Banca Popolare di Sondrio sold its first benchmark covered bond on Tuesday, a Eu500m five year OBG, and those involved in the deal shared with The CBR reasons for the timing of the deal, the use of only one lead manager, skipping a roadshow, and more.

The Italian co-operative bank priced the obbligazioni bancarie garantite (OBG) issue at 75bp over mid-swaps on the back of some Eu1.1bn of orders via sole lead BNP Paribas, which was joint structurer and arranger of a Eu5bn programme alongside Finanziaria Internazionale.

The deal was launched a week after the programme was signed, on 22 July, according to an official at Banca Popolare di Sondrio, who said that the issuer did not see any material advantage from waiting to tap the market until after the summer break.

“We felt there was enough conviction to go ahead with the trade,” he said. “The covered bond market has showed to be a safe haven even during time of volatility and in addition BTPs were performing well.”

Asked why the issuer decided to only appoint one lead manager and skip a roadshow – decisions that were questioned by several market participants – the official said that the issuer did not want to embark on a roadshow and “saw the opportunity to reach our target size of Eu500m even through a club deal assisted by a well-respected covered bond house which also helped us with the structuring of the programme”.

“The success of the deal demonstrates that a roadshow in this particular market juncture was not necessary as we met our target price and size,” he said. “It fully met our expectations both in terms of the final spread and of the number of bidding investors.”

The appointment of only one lead manager raised eyebrows in the market, with several market participants saying it would have negative implications for secondary market liquidity, in part because this makes the OBGs ineligible for the iBoxx euro covered bond index.

“We cannot remember commenting about the lead manager situation ever in 10 years of Covered Bond and Agency Monitor history,” wrote UniCredit analysts today in their weekly research. “However, seeing a sole-lead mandate in an inaugural transaction placed with investors is probably unique.”

They acknowledged that having only one lead manager on a deal would not be an obstacle to pricing a Eu500m issue, and said that despite the unusual approach the Sondrio deal “was a pure success”.

“However, one would expect a broader ‘group’ of lead managers in aggregate to have a much broader client coverage, which usually should result in less volatile trading,” they said.

A syndicate official said he did not understand the rationale for execution via only one lead manager, and said that it was a short-sighted move.

Damian Saunders, financials syndicate at BNP Paribas, played down the importance of index eligibility and the liquidity implications thereof.

“The covered bond market is bid only in any case,” he said. “The bank bid is the driving force behind many deals and indices don’t matter for those accounts.

“Some investors did say that it was a shame the bonds are not in the indices because they couldn’t participate as a result, but overall for a deal of this size and given the strength of the market it was felt that one lead was sufficient.”

Being the only bookrunner also made it easier to form a view on where the bond should be priced, he added.

Italian government bonds, Credito Emiliano OBGs and a Banca Popolare dell’Emilia Romagna (BPER) October 2018 issue served as comparables, according to Saunders, although ultimately the appropriate pricing was determined based on conversations with investors.

He said that feedback gained from domestic investors in the lead-up to the announcement of the mandate also informed the decision to skip a roadshow, as the response gave the issuer the confidence that a deal would work even without more extended investor work.

The OBGs were first marketed at the 80bp over mid-swaps area, with guidance subsequently revised to 75bp-80bp over. More than 50 accounts participated, with domestic investors taking the largest share of the bonds – 72.5% – followed by Germany and Austria with 15%, the UK 10%, and Switzerland 2.5%.

Asset managers were allocated 60%, banks 24%, and others the remainder.

Assessments of the pricing from syndicate officials away from the deal varied quite a bit. One, for example, said he would have seen it roughly 10bp-15bp tighter at launch and that it came too wide of where a new five year Emiliano OBG would be priced, but another said he thought Sondrio’s deal would have come wider, at 85bp over.

An investor said that, at 75bp over mid-swaps, Sondrio’s OBGs were priced around 20bp wide of BTPs.

“That’s fair,” he said.

Harnessing OBG benefits, pass-through contemplated

The official at Sondrio said that it was at the end of 2013 that the issuer decided to set up an OBG programme, and that work began on structuring the programme in January this year.

An OBG programme was seen as the “best way to approach the wholesale market, i.e. institutional investors”, according to the official. He said that there “were no specific wholesale funding needs” behind this week’s deal, but said that the issuer turned to covered bonds because the asset class can help meet several goals.

He listed five: entering a new market; diversification of medium and long term sources of funding; lengthening the maturity profile, “thus supporting the expansion of the bank’s lending business”; planning for repayment of funds borrowed via European Central Bank very long term refinancing operations (vLTROs); and “exploiting favourable market conditions and covered bonds’ more attractive funding levels compared to senior unsecured bonds”.

The emergence of further deals will depend on the expansion of the bank’s lending business, added the official.

Italian issuers have been identified as candidates for conditional pass-through covered bonds ever since Dutch bank NIBC pioneered the structure in October last year, and the official at Sondrio said that the issuer considered pass-through covered bonds but decided against it.

“We appreciate the structure but considering we are not a frequent issuer in the wholesale debt capital market, we preferred not to be the first Italian issuer to break the ice,” he said.