A debut benchmark covered bond for Italy’s BPER yesterday (Tuesday) was a first step in an LTRO exit strategy, according to its head of finance, while UBI Banca’s head of funding said its OBG return on Monday came as spread compression allowed for positive carry.

Banca Popolare dell’Emilia Romagna (BPER) has had a covered bond programme in place since September 2011, but until yesterday it had only issued two bonds off it and these were fully retained, according to Roberto Ferrari, head of finance at BPER.

Yesterday BPER sold a Eu750m five year obbligazioni bancarie garantite (OBG) to make its public debut in the asset class, and it intends to return to the market as part of plans to replace funding obtained via the European Central Bank’s longer term refinancing operations (LTROs).

“We don’t need the liquidity but as we participated in the LTROs for Eu4.5bn we are planning an exit strategy that means we will again issue covered bonds in the future,” Ferrari told The Covered Bond Report. “This was the first step of the LTRO exit strategy.”

BPER is aiming to fully redeem its LTRO borrowings by early 2015 with a manageable impact on interest margins, said Ferrari.

Leads Citi, Mediobanca, RBS, Société Générale and UBS built an order book of around Eu1.6bn, with around 106 accounts participating, and priced the Eu750m five year deal at 215bp over mid-swaps. The issuer had been targeting a Eu500m deal.

The final pricing was also better than the issuer’s target for the spread versus Italian government spreads. At 215bp over, the deal came around 28bp back of BTPs, said Ferrari, with the issuer’s target having been a maximum pick-up of 30bp over BTPs.

The 215bp re-offer spread came after initial price thoughts of the 225bp over area, with guidance subsequently set at the 220bp over area.

“We have a positive impression of the deal,” said Ferrari. “Within 30 minutes we already covered our Eu500m target and by 10 o’clock we had more than Eu1bn of orders so we could increase the size to Eu750m.”

He highlighted strong demand from foreign investors, who accounted for nearly half of the orders, as a positive.

Italy took 53%, Germany and Austria 15%, the UK and Ireland 12%, the Nordics 7%, Iberia 6%, others 3%. Fund managers were allocated 61%, insurance companies and pension funds 18%, banks 16%, and others 5%.

“We saw that there is still a strong search for yield and collateralised bonds,” he added. “Covered bonds in terms of their security and liquidity are probably the most valuable financial instrument for issuers and investors.”

A spread of 215bp over mid-swaps for five years’ worth of funding is more expensive than the cost of ECB funding, said Ferrari, but “not unmanageable”.

BPER’s covered bonds are expected to be rated Baa2 by Moody’s, which is the only rating agency the bank has lined up for its OBGs. Ferrari said that the issuer is weighing up whether to obtain a second rating.

“The quality of our cover pool is very high,” he said. “It’s the same as the RMBS we have retained for use with the ECB, which are rated AA by S&P and Fitch.”

UBI return well prepared

BPER’s deal came a day after UBI Banca sold a Eu1.25bn seven year covered bond on Monday, a deal that had been on the issuer’s agenda for several weeks, an official at the issuer told The CBR, with a compression of spreads luring the issuer back to the market.

The Italian bank priced the OBG issue at 148bp over mid-swaps on the back of more than Eu2.1bn of orders via leads Barclays, Crédit Agricole, Deutsche Bank, Natixis, Société Générale and UniCredit. It is the biggest Italian benchmark covered bond this year.

“The transaction was excellent,” said Giorgio Erasmi, head of funding at UBI Banca, “as we were able to tighten the spread from IPTs and the investor response was very positive.”

The leads initially marketed the deal at the 155bp over mid-swaps area before setting guidance at 150bp-155bp over, which they later revised to 150bp plus/minus 2bp.

The deal is UBI’s first in benchmark covered bonds since February 2011. Erasmi said that the issuer stayed away from the market because the spreads at which it would have been able to issue did not make economic sense for the issuer.

“In the past the new issue spreads for UBI were not in line with the spread we were going to receive on our lending,” he said. “Now we have a positive carry between funding and lending.”

A transaction from the issuer had been rumoured for some time, with UBI eventually publicly announcing a mandate on Friday. Erasmi said that the issuer had been preparing a transaction since last month and had for several weeks been ready to tap the market when it felt an issuance window was available.

UBI launched its deal without having been on a formal roadshow, but Erasmi noted that the issuer regularly met with investors, including many one-on-ones, during its more than two year absence from the benchmark covered bond market.

It announced its deal on Friday after a tumultuous week in Italian politics, with fears that ex-prime minister Silvio Berlusconi would bring down the country’s governing coalition having triggered volatility in Italian assets. Berlusconi ended up changing his position before a vote of confidence on Wednesday, announcing that his party would support the government, and Laurence Ribot, syndicate at Natixis, says that by Friday some stability had returned.

“And because there didn’t seem to be much risk in terms of the weekend newsflow we decided to announce the mandate to position the issuer in the pipeline,” she said. “That gave visibility for investors and allowed us to execute the deal on Monday because investors had been given the heads-up and some time to prepare.”

The leads took into account secondary market spreads for UBI covered bonds and Italian government bond levels to decide where to pitch UBI’s new issue, according to Ribot.

At 148bp over, the OBG came with a new issue premium of some 5bp and around 40bp through BTPs, she said.

“The aim was to do Eu1bn and although the market was more positive on Italy there was still a fair amount of volatility and globally the sentiment was a bit cautious, so we wanted to offer value,” she said. “It got off to a great start and worked really well.”

Some 160 accounts participated in the transaction. Italy took 40% of the bonds, Germany and Austria 28%, France 16%, the UK 9%, the Benelux 3%, Scandinavia 2%, and other 2%. Asset managers were allocated 60%, banks 18%, insurance companies and pension funds 19%, and others 3%.

Pass-through consideration on the agenda

BPER’s and UBI’s deals are among the first benchmark covered bonds to hit the market since NIBC sold a pioneering Eu500m five year conditional pass-through covered bond last Tuesday (2 October), with several market participants highlighting the structure’s wider market potential and the interest it has attracted from other issuers, particularly those in peripheral countries.

JP Morgan analysts said that they expect other issuers to emulate what is a “sensible structural development” and singled out Italy and the UK as jurisdictions where the pass-through structure would make a lot of sense.

“We believe this model is crying out for adoption by smaller issuers from both Italy and the UK, where the structured framework is currently used,” they said.

Asked whether BPER is considering partial pass-through covered bonds, Ferrari said that the issuer is discussing the structure.

“We are reviewing it to make up our mind about it,” he said.

Asked about UBI’s interest in a partial pass-through covered bond structure, Erasmi said that it is a topic the issuer will discuss in the future but that it has not made any decisions about whether or not to pursue it in relation to its own issuance.

Photo: ABIEventi