday (5 March).

“Spain is around 30bp tighter versus Germany than before the Italian election,” said a syndicate official, “while Italy is 30bp wider. In January the differential between Spain and Italy was 100bp and now it’s flat.”

Another said the convergence of Spanish and Italian government bond spreads was an encouraging development, even though it was primarily due to BTPs widening.

Fitch cut Italy to BBB+, on negative outlook, on Friday, but syndicate bankers said this was not a major event. BTP spreads widened by around 8bp-10bp this morning, said one.

However, Barclays covered bond analysts said this morning that following the Fitch downgrade they expect UniCredit covered bonds to be downgraded by one notch. They said that the impact on other Italian covered bonds is uncertain, but that in most cases they expect no rating impact.

“This analysis is based on the expected impact on the bank senior unsecured ratings (based on Fitch’s communications on recent bank rating actions) and Fitch’s covered bond methodology,” said the Barclays analysts. “If Fitch changes other analytical assumptions (i.e., sovereign cap for all Italian ratings, harsher assumptions in credit and/or cashflow analysis) there may be further adverse negative effects on the covered bond ratings.”