Leads BBVA, Crédit Agricole and Mediobanca launched the Eu750m no-grow January 2026 obbligazioni bancarie garantite (OBG) with initial price thoughts of the 20bp over mid-swaps area this morning. Guidance was then set at the 17bp area, plus or minus 2bp will price within range, on the back of around Eu1bn of orders, including Eu50m joint lead manager interest. The spread was later fixed at 15bp.

The deal is the tightest new benchmark OBG since the collapse of Lehman, according to syndicate bankers at the leads. It was priced 1bp inside the previous record holder, a Eu1bn short eight year for Cariparma in September 2015.

“A spread objective was set from the outset, and we therefore capped the size with a Eu750m no-grow wording – adding a scarcity element,” said a syndicate banker at one of the leads.

The final spread was seen as offering no new issue premium, with bankers at and away from the leads citing Cariparma September 2024s at 13bp, mid, March 2025s at 14bp, and March 2029s at 17bp. Bankers at the leads noted the deal was therefore priced well inside the bid side of the issuer’s curve.

The last benchmark OBG was a Eu750m 12 year issue for Mediobanca on 17 November. The deal was priced at 27bp over mid-swaps and seen at around 22bp, mid, today.

The leads also cited as a comparable UBI Banca October 2027s, at 12.5bp, mid.

The lead syndicate banker noted that Cariparma now trades much tighter to its Italian peers than it has historically, adding, “the sponsorship of the French CASA Group is paying off in terms of valuation”.

The new issue is Cariparma’s second benchmark OBG offering of the year, following a Eu1.5bn dual tranche, eight and 12 year deal in March.

That was the first Italian benchmark of 2017, and issuance has remained limited since, with only four more benchmarks following to take year-to-date OBG supply to Eu5.75bn, including today’s deal.

“Overall peripheral supply has been quite limited, meaning that even this late in the year there is still a lot of demand around for a deal like this,” said a syndicate banker away from the leads. “In that context Cariparma is a good name to bring to the market, being a familiar issuer and part of the Crédit Agricole group, while also having a good double-A covered bond rating.”

On 26 October Fitch revamped its covered bond rating criteria, replacing Discontinuity Caps (D-Caps) with Payment Continuity Uplifts (PCUs) and incorporating a broader view on eligibility for Issuer Default Rating (IDR) uplift, among other revisions.

The rating agency said a wave of upgrades could follow, mainly driven by higher IDR uplifts or PCUs, and has since raised or placed on review the covered bond ratings of several issuers, mostly from the European periphery.

On Monday of last week (14 November), Fitch placed the obbligazioni bancarie garantite (OBG) programmes of four Italian issuers on Rating Watch Positive (RWP) and maintained another two on RWP.

These rating actions were triggered by the implementation of the new criteria but also incorporated a revision of the outlook on the sovereign from stable to negative on 21 October and the revision of the IDRs of Credem and Mediobanca from stable to negative on 28 October.

On Tuesday of this week, the rating agency then upgraded the six programmes. The rating actions are:

• Banca Carige OBGs upgraded from BB+ to BBB+, on stable outlook
• Banca Popolare di Sondrio OBGs upgraded from A+ to AA+, on negative outlook
• Credito Emiliano OBGs upgraded from A+ to AA, on stable outlook
• Mediobanca OBGs upgraded from A+ to AA, on stable outlook
• Unione di Banche Italiane OBGs upgraded from BBB+ to A, on negative outlook
• UniCredit soft bullet OBG upgraded from AA to AA+, on negative outlook

In each case, the new rating is the maximum Fitch previously said was achievable.

The negative outlook on UBI’s OBGs reflects that of the bank’s IDR, and the negative outlooks on the OBGs of Sondrio and UniCredit mirror that of Italy’s rating, with the bonds rated at Italy’s country ceiling.

The stable outlook on Mediobanca’s OBGs, despite the negative outlook on its IDR, reflect a significant buffer against a downgrade due to different uplift factors above the IDR, Fitch said.

On Monday Fitch upgraded the covered bonds of Sandnes Boligkreditt from AA to AAA. An IDR uplift of zero notches has been assigned to Norwegian programmes because proposals for bank resolution in Norway remain under implementation, meaning that the IDR remains the floor for the covered bond rating.

Fitch added that the breakeven overcollateralisation (OC) for the current ratings of the Norwegian programmes have increased because its stressed refinancing spread levels (RSL) for Norwegian cover assets have increased compared with previous assumptions. Sandnes Boligkreditt’s relied-upon OC of 14.0% is in-line with the AAA breakeven OC.

Photo: Banca Popolare di Sondrio

The rating agency upgraded the CR assessments of Banco Popolare Societa Cooperativa (PMIIM) and Banca Popolare de Milano (BPIM) from Ba1 to Ba2 after the banks last Saturday announced that their shareholders had approved the merger, which is expected to be completed on 1 January to form Banco BPM SpA.

Moody’s put covered bonds of the two issuers on review for upgrade on 13 April and Maureen Schuller, head of financials research at ING, said today (Friday) that the ratings of their benchmark OBGs are likely to be upgraded from A2 to A1, taking into account the new CR assessments and the covered bonds’ Timely Payment Indicators (TPIs) of “probable”, which the rating agency in April said constrained the OBGs’ ratings.

“In our view,” added Schuller, “given the merger approval there seems to be a tad more convergence potential between the BPIM 0.75 3/22 and the PMIIM 0.875 9/22 with the latter still indicated 2bp tighter versus swaps.”

In a comment published yesterday afternoon, Moody’s said that arrears levels in Italian cover pools remain low and collateral quality firm in spite of a high volume of problem loans in the banking system. The rating agency noted that at around Eu360bn, or 18.1% of overall outstanding customer loans as of 31 December, the stock of non-performing loans (NPLs) on Italian banks’ balance sheets is among the highest in Europe.

However, Italian covered bond law and contractual arrangements in effect limit the amount of problem loans used as collateral, Moody’s said, meaning that the performance of Italian cover pools differs from that of banks’ loan portfolios.

While Italian covered bond law does not require that NPLs be removed from cover pools, such loans are excluded from legal asset tests and are also excluded from the calculation of contractual overcollateralisation (OC) in practice, hence requiring that a minimum level of performing assets be maintained in the cover pool, Moody’s said. It added that some Italian issuers often buy back problem loans.

The rating agency also said that maximum loan-to-value ratios (LTVs) offer protection against collateral deterioration, and noted that the vast majority of Italian covered bonds may only be backed by residential mortgage loans, with commercial loans accounting for the largest proportion of NPLs in the Italian system.

Moody’s noted that over the year ended 31 March, the average arrears rate in Italian cover pools did not exceed 2.5%. It said that the credit quality of Italian cover pool assets also remained firm over 2015, ranging between 9.6% in Q1 and 8.9% in Q4.

Under Moody’s covered bond methodology, the credit quality of cover pools is reflected by a collateral score, which determines the level of losses expected in a cover pool after an issuer default – the lower the figure, the better. Moody’s average collateral score for Italian mortgage covered bonds was 8.9% at the end of Q4 2015, lower than the average collateral score of 10.8% for mortgage covered bonds that it rates globally and lower than for mortgage covered bonds in EU countries such as Greece (35.8%) and Spain (18.7%).

Banca Monte dei Paschi di Siena (MPS) has the highest stock of problem loans as a percentage of gross loans among the Italian banks supervised by the ECB, at 34.4%, but Moody’s noted that only 0.8% of loans in MPS’s cover pool were in arrears as of the end of the first quarter.

Moody’s said Italian covered bonds are nonetheless “highly sensitive” to a weakening of issuers’ creditworthiness.

“Even a moderate decline in the credit merit of issuers,” said Moody’s, “which may result from a further material deterioration in bank asset quality due to the high stock of problem loans, would likely have a negative effect on the credit quality of Italian covered bonds and likely result in negative rating actions.

“A weakening of the credit strength of issuers, rather than a decline in collateral performance, has to date been the main trigger for the credit deterioration of Italian covered bonds.”

The average Timely Payment Indicator (TPI) assigned to Italian covered bonds is “probable” and the average TPI Leeway – which measures the number of notches by which the issuer’s covered bond anchor can be lowered without the covered bond rating being affected – is 1. The covered bond anchor for all Italian covered bond programmes rated by Moody’s is the Counterparty Risk (CR) assessment plus one notch.

Moody’s yesterday placed on review with direction uncertain its A2 rating of the conditional pass-through (CPT) covered bonds of Banca MPS. This was prompted by a similar action on the issuer’s B2 CR assessment.

On Monday, Moody’s changed a review of MPS’s CR assessment, B2 deposit rating and B3 senior unsecured rating to direction uncertain, from review for downgrade, and also put on review with direction uncertain the bank’s ca standalone Baseline Credit Assessment (BCA).

On 29 July, MPS announced a plan to dispose of its bad loan portfolio, and raise Eu5bn of capital, having earlier announced that the European Central Bank was seeking a reduction of its problem loans.

Moody’s said the review with direction uncertain reflects the potential for improvements in the bank’s creditworthiness if its restructuring plan is successfully implemented, that there is considerable uncertainty as to whether the plan will be executed as outlined, and the anticipated negative consequences for the bank’s creditors if it is unsuccessful.

The rating agency had placed the OBG programme on review for downgrade on 18 July, having initially taken the same action on the issuer’s CR assessment on 15 July.

The TPI assigned to the CPT OBG programme is “very high”, and the TPI Leeway for the programme is “limited”. Moody’s said any reduction of the covered bond anchor may therefore lead to a downgrade of the covered bonds.

Fitch placed its BBB rating of MPS’s CPT OBGs on Rating Watch Evolving on Monday, and on the same day DBRS confirmed its ratings on MPS’s two OBG programmes and maintained them under review with negative implications. DBRS rates MPS’s Eu10bn CPT OBG programme A (high) and a second Eu20bn OBG programme A.

Analysts at UniCredit said the announced restructuring plan should be credit positive for MPS bonds, and said the reviews support their bullish stance on the OBGs.

“However, rating upgrades and a future outperformance of the bonds – up to now MPS bonds have underperformed the Italian sector since the announcement – is dependent on the successful implementation of the restructuring plan, which is our base case,” said Emanuel Teuber, credit analyst at UniCredit.

The law amendment was included in the Italian government official gazette published on Friday after being approved in parliament on 6 April.

An Italian bank official involved in the European Covered Bond Council’s work on SME-backed instruments said that the new amendment has been achieved following a long and constructive dialogue between the authorities and the banking industry, notably the Italian banking association (ABI). He said that the legislators recognised the needs of the banks, while the move also fits in with the European Commission Capital Markets Union (CMU) initiative.

Italy’s securitisation law was initially amended in 2014 with the creation of a separate article to introduce the new class of instrument. According to the Italian official, the main purpose of the latest amendment is to introduce public supervision for the instrument.

Speaking at an ECBC plenary in Copenhagen on Thursday, he said that the law amendment now needs to be followed by secondary legislation, which will take the form of a ministerial decree and regulations issued by the Bank of Italy, with the former setting out which types of SME loans will be eligible as collateral alongside leasing, factoring, ship loans and other commercial loans.

“It is a simple structure, and similar to the existing OBG structure,” said the official.

However, he said that the previous name of obbligazioni bancarie collateralizzate (OBC) will no longer be used as it is too similar to the name of Italy’s covered bonds, obbligazioni bancarie garantite (OBG). He said that it is considered important that the new SME instrument is not confused with traditional covered bonds, and that a different name and distinct article for the instrument in legislation should help protect the OBG.

The instrument will otherwise reflect typical covered bond characteristics and matches the on-balance sheet model proposed by the ECBC in its European Secured Notes (ESN) initiative.

The Italian official said that the new instrument is well suited to SME loans since these are typically of short duration and, for example, may be restructured, and being able to include them in a dynamic cover pool is more efficient than setting up standalone securitisations for such assets. However, he noted that the costs of establishing a programme could limit use of the instrument to larger Italian banks, as has been the case for OBGs.

He said that the attractiveness of the instrument would also depend on whether they are ECB-eligible and benefit from other preferential regulatory treatment, as traditional covered bonds do. He expects them to be more costly to issue than OBGs, but hopes that the pricing will be “not too far” away from them.

According to ABI figures cited by the Italian official, there are some Eu190bn of unsecured SME loans in the Italian banking system

“But we have to see how many will be eligible,” he added.

Bernd Volk, head of covered bond research at Deutsche Bank, yesterday (Tuesday) noted that there has been some weakness in Italian covered bonds recently, for example compared with cédulas, and that the iBoxx Italy Covered index was the only iBoxx covered bond index not to have tightened over the past four weeks, having widened slightly in that timeframe.

While the economies of fellow bailed-out countries Ireland, Portugal and Spain have started to grow after the broad recession induced by the financial and European sovereign crises, in Italy the economy shrank by 0.2% in the second quarter, following a 0.1% contraction in the first quarter. The recession is Italy’s third since 2008, according to Moody’s, which on Thursday said it is credit negative for Italy’s banks.

Deutsche’s Volk said he expects the recent economic contraction and uncertainty regarding credit quality of second tier Italian banks to dominate sentiment toward OBGs in the weeks to come, but that “the cover pool reports of Italian covered bonds continue to look rock solid”.

“While spreads of covered bonds of weaker Italian banks seem vulnerable in such an environment, besides the still high spread pick-up compared with covered bonds of international Italian banks, the usual arguments in favour of Italian covered bonds fully apply,” he added, citing covered bonds’ bail-in exemption under BRRD, relatively low asset encumbrance via covered bonds in Italy, low supply, high overcollateralisation, and the performing amortising low LTV owner-occupied residential mortgage loans backing obbligazioni bancarie garantite (OBGs) issuance.

A syndicate official today agreed that although Italian covered bond spreads have underperformed, but said the development is “negligible”, with cédulas for example some 3bp-4bp tighter over recent weeks and OBGs 1bp-2bp.

“Yes, there has been underperformance, but it’s not material,” he said, adding that there is still room for performance in second tier Italian covered bond issuance, in part because there has not been that much supply.

Besides a sole-led Eu500m five year issue for newcomer Banca Popolare di Sondrio on 29 July, a Eu1bn 10 year OBG for Banca Monte dei Paschi di Siena on 8 July was the last Italian covered bond benchmark to have hit the market after only two Italian benchmarks in the second quarter. MPS’s benchmark was priced at 148bp over mid-swaps, but was today said to be bid at 170bp over. Mediobanca priced a Eu750m five year issue at 51bp over on 10 June, and that was said to be at 50bp over bid after having been tighter.

Moody’s today said that Italian banks’ reliance on central bank funds is the largest compared with that of the Irish, Portuguese and Spanish banking systems, but that concerns about liquidity and the expiry of the ECB longer term refinancing operation (LTRO) in all four systems are greatly reduced by the ECB’s targeted LTRO (TLTRO), a switch to shorter term repos and improving market confidence.

“Market access is opening, even for weaker banks, and the pricing differential for funding continues to converge with core Europe,” said the rating agency. “These gains remain fragile, however, as market confidence could reverse quickly.”

In general, the covered bond market has rallied over the summer, with a syndicate official yesterday describing the tightening has “striking”. Another today said that Australian covered bonds have outperformed, due to speculation about favourable Liquidity Coverage Ratio (LCR) treatment, while another said he was taking secondary levels with a pinch of salt given light flows.

“Everything is tighter, but on small turnover,” he said.

The Italian issuer will price a Eu500m no-grow five year obbligazioni bancarie garantite (OBG) issue at 75bp over mid-swaps, the tight end of guidance of 75bp-80bp over, after sole lead BNP Paribas gathered more than Eu1bn of orders.

The deal is Sondrio’s first benchmark covered bond, and comes after the issuer yesterday (Monday) announced that it had mandated BNP Paribas and Finaziaria Internazionale as structurers and arrangers for a Eu5bn programme backed by Italian residential mortgages. Fitch yesterday assigned an expected A rating to the bank’s covered bonds, on negative outlook. The bank is rated BBB by Fitch.

The deal is the first benchmark covered bond in just over a week, coming after Toronto-Dominion Bank made its legislative and euro debut, and the first from an Italian, and any peripheral issuer, since Banca Monte dei Paschi di Siena sold a Eu1bn 10 year OBG at 148bp over mid-swaps on 8 July.

One syndicate banker away from Sondrio’s deal said the level appeared tight, but several syndicate officials away from the transaction were mainly focussed on, and puzzled by, the execution thereof, specifically the choice of only one lead manager and the apparent decision to eschew a roadshow.

One said that he did not understand why only one bookrunner was appointed, noting that it means the bonds will not be index eligible and that secondary market liquidity will be limited as a result, and another said it was “very bizarre”.

Some syndicate officials were also seemingly surprised by the emergence of a deal so soon after the programme mandate was announced, with several having said that they expected the issuer to go on a roadshow first.

“To me it sounds like a name that needs a roadshow,” said one. “When was the last time a debut issuer didn’t go on a roadshow?”.

Others also said they assumed the issuer would go on a roadshow first. One had yesterday afternoon said that he thought a deal would emerge in a few weeks’ time. However, he mentioned the possibility of it coming without a roadshow, saying that those involved would be exploring such an option.

A syndicate banker on Sondrio’s deal said that it was launched without a roadshow because it was felt that demand for covered bonds and the market backdrop were sufficiently strong to skip this step.

“We took a bit of caution by going over a two day process,” he said, “but we felt that the appetite for this product is strong enough that you can put it on the tapes and it works, and it did.”

The market backdrop for covered bonds in general is positive at the moment, he added, and Italian government bonds and OBGs have tightened considerably in the past few weeks.

He played down the importance of index eligibility, and said that having only one bookrunner can benefit the price discovery process, making it easier to get a handle on investors’ views on pricing.

“I think today’s deal shows that having multiple leads isn’t a pre-requisite for success,” he said. “It actually makes the process quicker.”

More than 50 accounts participated in Sondrio’s covered bond. Italian accounts took 72.5%, Germany and Austria 15%, the UK 10%, and Switzerland 2.5%. Asset managers were allocated 60%, banks 24%, and others 6%.

The purchase programme was announced in November 2013 as part of an initiative to stimulate residential mortgage lending in Italy, with CDP having set the size of the scheme at Eu3bn, for spending on obbligazioni bancarie garantite (OBG) issues and what was described as “securities of a similar nature”.

As previously reported by The Covered Bond Report, CDP began purchasing OBGs in December, having by early February bought a total nominal amount of Eu550m, with three issues in its portfolio.

A spokesperson today (Wednesday) told The CBR that CDP has since December subscribed to eight issues in the primary market, including RMBS.

“The corresponding volume is Eu835m in OBGs and Eu120m in RMBS,” he said. “At present, four out of eight bonds are still in CDP’s portfolio.”

Under the scheme, CDP will only purchase OBGs in the primary market, subject to eligibility criteria being met, and its involvement is tied to issuers committing to using the proceeds to grant new residential mortgages to Italian residents.

CDP’s OBG purchase programme will run until the state fund’s subscriptions have reached a total of Eu3bn under the scheme, according to the spokesperson.

“Banks still like CDP presence and role and ask for CDP intervention,” he said when asked if any consideration had been given to ending the scheme early in light of factors such as the ECB targeted longer term refinancing operations (TLTROs) and a fall in Italian banks’ borrowing costs on the public bond market.

The CDP spokesperson noted that it appears residential mortgage loans will not count toward banks’ borrowing allowance under TLTROs that the European Central Bank recently announced.

Banca d'Italia, Rome

Commenting on the proposals, which were announced by the Italian central bank on 4 April, the rating agency said that plans to restrict the acceptance of securitised notes will increase the quality of cover pools for obbligazioni bancarie garantite (OBG). The restrictions that will lead to the prospective increase in credit quality are: if the proportion of securitisation notes exceeds 10% of the cover pool then the underlying assets have to be originated by the issuer, and the issuer will have to retain the junior notes, which are deemed riskier.

“The proposed regulation also explicitly states that the issuer and the guarantor should be able to verify, at any time, the eligibility of the underlying securitised assets, 95% of which should be eligible for the OBG pools,” said Elise Savoye, assistant vice president and analyst at Moody’s. “The proposed regulation also extends to securitisation deal participants a duty to provide the required data to the asset monitor.”

In Italy securitisations of mortgages originated by a covered bond issuer have been used in cover pools to facilitate structuring.

According to Moody’s, the asset monitor would also be required to the check the eligibility of the underlying securitised assets in the same manner that it assesses assets directly belonging to the pool.

The rating agency said that under the proposals, an issuer would be required to recalculate its loan-to-value (LTV) ratios each time property valuations are updated.

“These additional details provide more guidance on the monitoring of the cover pool and reduce uncertainty in regards to the practical application of the LTV eligibility criteria,” said Savoye.

However, Moody’s cautioned that the credit quality of OBG pools could be negatively affected by a lowering of capital requirements, with a minimum consolidated supervisory capital for issuers of Eu250m instead of Eu500m, which will increase the number of potential OBG issuers.

“This could negatively impact the credit quality of the OBG pools; for example, smaller banks’ portfolios might display less regional diversification and higher correlation risks relative to the issuer’s performance,” said Savoye. “However, the capital requirement remains high which prevents small-sized banks and those of lower creditworthiness from issuing OBGs.”

In addition, the rating agency said that stricter requirements on asset encumbrance could reduce future asset availability to cover pools, saying that the regulation defines the Tier 1 ratio as the determinate for the amount of assets an issuer can transfer to the cover pool.

“This implies that for a given Tier 1 ratio, the amount of assets that could be transferred may be further restricted, reducing future asset availability for the OBG pool,” Savoye said. “However, this does not affect the assets already transferred and we do not expect the tightened asset transfer limits to have any immediate effect on the existing OBG programmes.”

Banca MPS's Palazzo Salimbeni

Leads Commerzbank, Goldman Sachs, MPS, RBS and Société Générale will price MPS’s first covered bond since March 2011 at 160bp over on the back of more than Eu4bn of orders. MPS’s obbligazioni bancarie garantite (OBGs) are rated Ba1 by Moody’s and A by Fitch, with today’s deal thought to be the first publicly placed Italian benchmark covered bond carrying a sub-investment grade rating.

The leads set initial price thoughts at 175bp over mid-swaps before revising the spread to go out with guidance of 165bp over. The spread was tightened further still and fixed at 160bp over on the back of the “huge” investor demand, with more than 200 accounts participating, according to a syndicate official at one of the leads.

He said the “extraordinary” level of oversubscription had allowed the spread to be fixed at flat to fair value, adding that “the periphery is exceptionally strong right now”.

The syndicate official said that he was unsurprised by the strength of demand, noting that a recent Eu1bn five year senior unsecured deal for the issuer had tightened by 30bp after pricing at 275bp over.

“If Monte dei Paschi works in senior format, it’s clearly going to work in covered,” he said. “Investors are looking at anything with a decent spread on it, whether it be something more subordinated or a peripheral issuer.”

Syndicate bankers away from the deal echoed this sentiment.

“MPS was always going to be a blow-out,” said one. “It’s a spread that was needed. There’s not a lot around with that spread.”

Another syndicate official away from the leads also said a strong response was to be expected.

“It’s the cheapest you can get,” she said.

The issuer paid the right price, according to another.

“It’s a great trade,” he said.

The lead syndicate official said MPS’s OBG issue was coming 48bp wider than Italian government bonds, which were trading today at 112bp over.