Italy’s UniCredit was inundated with orders for a Eu1.5bn dual tranche OBG today (Wednesday), a rare format in euro covered bonds made more unusual by inclusion of an FRN, which bankers said caters to growing bank treasury demand but also benefits issuers.

Leads Crédit Agricole, Credit Suisse, Danske, ING, Natixis and UniCredit collected around Eu4bn of orders (pre-reconcilation) for the Eu1.5bn maximum dual tranche obbligazioni bancarite garantite (OBG) issue, which will be split between a Eu1bn 10 year fixed rate deal and a Eu500m three year floating rate note (FRN).

The deal met with strong interest from early on in the execution process, with initial price thoughts (IPTs) generating more than Eu2bn of indications of interest, slightly skewed toward the 10 year tranche, according to syndicate officials at the leads.

As a result, the leads were able to tighten the spread, from IPTs of 105bp-110bp over mid-swaps for the 10 year tranche to a re-offer spread of 98bp over, and from IPTs of the 65bp over three month Euribor area for the FRN to 57bp over. Official guidance was revised once during the execution process.

Both tranches were significantly oversubscribed and sized relative to demand, according to a banker on the deal.

Dual tranche transactions are not unprecedented in euro benchmark covered bonds, but have been rare of late, with a Eu1bn Pfandbrief for Landesbank Hessen-Thüringen in June last year having been the first dual tranche deal for several years.

Also and arguably more unusual is the syndicated sale of a floating rate note in benchmark size, with UniCredit’s thought to be the first such public deal. Floating rate covered bonds are common in other markets such as sterling, and German issuers have sold them in euros but syndicate bankers played down their significance as precedents given that these tend to be sub-benchmark size and privately placed.

But floating rate covered bonds could become more prevalent in the euro benchmark covered bond market and establish themselves as a new product, if still secondary to fixed rate deals, according to bankers on and off UniCredit’s transaction.

The combination of the FRN and fixed rate tranches “makes perfect sense”, said a syndicate official away from the leads.

“Issuers are conscious that Eu1bn is not a given especially after a lot of supply in the peripheral space so they are playing it safer,” he said. “It gives the issuer flexibility as there is FRN demand because LCR portfolios are buying it at the shorter end.”

Covered bonds are eligible as Level 2 assets for Liquidity Coverage Ratio (LCR) requirements under Basel III, and are set for this treatment or better under CRD IV, with there being a big push for the European Commission to upgrade them to Level 1 LCR status when it decides on the matter by the end of June.

The benchmark FRN is aimed at capitalising on the growing bid for covered bonds from bank treasuries and increased asset swaps in the 18 months, but also offers benefits to issuers, according to a lead syndicate official.

“FRNs avoid investors having to swap and make sense structurally for investors now, and once you add on the view on rates then you have two angles that should make this market a lot more appealing in general,” he said. “There was never any doubt in my mind that this trade would work but it was just a question of finding the right issuer to take advantage of it and set the right tone for the new product.

“You have a very risk-on environment and a national champion with a bit of spread and this flies.”

Being able to tighten the FRN spread from 65bp over to 57bp over is “a super-strong result for an untested product”, he added.

From an issuer standpoint the FRN offers more flexibility and more efficient funding, according to the syndicate official.

A syndicate banker away from the deal had questioned why UniCredit went for a FRN, seeing it as offering funding at a cost in line with a euro fixed rate OBG in three years, but the lead syndicate official did not agree, putting the savings at around 12bp.

Another syndicate official away from the leads was positive about the transaction, saying that although the FRN tranche took some people by surprise it made sense to him given increased bank treasury demand in covered bonds and was a long time coming.

However, he expects FRNs to be supported by the market but to remain a niche product as its appeal to issuers will depend on many factors specific to them.

UniCredit’s 10 year tranche was in a maturity popular in euro benchmark covered bonds so far this year, with five out of 12 new issues carrying this maturity. However, UniCredit is only the third peripheral issuer to tap the benchmark covered bond market this year, with senior unsecured debt having been the focus for peripheral supply.

Syndicate officials away from the leads were generally supportive of the pricing on the 10 year. One said the starting point was cheap but defensible while another put the new issue premium at 3bp on the basis of an interpolated curve, seeing UniCredit October 2020 OBGs at around 81bp over mid-swaps mid.

UniCredit’s deal comes as broader markets regain form after a small wobble yesterday (Tuesday), when Deutsche Pfandbriefbank (pbb) was the only FIG issuer out with a live deal.

It sold a Eu500m eight year mortgage Pfandbrief at 17bp over mid-swaps, the middle of guidance of the 17bp over area, with order books in excess of Eu500m including lead order interest. The unusual eight year maturity was mentioned as a factor limiting demand for the deal.

Goetz Michl, head of funding at pbb, said that the deal was launched after the issuer and the leads saw a window of opportunity.

“Actual demand was then, however, below expectations,” he said. “The term of the Pfandbrief was determined together with the leads. It reflects our longer term lending business and considerations about the spread we would be able to offer to the market. “As we are a regular issuer in the market this was only the first of several benchmark issues we have planned for 2014.”