UBI Banca priced a Eu1bn 10 year covered bond at 30bp over mid-swaps yesterday (Tuesday), well inside its curve, and the bank’s head of funding attributed the success of the deal to the strength of the product as well as prevailing market dynamics.

Leads Banca IMI, Barclays, Deutsche, ING, LBBW, Mediobanca and Natixis priced the Eu1bn 10 year issue at 30bp over mid-swaps on the back of a book of over Eu3bn comprising 125 accounts. The ultimate pricing followed initial price thoughts of the high 30s, then guidance of the 35bp area, which was revised to the 32bp area.

Giorgio Erasmi, head of funding at UBI Banca, noted that the deal is the tightest covered bond that UBI Banca has launched since its debut in 2009 and that this was achieved in the 10 year maturity, which is “not an easy maturity”.

He said that the success of the deal highlighted the strength of the covered bond product.

“This is the main point that we saw today,” said Erasmi. “There is the purchase programme of the ECB and there is strong demand from investors.

“Other covered bonds issued in Europe are coming below mid-swaps, so when you find an instrument, as with our covered bond – our good quality, the dual recourse, good underlying assets, first lien residential mortgages – I think that investors are really interested.”

Erasmi said that UBI Banca accelerated its covered bond issuance plans in light of the attractive market.

“We were not planning to issue a new covered bond for the remainder of this year,” he said. “Our budget was only for one issue next year, in 2015. But then last week we recognised the strong momentum in the market, while supply was not so significant in terms of volume.

“We decided to issue in a longer maturity than other issuers had been doing – it was mostly seven years in recent weeks. We felt that it would be appropriate to issue a 10 year maturity at these levels to refinance our lending in general, to the economy. We are happy that we have been able to do this and to achieve an important final result in terms of cost for the bank.”

Erasmi said that the outcome of a Eu750m seven year issue for fellow Italian Credito Emiliano, which was priced at 25bp over mid-swaps last Thursday, came as a pleasant surprise.

“Credito Emiliano’s deal showed that investors’ appetite was extremely strong,” he said.

Although UBI Banca’s leads went out with initial price thoughts of the high 30s over mid-swaps, Erasmi said that an ultimate level of 30bp-35bp was expected from the outset.

“The high 30s was slightly generous, to be honest,” he said, “but where exactly we would end up was dependent upon the real interest of investors. If we had realised that investors didn’t like to go below a certain level, we would have stopped. But we realised that investors had a big appetite and so we decided to go in the lower part of the talk we had in mind – only because the market was with us.

“Indeed, the majority of the book was at re-offer – we had very, very few, only four or five orders with limits in terms of spread. This is another important sign that investors want to buy, and they understand that if they want to buy they have to buy on the primary market.”

The deal was announced as a benchmark and Erasmi said that Eu1bn was the largest amount the board had given authorisation to for the covered bond issue.

As with other CBPP3-eligible issuance since last Wednesday, interest from Eurosystem central banks came in early, he said, with orders co-ordinated through the respective national central bank, in this case the Bank of Italy.

“In terms of allocation, we don’t treat any differently orders coming from the ECB and orders coming from other investors in terms of allocation,” said Erasmi. “For us, it is an investor like the others, and we use the same metrics.”

Central banks and official institutions were allocated 27%, fund managers 51%, insurance companies and pension funds 12%, and banks and private banks 10%.

Erasmi said that the extent of distribution outside Italy – 65% – was satisfying. Alongside Italy’s 35% share, Germany and Austria took 28%, France 16%, the UK and Ireland 6%, the Benelux 5%, Switzerland 3%, Asia 3%, the Nordics 2%, Iberia 1%, and others 1%.

He noted that, in spite of the size of the order book and strength of the market, orders did not appear to be inflated.

“I sensed that investors were putting in appropriate amounts,” he said. “We didn’t have big, big orders where you imagine that it is an inflated order aimed at receiving the desired amount after allocation. This is positive.”