Sub-benchmark, sub-investment grade Italian bank debt was in vogue on Thursday as Banco BPM grabbed €350m of Tier 2 pre-funding and illimity Bank made its capital markets debut.
The two Italian lenders - each with very different profiles and business models - became the latest issuers to benefit from a highly conducive primary market, which has seen higher beta and often sub-benchmark sized transactions win strong support from investors in recent weeks.
A banker at one of Banco BPM's leads said the deal - which is expected to be rated B1/BB (Moody's/DBRS) - was aimed at pre-funding part of next year's issuance plan, while taking advantage of a recent rally in the bank's secondaries. Italian bank debt has tightened in recent weeks amid a broad credit compression, supported by a buzz over consolidation in the Italian banking sector.
"They were trying to take an opportunistic view of the market given how strong the momentum has been," he said. "They’ve got Tier 2 needs next year and they’ve got Pillar 2 requirements as well."
Leads Banca Akros, Bank of America, Credit Suisse, Deutsche Bank, HSBC and UniCredit offered the January 2031 non-call 2026 transaction with initial price thoughts of mid-swaps plus 410bp area for an expected size of €300m, before moving to guidance of 380bp-385bp (WPIR), with books in excess of €850m.
A €350m deal was subsequently launched at 380bp, with demand having fallen to €700m.
The new issue is Banco BPM's second Tier 2 of 2020, following a €500m 10-year non-call five transaction priced on September 7. That deal, which was marketed on a coupon basis and priced at 5% with a spread of 541.9bp, has tightened significantly in the months since and was bid at 375bp on Thursday morning.
Extrapolating from that deal, bankers said the new issue was priced without any concession.
"They compressed 30bp through the process as well, which is great," said a banker away from the leads. "A €700m book at the end for a €350m deal is not a huge level of oversubscription but I would say that typically once you get away from the champions in Italy you don’t get massive order books – especially for a sub-benchmark trade – so I think it very much tied in with what we were expecting. "
Investors buy into illimity story
Illimity, meanwhile, was in the market with its first ever capital markets issuance, a €300m senior preferred.
Illimity is an Italian challenger bank with a focus on specialist lending to SMEs and the purchasing and servicing of non-performing loans. Formed in 2018, the bank also offers current accounts, deposits and third-party products to retail customers through an online-only platform.
Following investor calls earlier this week, the three-year deal was marketed on Thursday morning with initial price thoughts of 3.75%-4% for an expected size of €300m.
Leads BNP Paribas, IMI-Intesa Sanpaolo, Morgan Stanley and NatWest Markets then set guidance at 3.5% area (+/-0.125% WPIR) and fixed the size at €300m, before launching the deal at 3.375% on the back of more than €1bn of orders.
“It’s their first DCM deal but they already made quite an impression on the equity market with their IPO last year," said a banker at one of the leads.
"They’re run by a management team that has a pretty strong track record in capital markets and in banking, so I think a lot of investors – especially in Italy – are familiar with the name and the credit. This was the logical next step for them in terms of their investor outreach. Obviously there was a lot of demand from domestic accounts but the demand we saw from international investors was really encouraging and a testament to the investor work they’ve been doing over the last couple of years.”
The leads said there were no proper comparables for the new issue and that the price was driven by investor feedback.
“A lot of people were looking at Banca IFIS, which is probably the widest Italian name in senior preferred, but even that has a different business model and that was trading around 2.5%," said the lead banker.
"Investors generally wanted a premium over that, but what we have here is investors that are buying into the story at the early stages because it is a business with pretty significant growth potential and rating upgrade potential as well."
The deal is expected to be rated B by Fitch, one notch below the issuer's rating of B+, based on an estimated recovery rating of RR5.
"This reflects Fitch's view that recovery prospects for the bank's senior preferred creditors would be below average given full depositor preference in Italy and the bank's funding structure, which we view as effectively reducing recovery prospects for senior preferred creditors in a liquidation (our central assumption should illimity be in distress)," wrote Fitch.
"Illimity's funding structure mainly relies on customer deposits, ECB funding and repurchase agreements. Illimity has not issued senior preferred debt before and has no buffers of subordinated debt and hybrid capital that would participate in absorbing losses ahead of senior debt."