Italy’s Banca MPS priced a Eu1bn 10 year covered bond yesterday (Tuesday), and although the level of demand fell short of expectations those involved in the deal said it showed the bank’s ability, and more generally peripheral issuers’ ability, to access the market in longer maturities. The OBGs were 4bp wider early this afternoon.

Banca MPS, Bank of America Merrill Lynch, Deutsche Bank, HSBC and UBS priced the obbligazioni bancarie garantite (OBG) issue at 148bp over mid-swaps, the tight end of guidance of the 150bp over area, which was in line with initial price thoughts.

The covered bonds were early this (Wednesday) afternoon trading 4bp wider, according to a lead syndicate official, with the peripheral market weaker overall today. Peripheral covered bonds are 1bp-2bp wider, while Portuguese government bonds had widened 20bp today but retraced some 3bp since, and Italian and Spanish government bonds were 4bp-5bp weaker on the day.

Banca MPS said yesterday’s covered bond was the first time the bank has successfully tested the 10 year maturity, and that the transaction shows the bank’s ability to access the capital markets in longer maturities. It noted a recent upgrade of its OBGs by Moody’s – the rating agency on Monday of last week (30 June) upgraded them from Ba1 to Baa3, just inside investment grade, after upgrading the issuer from B2 to B1.

A syndicate banker at one of the leads said that MPS’s deal is “proof that the recent long end appetite isn’t only something for core country issues”.

The last peripheral covered bond to hit the market before MPS’s transaction was a Eu1bn issue for Spain’s BBVA in early June, which came with a 10 year maturity and was priced at 73bp over mid-swaps.

Of the 14 deals that followed, all for core issuers, eight came with a maturity of seven years or longer. Six peripheral deals of 10 years or longer have been priced so far this year.

At 148bp over, the covered bond came flat to slightly inside secondary market levels for Banca MPS, with fair value seen at around 150bp over, according to a syndicate banker at one of the leads.

The re-offer spread is tighter than where the issuer priced a Eu1bn seven year OBG in April – 160bp over, noted the syndicate official.

“Their bonds have performed really well,” he said.

The April 2024s were trading at around 133bp over before the deal was launched. MPS’s new issue came 15bp over Italian government bonds, with March 2024 BTPs trading at 133bp over mid-swaps, according to the syndicate banker.

“The 148bp over was a great result,” he said. “There was no pushback on the spread and it was fairly priced.”

Syndicate officials away from MPS’s deal had yesterday said they were surprised that demand for MPS’s covered bond was not stronger, citing, for instance, the issuer having recently strengthened its capital with a rights issue.

The lead syndicate banker acknowledged that the volume of demand was somewhat surprising, with MPS’s April issue having attracted Eu4bn of orders and there having been a lack of peripheral supply. He cited softer market conditions, with rates having fallen recently, and the 10 year maturity being too long for some accounts at this particular time, as contributing factors.

However, he said that the order book was of high quality, with 115 accounts participating and almost 60% of the bonds allocated to real money.

The issuer had been looking to tap the market before the onset of the summer recess to satisfy some funding needs, and because the market was stable the leads felt it was a good opportunity to proceed with a deal, he added.

Fund managers took 58%, banks 27%, insurance companies and pension funds 13%, and others 2%.

Germany and Austria were allocated 32%, Italy 28%, the UK and Ireland 26%, the Benelux 5%, Switzerland 4%, Iberia 3%, France 1%, and others 1%.