A Eu1bn seven year issue for Italy’s Banca Monte dei Paschi di Siena today (Thursday) confirmed the extent of demand for spread in the euro covered bond market, with more than Eu4bn of orders placed for the Ba1/A OBG and bankers saying a “blow-out” was to be expected.

Banca MPS's Palazzo Salimbeni

Leads Commerzbank, Goldman Sachs, MPS, RBS and Société Générale will price MPS’s first covered bond since March 2011 at 160bp over on the back of more than Eu4bn of orders. MPS’s obbligazioni bancarie garantite (OBGs) are rated Ba1 by Moody’s and A by Fitch, with today’s deal thought to be the first publicly placed Italian benchmark covered bond carrying a sub-investment grade rating.

The leads set initial price thoughts at 175bp over mid-swaps before revising the spread to go out with guidance of 165bp over. The spread was tightened further still and fixed at 160bp over on the back of the “huge” investor demand, with more than 200 accounts participating, according to a syndicate official at one of the leads.

He said the “extraordinary” level of oversubscription had allowed the spread to be fixed at flat to fair value, adding that “the periphery is exceptionally strong right now”.

The syndicate official said that he was unsurprised by the strength of demand, noting that a recent Eu1bn five year senior unsecured deal for the issuer had tightened by 30bp after pricing at 275bp over.

“If Monte dei Paschi works in senior format, it’s clearly going to work in covered,” he said. “Investors are looking at anything with a decent spread on it, whether it be something more subordinated or a peripheral issuer.”

Syndicate bankers away from the deal echoed this sentiment.

“MPS was always going to be a blow-out,” said one. “It’s a spread that was needed. There’s not a lot around with that spread.”

Another syndicate official away from the leads also said a strong response was to be expected.

“It’s the cheapest you can get,” she said.

The issuer paid the right price, according to another.

“It’s a great trade,” he said.

The lead syndicate official said MPS’s OBG issue was coming 48bp wider than Italian government bonds, which were trading today at 112bp over.