UBI Banca will price its first benchmark covered bond since February 2011 and the largest Italian deal of the year today (Monday), a Eu1.25bn seven year OBG that met with strong demand despite softer market sentiment, with other OBG issuers waiting in the wings.

A deal from the Italian issuer had been rumoured for some time, and comes ahead of potential supply from peers Banca Popolare dell’Emilia Romagna (BPER) and Mediobanca, which recently went on roadshows to present their OBG programmes.

UBI announced the mandate for its trade on Friday, thereby staking a claim to a slot in what syndicate bankers expect to be a busy week for primary markets across asset classes as issuers anticipate the impact of debt ceiling negotiations in the US.

Spain’s CaixaBank is already out with a three-and-a-half year senior unsecured deal at 170bp and Lloyds is out with a five year senior transaction, also in euros, at 70bp. A syndicate banker said that the three FIG deals were going well despite the market being somewhat weaker this morning.

UBI Banca has been absent from the benchmark covered bond market for some time, having last tapped it in February 2011. Neither BPER nor Mediobanca have sold benchmark covered bonds in the public market before.

Leads Barclays, Crédit Agricole, Deutsche Bank, Natixis, Société Générale and UniCredit will price UBI’s Eu1.25bn seven year obbligazioni bancarie garantite issue at 148bp over mid-swaps after building an order book of more than Eu2.1bn, pre-reconciliation.

The deal is the largest Italian benchmark covered bond this year and comes after Intesa Sanpaolo downsized a five year OBG from a targeted Eu1bn to Eu750m when it launched the deal on the second day of a major industry gathering in September. That issue was priced at 90bp over, while UniCredit sold a Eu1bn seven year issue at 95bp over on 22 August. The UniCredit October 2020s are trading at 114bp/105bp over, according to a syndicate banker away from UBI’s deal.

He said that he would have advised the issuer to start 5bp-10bp tighter and that the deal, at least in the early marketing stages, looked cheap relative to the curve but not materially so.

He suggested that the timing and execution of UBI’s deal was made somewhat more challenging by CaixaBank’s senior unsecured deal, which came with a wider spread and shorter maturity, and Italian supply in the form of a BTP auction on Thursday and possible additional OBG deals.

The UBI leads initially marketed today’s deal at 150bp-155bp over, which triggered more than Eu1.2bn of indications of interest. They then set official guidance at the 155bp over area before revising this to the 150bp over area plus/minus 2bp.

Italian government bonds with a September 2020 maturity were trading at around 185bp over when the order books on UBI’s deal were opened, according to a syndicate official at one of the leads. He put a UBI December 2019 OBG at 136bp over bid, and a January 2021 issue at 145bp over bid.

A syndicate official away from the leads said that at 148bp over, UBI’s deal was coming with a small new issue premium of around 3bp.

UBI’s deal comes two weeks after its OBGs were placed on review for downgrade by Moody’s, which rates the issuance A2. The review was prompted by a review for downgrade of the issuer’s rating (Baa2).

Maureen Schuller, head of covered bond strategy at ING Bank, said that UBI is the widest trading Italian covered bond issuer in its issuer rating segment, with its OBGs trading around 45bp over the UniCredit curve.

“The 45bp pick-up versus UniCredit or 17bp over Credit Emiliano in our view offers a performance cushion against the spread impact of the rating review at Moody’s,” she said. “UBI Banca has for example a one notch better A+ covered bond rating at Fitch than UniCredit.

“Although the rating pressure on Italian banks has been building in recent months, momentum with respect to the Italian government issues has improved. Italian covered bond supply may also still partly benefit from the Eu1.8bn in redemption payments made on Italian covered bonds last month, against Eu0.75bn in new issuance.”