Italy’s Banca MPS launched its second benchmark covered bond of the year today (Tuesday), a Eu1bn 10 year that will be priced at the tight end of guidance but met with a considerably less enthusiastic response than that for a seven year in April.

Bank of America Merrill Lynch, Deutsche Bank, HSBC, MPS Capital Services and UBS began marketing the obbligazioni bancarie garantite (OBG) issue this morning with initial price thoughts (IPTs) of the 150bp over mid-swaps area. This generated interest approaching Eu1bn, according to an update shortly after 1100 CET, when guidance was announced as the 150bp over area, in line with IPTs.

The order books grew to nearly Eu1.3bn, involving some 115 accounts, and the spread was fixed at 148bp over, according to an update from the leads shortly before 1300 CET.

Syndicate bankers away from the leads approved of the spread at which the OBGs were marketed, but some were surprised by investors’ initial response to the deal, which they said was weaker than they would have expected. The comments were made after an update from the leads said orders were approaching Eu1bn.

“I was expecting a bit more excitement,” said one. “It’s fine, but I was expecting an update that books were well above Eu1bn.

“The market is a touch softer today, but covered bonds have been really well bid in the past couple days.”

He acknowledged that momentum in the deal could pick up after the release of guidance.

Another said that pricing 2bp inside guidance is “not a bad result” and that overall the deal was more positive than negative. However, he had earlier said that the lack of any move in the spread from IPTs to guidance “is never a strong sign” and that although the spread looked fair – not offering much of a concession but not aggressive either – the deal did not develop as strongly as he thought it had reason to. He cited, as did others, a recent capital increase by MPS and other improvements in the bank’s credit quality.

Banca Monte dei Paschi di Siena (MPS), which had to be bailed out by the Italian government, raised Eu5bn in capital via a rights issue in June, which will be used to repay a government loan and strengthen the bank’s capital buffers. On Monday of last week (30 June) Moody’s upgraded MPS OBGs from Ba1 to Baa3 after an upgrade of the issuer’s rating from B2 to B1.

Another syndicate official had earlier this morning said that he had yesterday suggested a final spread of 140bp over with a starting point at 150bp over. The 140bp over level would not include any new issue premium, he said. Another syndicate banker said that the 150bp over level was “eye-catching” and that the deal should work well.

Today’s deal is MPS’s second benchmark covered bond of the year, coming after a Eu1bn seven year in April that drew more than Eu4bn of orders and was priced at 160bp over mid-swaps. One syndicate banker this morning said the 2.875% April 2021 OBG was trading at 130bp over, bid, while others this morning put it at 124bp or 125bp over.

One said the Italian government bond curve was worth some 30bp between seven and 10 years, with May 2021 BTPs at around 103bp over mid-swaps and March 2024s at 131bp over, and that the level on MPS’s OBGs looked fair on that basis.

A spread of 150bp over would offer a yield of nearly 3%, he said, which “should be enough to sell it”.

He contrasted MPS’s covered bond with the reception for a 10 year deal from the German state of Hessen, noting that even though that the yield on that was less than 1.5% the transaction nonetheless attracted strong demand and the spread could be tightened for a deal of decent size.

Hessen priced a Eu1.25bn June 2024 deal at 4bp over mid-swaps today, the tight end of guidance of the 5bp over area that was revised from 5bp-6bp over. Valid orders totalled Eu1.6bn and the yield was 1.475%, according to one of the leads – Commerzbank, Deutsche, JP Morgan, Helaba and UniCredit.

The outcome of Hessen’s deal compared with the response to MPS’s deal, at least in the initial stages, is a continuation of a recent trend for core deals to be more oversubscribed than peripheral transactions, according to the syndicate official.

Similar dynamics can be observed in the secondary market, he added, with German Pfandbriefe tightening by 2bp-3bp last week but interest in peripheral paper more subdued.

The contrast between Hessen’s deal and MPS’s would suggest that a core covered bond would be the best next new issue, he said, adding that core issuance will probably benefit more, at least initially, from Liquidity Coverage Ratio (LCR) requirements.

The European Commission was due to decide by the end of June on the final eligibility criteria for LCRs. Based on a leaked document from June certain, higher rated, covered bonds are expected to count as up to 70% of Level 1 assets and other, lower rated covered bonds, as Level 2A.