Credito Emiliano ended a six month hiatus in Italian covered bond issuance with a successful EUR750m five year OBG yesterday (Thursday), and syndicate bankers said the deal offers encouragement that the primary market is open to a wide range of credits.

Yesterday’s deal is the first benchmark issuance of obbligazioni bancarie garantite (OBG) since July 2018, when a EUR1bn seven year Intesa Sanpaolo benchmark was followed by three EUR500m trades. A clash between the Italian government and EU over the country’s budget from September until December disrupted any subsequent issuance plans, but a resolution of the situation at the end of the year was “a big weight off their shoulders” and – along with rescue measures early this week for Banca Carige – paved the way for the reopening of the OBG market, according to a banker at one of Credem’s leads.

“The important thing was that the first trade that came went very well and didn’t just scrape over the line,” he said, “and it went very, very well.”

The bank was deemed an appropriate candidate to reopen the Italian market, with the leads citing credit positives including it having the lowest NPL ratio in Italy and highest SREP buffer.

“Credem is a credit people really like,” said the lead banker. “It may be a smaller issuer, but it is good quality and investors like its simple story.”

The mandate was announced on Wednesday afternoon on the back of a constructive primary market being in evidence since the start of the week, with a variety of lower rated credits approaching the market in a range of asset classes, while Deutsche Bank SAE that day launched the first peripheral covered bond of the year, a EUR500m six year cédulas.

The lead syndicate banker said finding the correct price for Credem’s five year OBG was a little difficult, but based on a variety of comparables and following discussions with investors heading into the deal, fair value was put at around 70bp-75bp over mid-swaps, and he noted that the EUR500m trades last summer had come with initial price thoughts that implied new issue premiums of 25bp-30bp.

Another lead syndicate banker said the starting point of the 100bp area for Credem was slightly wider than it would have been had the market not opened on a softer note yesterday morning on the back of the latest takeaways from the US-China trade situation leading to a weak overnight session in Asian equities. However, market conditions were deemed to have still been sufficiently conducive to proceed ahead of BTP sales today and potentially disruptive factors such as the UK’s parliamentary Brexit vote on Tuesday.

“We felt that the triple-digit spread would get us the necessary momentum,” added the lead banker.

Leads Barclays, Crédit Agricole, SG and UniCredit opened books at around 9.30 CET and gave a first update after around an hour and 10 minutes that books were above EUR500m, which the lead banker said was very positive and helped spur further demand, as did an update that books were above EUR750m another three-quarters of an hour later, “because there were some doubts in investors’ minds, with some still sceptical about Italy”. At around 12.10 CET, with books were well above EUR900m, the spread was set at 95bp over and the size at EUR750m, after which the book grew to EUR975m, pre-reconciliation and excluding joint lead manager interest.

“The book was still solid for the EUR750m volume at 95bp, as demonstrated by the book growing after the spread was set,” said the lead banker.

“The issuer could have squeezed inside 95bp, but went for size,” he added, noting that EUR750m was at the upper end of the anticipated range.

The spread is the highest on a euro benchmark covered bond since the last Italian benchmark, a EUR500m long five year for Banca Popolare di Milano on 25 July 2018 that was also priced at 95p over. Credem’s new issue came at around 85bp through BTPs.

Bankers expect the success of Credem’s reopener to encourage others to consider issuing.

“People will have sat up and taken notice, so I wouldn’t be surprised to see follow-on trades,” said one. “If Italy can access the market, then any jurisdiction can – at the right price – but not necessarily every name.”

The possibility of the ECB offering a new targeted longer-term refinancing operations (TLTROs) in the coming months has been considered a key variable in determining just how much euro benchmark covered bond supply there will be this year, particularly from the periphery, and minutes of the ECB December governing council meeting released yesterday (Thursday) suggested such measures remain under discussion.

However, one banker said that it will “not be clever to bet on TLTROs”.

“Who knows what’s going to happen with TLTROs?” he added. “I think you would be unwise if you were to plan your funding based on there being further TLTROs. So if there is an opportunity, issuers should absolutely consider it, otherwise they’ll be chasing the market later in the year.”