Monday, 23 July 2018

UniCredit testing new covered structure (free content)

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UniCredit’s first bond from its new conditional pass-through Obbligazioni Bancarie Garantite programme will provide some crucial insight into what investors will pay for this relatively untested structure. 

The conditional pass-through format is a less collateral-intensive structure than traditionally seen. It permits the issuer to extend the bond’s maturity in case it runs into default, postponing repayment without having to immediately sell or pledge the cover pool - in UniCredit’s case, up to 38 years after the initial maturity date.

As such, the structure allows higher ratings than traditional covered bonds. UniCredit’s new €25bn conditional pass-through programme is rated AA+ by Fitch, compared to AA- in the case of its regular OBGs.

But the format is relatively untested in public benchmark format, with only NIBC preceding UniCredit, and that back in October 2013. Many therefore expected UniCredit to pay a small premium, particularly because the pool structure includes employee (11%) and commercial (20%) loans alongside the more usual private mortgages.

But those factors are countered by the structure’s ratings advantages and the spread compression that has taken hold of the covered market more broadly.

“A look at the NIBC example shows  that such structural differentiation has shrunk significantly in the wake of general spread convergence. This should also benefit UniCredit,” Commerzbank analysts wrote in a note.

Added to that, the bonds are CRR, ECB repo, CBPP3 and LCR level 1 compliant, broadening their appeal.

IPTs came at mid-swaps plus mid-20s this morning. A source close to the deal said UniCredit was targeting a €1bn size.

“It looks very cheap to me – they’re starting cautiously for their first pass-through,” said one syndicate official.

Guidance followed at 20bp area as books hit €1.3bn. The spread was later set at 18bp over swaps as orders passed €2bn.

“On average, accounts are looking at this new structure like it is part of the previous programme,” said a lead.

“Many accounts like bank treasuries view the different structure just as a technical feature and are not really paying attention to the difference. Some others such as asset managers are looking into it more deeply.”

He saw fair value at 15bp, putting the new issue premium around 3bp. UniCredit has a January 2024 covered bond bid at 15bp over swaps, according to Tradeweb.

The bank undertook a roadshow in the first half of this week, after announcing the programme last November.

Banca IMI, Credit Suisse, Natixis, RBS, SG CIB and UniCredit are leads on the deal.

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