Banca Monte dei Paschi di Siena (MPS) met with “unanimous” investor interest upon returning to the euro benchmark market yesterday (Thursday), allowing the leads to price the Eu1bn seven year covered bond at flat to fair value, according to a syndicate official on the deal.

Leads Commerzbank, Goldman Sachs, MPS, RBS and Société Générale went out with initial price thoughts of 175bp over mid-swaps for the Italian issuer’s first obbligazioni bancarie garantite (OBG) since March 2011. The decision was then made to tighten the spread on the back of strong indications of interest and go out with guidance of 165bp over.

“When books closed we had around Eu4bn of orders and 200 accounts,” said Jez Walsh, head of covered bond syndicate at RBS. “Pricing at 160bp over was flat to where we saw fair value, suggesting no new issue premium.”

The leads took two outstanding OBGs from MPS, a September 2016 and a February 2018, which were yesterday trading at 100bp over and 134bp over, respectively, and compared them with other Italian issuance, such as a UBI Banca September 2016 and a UniCredit January 2018 trading at 40bp over and 42bp over, respectively, to calculate the differential between MPS and its tighter peers. They then came up with a level that put the new MPS at a similar differential to its peers in the seven year part of the curve, with, for example, a UBI Banca January 2021 at 80bp over.

Yesterday afternoon the spread on the new issue tightened 4bp-5bp in the aftermarket.

“The transaction confirms the Siena-based lender’s ability to access capital markets and is testimony to its brand recognition among international investors,” said MPS.

Walsh said that prior to issuing, MPS had received “unanimous” feedback from investors that they wanted to participate in the deal, and the levels of oversubscription highlighted the continuing strength of the peripheral markets.

According to Walsh, the Italian issuer had been seeking a market return for some time, but a vote against a capital increase from its main shareholder in January had prevented this. However, following that shareholder’s decision to reduce its holding from 28% to 6%, MPS decided to return to market, first with a Eu1bn five year senior unsecured late last month, which was priced at 275bp over.

The decision to go out first with a senior unsecured was linked to the strength of investor appetite for that instrument, with Walsh highlighting a recent preference among Italian issuers to use senior unsecured over covered bonds while the appetite is there.

“Covered bonds are a more defensive instrument, and are always able to find a place within investor portfolios,” said Walsh. “So it’s natural that when you see a very strong senior market you decide to take that route.”

He said that market sentiment and reaction to the senior unsecured was extremely positive, and that deal is now trading 30bp inside re-offer.

“The natural consequence of this success was the issuer’s decision to access the covered bond market and present investors with another strong message showing that MPS is back on track,” said Walsh.

The size of MPS’s cover pool restricted the size of the issue to a maximum of Eu1bn, said Walsh, who added that the issuer asked RBS to sound investors’ preference for a seven or 10 year maturity.

“We saw little difference in investor appetite between seven and 10 year maturities and recommended either trade, with the issuer finally deciding on seven years,” said Walsh. “The direction of travel for spreads is currently tighter and that was in the issuer’s thinking when deciding on maturity.”

Walsh added that the decision to go for a seven year maturity would allow the issuer to benefit from its success should it choose to return with a 10 year at a later stage.

The UK and Ireland took 46%, Italy 32%, Germany and Austria 10%, France 3%, Iberia 3%, Switzerland 3%, the Benelux 1%, the Nordics 1%, and others 1%.

Asset managers were allocated 63%, banks 17%, insurance companies and pension funds 10%, private banks 2%, central banks 1%, and others 7%.