SME covered bonds could be enthusiastically welcomed by Italian financial institutions if certain key conditions are met, the head of finance at an Italian bank told a conference hosted by LBBW on Friday, although delegates at the event in Mainz expressed scepticism towards the product.

Paolo Altichieri (left) at the LBBW event in Mainz

Paolo Altichieri, head of finance at Banca Popolare di Vicenza, told delegates at the 8th LBBW European Covered Bond Forum that there is currently a lot of uncertainty around covered bonds backed by loans to small and medium sized enterprises, but that he would take them up immediately if certain conditions were present.

He said that for such instruments to take off, legislation is necessary. He noted that Italian legislation aimed at creating SME covered bonds was going through parliament and that the Ministry of Economic Development had indicated that this could be in place by the end of the month. (See here for previous coverage.)

Should this materialise, the Bank of Italy would then need to put in place specific rules governing the new instruments, Altichieri added, saying that he would like to see it issue stringent criteria and transparent regulations.

“If these conditions come to pass, these covered bonds could prove very popular with Italian financial institutions,” he said.

Altichieri stressed the importance of the criteria that would be necessary on the types of loans that would be eligible, and the percentage of secured versus unsecured loans, for example. He noted that the Ministry of Economic Development – “putting lots of presents under the Christmas tree” – had also put together a framework for the issuance of securities by SMEs, and that this could provide a basis for standards for SME covered bonds.

According to Altichieri, Banca Popolare di Vicenza is the only Italian bank to have issued an SME ABS since 2005, having sold one in July last year, and he noted that one aspect of this that had been well received was that the average size of the loan was Eu153k – not much larger than the average residential mortgage and hence offering comparable granularity, which could help attract investors.

He said that SME covered bonds would be “one ingredient” in helping the flow of finance to SMEs, likely being better than ABS in terms of funding. A fall of 25% in lending to the real economy from 2008 to 2013 by Italian banks had occurred, which did not reflect a fall in demand for SME financing, and were SME covered bonds to take off, they would definitely be beneficial, Altichieri concluded.

However, other Italian representatives spoken to by The CBR at the event played down expectations of issuance any time soon.

An investor on the same panel as Altichieri said that a legal framework was a “must-have” before he would even start to consider investing – not only in Italy, but more generally in SME covered bonds. He said that even then it was doubtful he would invest and that he did not consider existing contractual SME covered bonds, i.e. those of Commerzbank, to be covered bonds at all. Such issuance would be handled by his ABS colleagues, he added, but suggesting that they had not yet found issuance interesting.

A broader poll of investors attending the LBBW event also found a lack of enthusiasm for SME covered bonds. Of 77 investors responding to a live poll, only two were already invested in SME covered bonds, 12 said they were open to it, but the remainder said they were not invested in them and did not intend to participate.

Investors in the audience also demonstrated a conservative outlook when asked what jurisdictions they plan to overweight and underweight, with German covered bonds being the most popular overweight and southern Europe the most popular underweight.

However, a final poll question suggested that the Mainz audience might have a built-in German bias: when asked who they expect to triumph in this summer’s football World Cup, Germany came out on top, with 49 votes, while Spain ranked only fourth (14) after Brazil (35) and Italy (18).