Mediobanca increased the size of an inaugural OBG benchmark to Eu750m on the back of strong demand for a rare debut in the 10 year maturity yesterday (Thursday), emphasising support for Italian covered bonds beyond the national champions, which totalled Eu2.75bn this week.

Mediobanca headquarters in Milan

The aggregate supply is understood to be the most in the space of a week from outside national champions Intesa Sanpaolo and UniCredit. On top of this, Italy sold a Eu5bn seven year BTP on Wednesday and held further auctions this morning.

“It’s clearly been an Italian week and we have seen such great support from the market in all three deals,” said Ralf Grossmann, head of covered bond origination at Société Générale – a lead on all the week’s Italian covered bonds.

The positive tone was a far cry from that which might have been expected when Silvio Berlusconi threatened to bring down the Italian government the weekend before last.

“Between that Saturday evening and the Wednesday when it was resolved, obviously we had some uncertainties,” said a banker at one of Mediobanca’s leads. “But ultimately we saw the best possible outcome and were left in an even better position than beforehand.”

After UBI Banca sold the biggest OBG of the year on Monday, a Eu1.25bn seven year deal, and Banca Popolare dell’Emilia Romagna (BPER) debuted with a Eu750m five year OBG on Wednesday, Mediobanca chose the 10 year maturity for its inaugural benchmark covered bond yesterday.

According to SG’s Grossmann, since the collapse of Lehman Brothers only four other issuers have debuted in the 10 year maturity – one Austrian, one UK and two French – so none from the periphery.

Another banker involved in the deal said that Mediobanca was confident in debuting at the long end of the curve since it considers its cover pool to be of a higher quality than those of its peers, for example having higher seasoning, lower than average arrears and a very strong origination policy for its mortgages. He said that the bank was also keen to get as efficient funding as possible – with the longest maturity and lowest spread – given that it is perceived as being one of the top Italian names, being priced close to Intesa and UniCredit in senior unsecured.

He said that during the roadshow Mediobanca had discussed going out to a seven or 10 year maturity and that investors had been open to the possibility, and that the bank had been further encouraged by the success of UBI Banca’s seven year on Monday.

“Mediobanca wanted to differentiate itself and position itself in the same bracket as the top names,” he said. “And ultimately it was able to extend the maturity without giving away too much spread.”

A syndicate official at one of the leads said Mediobanca enjoyed support from a very diverse and high quality range of accounts. Leads Barclays, Commerzbank, Mediobanca, SG and UniCredit built a book of more than Eu1.7bn, comprising 115 orders, leading the issuer to increase the size of the issue from its initial target.

“The response was a function of a market seeing volatility easing after the resolution of the Italian political situation last week,” he added, “but also of cash rich investors looking for higher yielding opportunities offering good value.”

He acknowledged suggestions that the tightening from initial price thoughts of 160bp-165bp to the ultimate re-offer spread of 150bp was significant, but said that the deal still offered good value at the re-offer level, especially versus where Mediobanca’s established peers were trading, but also as a good diversification for investors wanting to get Italian exposure. He said that a new UniCredit 10 year would probably come at 125bp-130bp over mid-swaps, meaning that the pick-up offered by Mediobanca was 20bp-25bp – in line with the pick-up of around 25bp the bank trades at relative to Intesa and UniCredit in senior unsecured, where Mediobanca has been more active.

The new OBG was said to be around 5bp tighter this morning.

Meanwhile the syndicate official noted that the 3.375% coupon on offer was also “quite healthy” in the low yield environment.

Germany and Austria were allocated 28% of the issue, Italy 26%, France 18%, the UK and Ireland 16%, Iberia 4%, Switzerland 2%, the Benelux 2%, and others 4%. Fund managers took 57%, insurance companies and pension funds 22%, banks 15%, central banks 4%, and others 2%.

The covered bonds are rated A by Standard & Poor’s.