Italian banks pre-empt political noise

IFR 2416 - 15 Jan 2022 - 21 Jan 2022
5 min read
Americas, EMEA
Tom Revell

Italian banks converged on the market last week to lock in attractive funding costs while they last, with an eye on potential volatility ahead of the country's looming presidential election.

In terms of the number of tranches, Italy was the most active jurisdiction in the euro FIG market last week with eight lines offered.

With rates expected to rise and credit spreads expected to widen in 2022, banks from across Europe have been quick to load up on funding this month. Italian issuers proved extra motivated given the presidential election, which will be held on January 24.

The prospect of current prime minister Mario Draghi being chosen as president has raised concerns over a return of political instability, as his departure could trigger an early general election.

Mediobanca was first to test the waters with a €500m July 2029 non-call 2028 senior preferred on Monday.

"The upcoming election was one of the drivers," said a banker at one of Mediobanca's leads. "On the one hand you have to consider that the January window is usually much more supportive and investors are starting from scratch with money available to invest, and on the other hand you have to take into the account the expected noise that could arise because of the presidential election."

Bankers cited encouraging signs as the €500m July 2029 non-call 2028 senior preferred garnered €875m of demand, allowing the leads to price the deal some 20bp inside initial price thoughts at 90bp over mid-swaps, incorporating a relatively modest new issue premium of around 5bp.

"In terms of book size it is okay, maybe not a blowout in terms of momentum and investor appetite, but certainly good enough for a €500m print, allowing them to price relatively close to fair value," said a banker away from the deal.

No duration please

But more challenging trades were to come.

On Tuesday, UniCredit marketed a six-year non-call five and a 10-year senior preferred duo, at IPTs of mid-swaps plus the 105bp area and 135bp area, respectively.

Deals across asset classes and jurisdictions showed a clear bias towards shorter tenors last week, reflecting rates expectations, but some issuers still found some joy at the long end. In the case of UniCredit's 10-year, however, the combination of duration, potential political risk and heavy competing supply limited demand to just €700m.

The tranche was priced at 125bp and sized at €500m, crystallising a sizeable new issue premium of 15bp versus UniCredit's curve.

In contrast, the €1.25bn shorter tranche drew €1.5bn of orders and was priced at 85bp, 7bp–10bp back of fair value.

"Lower-yielding, long-dated deals have encountered comments such as 'hang on, yes I like the credit, but there is potential political volatility ahead but don't give me too much duration'," said a DCM banker who worked on some of last week's deals.

Those misgivings were apparent again on Wednesday as Credit Agricole Italia launched a dual tranche 10 and 20-year covered bond.

The €500m 20-year was priced in line with IPTs at 20bp, incorporating an 8bp premium, as demand topped €650m. The €1bn 10-year fared better, attracting more than €1.6bn of orders, allowing the leads to tighten 3bp from IPTs and trim the concession to around 6bp.

Yield talks

In the belly of the curve, with the additional support of attractive yields or ESG labelling, deals gained greater traction.

Also on Wednesday, Banco BPM landed an upsized Tier 2 – which bankers said was an impressive outcome given the deal's sub-investment grade expected ratings of B1/BB (Moody's/DBRS).

The 10-year non-call five transaction was marketed with IPTs of the 365bp area for an expected size of €350m. The spread was ultimately set at 340bp and the size at €400m, with books in excess of €700m. Bankers saw fair value for the deal between the mid 320s and 330bp.

Rare issuer BFF Bank at the same time raised €150m of AT1 bonds at a price of 5.875%.

In both cases, attractive yields offered sufficient compensation for the looming uncertainty, said bankers, adding that Italian banks' relatively limited issuance needs should also support prices if and when conditions deteriorate.

"Particularly if you think about AT1, Tier 2 and even senior non-preferred, Italian banks still offer a decent premium to most of their Northern European competitors, therefore I suspect ... the big banks are unlikely to move too much because people see value in those levels," said the DCM banker.

In the senior market, meanwhile, Credito Emiliano landed an inaugural green bond, raising financing for a portfolio of green building loans.

The €600m deal was launched at 105bp, inside IPTs of the 125bp area. The book was last reported above €1bn.

Additional reporting by Malicka Sielinou