Banco BPM benefitted from a rally in Italian govvies when selling a EUR500m long five year OBG today (Wednesday), with improved relative value versus the sovereign helping attract greater demand than two previous trades and potentially tempting more issuers into the market.

The new issue is the fourth benchmark OBG since Intesa Sanpaolo on 4 June reopened the Italian market, which had remained dormant as political uncertainty hit Italian debt in May. While Intesa’s reopener was well received, the shorter-dated trades that followed from Mediobanca and BPER paid successively wider spreads and attracted much less demand.

This morning Banco BPM leads Banca Akros, Barclays, LBBW, Natixis, Santander and UniCredit launched the September 2023 issue with guidance of the mid-swaps plus 95bp area for an expected issue size of EUR500m. Around two hours later, the leads announced that books were above EUR500m, excluding joint lead manager interest.

The spread was later set at 95bp and the size at EUR500m. The final order book was later announced to be above EUR600m from over 50 accounts.

“It is a good transaction,” said a syndicate banker at one of the leads. “You would not expect a EUR1bn-plus book for this, but it has been a solid exercise.

“The order book dynamics were clearly better than for the last two OBGs.”

Intesa’s EUR1bn seven year deal on 4 June attracted demand of over EUR1.5bn at a final spread of 63bp over mid-swaps and was deemed an encouraging reopener, but on 5 June a EUR500m six year for Mediobanca was marginally subscribed and priced in the middle of guidance at 70bp. A EUR500m five year for BPER last Tuesday was also priced in the middle of guidance at 85bp upon slightly larger orders, of around EUR550m.

Bankers blamed the latter two’s relative struggles on investors’ preference for the top tier Italian banks over other issuers and on the deals’ relative value versus BTPs. The trades from Intesa and Mediobanca were priced around 110bp inside the sovereign – among the biggest differentials ever seen in the Italian market – whereas BPER’s later trade came around 70bp inside.

“The most important piece of the puzzle here is the spread against BTPs, which has become much more attractive to investors in recent days,” said the lead syndicate banker.

Italian government bonds have performed strongly in recent days on the back of increased risk appetite, tightening 10bp-12bp across the curve yesterday, with the 10 year yield falling below 2.50% for the first time since the end of May. Thanks to these moves, Banco BPM’s deal was priced around 45bp inside the sovereign.

“You can sleep well after investing at this level,” said the lead syndicate banker.

The greater demand was also attributed to the deal’s outright final spread. Excluding Greek and Turkish trades, the final spread is the widest offered by a euro benchmark covered bond since November 2015, when Banca Monte dei Paschi di Siena priced a EUR1bn 10 year issue at 127bp over mid-swaps.

Syndicate bankers said Banco BPM’s deal paid a new issue premium of 20bp-25bp, based on the issuer’s curve and on recent supply, roughly in line with the premiums paid by the previous Italian deals.

The improved OBG demand demonstrated by today’s trade and the changing valuations could encourage other Italian issuers to follow Banca BPM into the market, said bankers.

“Just think back six weeks ago when BTPs in five years were just under 3%, and we’re now around 1.70%,” said a syndicate banker. “When you seen continuing improvement and sovereign curve dislocations being repaired that gives some confidence back.

“There is still the risk you could see some widening in BTPs, but probably nothing compared to what we’ve seen before, and given OBGs’ stability and their being slower to react, I’d be fine with holding a shorter duration Italian covered bond.”

Even before the improvement in relative value versus the sovereign, syndicate bankers said Italian issuers had been continuing to look at the covered bond market in the belief that issuance conditions may only get worse as the ECB is expected to reduce its presence in the market later in the year and with potentially tricky Italian political hurdles coming up in the autumn.

The new issue is Banco BPM’s second benchmark obbligazioni bancarie garantite (OBG) since the bank was formed by a merger of Banco Popolare and Banca BPM in January 2017. Its first was a EUR750m seven year issue priced at 40bp over mid-swaps in January.

“That’s a really stark demonstration of just how far the Italians have widened,” said a syndicate banker away from the leads.

Italian covered bond spreads have widened significantly since the Italian sell-off and are now at their highest since 2016, noted analysts. Since the reopening of the OBG market on 4 June alone OBG spreads have in some cases widened by as much as 12bp, with analysts attributing this in part to the generously priced new issuance.

“The fact that secondary market valuations of outstanding bonds have at the same time come under significant pressure indicates that part of the demand was probably driven by switch trades from old holdings,” said analysts at Commerzbank. “This is not surprising given the high issuance premiums, but it makes it harder for other new entrants to estimate any reliable spread equilibrium.”