After Credito Emiliano attracted demand of more than €1bn for its €750m five year OBG issued last week at 95bp over mid-swaps, bankers were left wondering which Italian institution would follow.
The improvement in sentiment that followed this deal was given a further boost following the Italian government’s recent BTP sale — which flew off the shelf.
However, the fact that UniCredit stumped up more than 6.5% last week to raise $2.5bn of three year senior non-preferred funding will have driven home the point that this market is not yet economically viable for the rest of Italy’s banks.
Although covered bond issuance can’t help banks meet their regulatory ratios, it can at least demonstrate market access.
And, with a few successful OBGs in hand, ECB president Mario Draghi would then be able to show his political paymasters that a third TLTRO is required, not to stave off a collapse of the Italian banking system, but to help lower funding costs and bolster economic growth.
Showing they have access to the market would be particularly helpful for the country’s weakest banks, such as Banca Monte dei Paschi di Siena.
Last year Monte missed the deadline for tier two issuance, causing the ECB to question its ability to “execute its funding strategy”.
Monte’s refinancing needs sit alongside a wide range of other Italian institutions, which have been among the heaviest borrowers of the ECB’s second TLTRO.
From June this year, €400bn of TLTRO II funding will no longer be considered stable funding — which means the ECB will want to have a material alternative liquidity facility in place well before then, possibly by the end of March or early April.
For that to happen, it would be make sense for several Italian banks to have demonstrated access to some sort of funding and, in practice, that means the OBG market.
Given that Monte’s outstanding OBGs due July 2024 trade around 160bp over mid-swaps, a new five year would probably need to start at 200bp at the wider end of the range.
Banco Popolare di Milano (BPM), which issued two OBG benchmarks last year, could be another candidate. Its most recent five year trades around 120bp, implying a starting spread in the region of 150bp.
Banca Carige may not seem like the obvious candidate given its inability to raise capital, but its cover pool is in good shape, its OBGs have an investment grade rating and there’s a fair chance that, like Banesto and Banco Popular, it will eventually be sold to a higher rated bank.
They might all be troubled banks but by issuing an OBG they would all essentially show they are open for business (admittedly, at levels that are on the steep side). Then all the ECB will need to do is give them a helping hand.
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