UniCredit opened what could be a brisk period of Italian covered bond issuance with a bang yesterday (Tuesday), attracting over Eu3bn of orders for a Eu1bn seven year obbligazioni bancarie garantite issue. A funding official at the bank discussed the timing with The Covered Bond Report and said that a tight spread to BTPs achieved was a good result.

Andrea Laruccia, head of term funding at UniCredit, said that a combination of factors explained the lack of Italian issuance since early March, when Banca Monte dei Paschi di Siena issued the last OBG benchmark.

“Firstly, the turmoil in the peripheral markets that have been driving government bonds wider,” he said. “Also, there has been the results season, which has meant that banks have been in blackout periods.

“And some technical issues with preparing the cover pool ahead of issuance has meant that we cannot just issue when the market is there, too.”

However, UniCredit felt the time was right for it to reopen the OBG sector.

“We had the perception that in the last few weeks there was huge demand from the top investors for an OBG in particular,” said Laruccia. “The reason why is that peripheral government bonds have widened but investors see Italy as being by far the best among these, so when they see it widening they see also a buying opportunity.

“Further, OBGs typically have to be priced with a premium to the reference government bonds, but they are attractive to investors because they have a higher rating, especially one from UniCredit that has a triple-A from all the rating agencies. The performance of this instrument has also proven to be less volatile than government bonds during the turmoil.”

UniCredit was also aware that potentially competing supply was on the way. Credito Emiliano and Banca Carige are among those cited as potential issuers in the coming days (see separate story).

“We believed that in the next couple of weeks there could be further Italian issuance,” said Laruccia, “so as we were ready and we knew that there was demand we decided to go ahead and the result was very good.”

The Eu1bn seven year OBG was priced at 123bp over mid-swaps, equivalent to around 4bp over Italian government bonds, according to a syndicate official at one of the leads.

“The premium over the relevant reference government bond was very small, 4bp-5bp, which was quite a good result,” said Laruccia. “Investors typically require a premium and it’s not to be taken for granted that it is in the single-digits territory.”

A banker away from the leads saw the spread over government bonds at 5bp-10bp, but still described it as very tight to the BTP curve. He contrasted the Italian deal with a Eu1bn five year for Santander last week.

“They are both national champions, they both came with tight spreads to the government curves, but whereas UniCredit was a great deal Santander was not at all,” he said. “The market is no better this week and it just shows that investors are very much differentiating between Italy and Spain.”

An Italian investor noted that ahead of the new issue secondary UniCredit paper had been trading flat to a few basis points through the Italian government curve, but that the new issue had resulted in what he called a normalisation of spread levels, with secondaries widening to trade slightly above the BTP curve.

“The premium they provided realigned the situation, which was in line with our expectations,” he said. “I believe they shouldn’t trade through governments.”

Leads Banca IMI, Credit Suisse, Deutsche Bank, Natixis and UniCredit built a book of around Eu3.25bn, comprising 163 accounts, in an hour and a half.

“We had a good strategy, taking indications of interest yesterday morning at 125bp-130bp,” said Laruccia. “We then saw the book growing swiftly, with a shadow book of Eu1bn, which made us comfortable opening the book officially at the 125bp area.

“The final 123bp level was much tighter than the initial indications, so it was a very smooth and successful execution. The volume limit we had of Eu1bn also gave us the leverage to drive pricing that tight.”

Italian accounts took 20% of the issue, while the UK was allocated 21%, France 21%, Germany 21%, the Benelux 7%, Austria/Switzerland 5%, Iberia 2%, Nordics 2%, and others 2%.

“The distribution was very, very well balanced, with a reduced component of domestic demand in the final allocation,” said Laruccia. “This proves that investors appreciate the international footprint of the group.

“We are a European group and investors are becoming more and more familiar with our subsidiaries in Germany and Austria, where we have also been rebranding.”

The Italian investor said that his participation had been only marginal given the amount of UniCredit paper he already holds. He said that he would rather take on extra exposure to the credit in a format other than covered bonds.”

Funds were allocated 67%, insurance companies 16%, banks 15%, and others 2%.