Italy

Credito Emiliano has become the fifth Italian bank to set up a separate covered bond programme to access European Central Bank (ECB) repo funding. But bankers warn that these programmes could have a negative effect on issuers’ original public programmes, even though they help improve banks’ liquidity. This article has one comment.

After the drama and excitement of UniCredit pricing through BTPs, the European covered bond market has returned to normal — only to be outshone by senior unsecured, where three deals are on the way.

Intesa Sanpaolo was the most likely candidate to follow UniCredit’s groundbreaking €750m reopener, but could face an even higher spread, investors told The Cover on Wednesday. Italy also represents the only hope for peripheral supply in the short term, as Spain remains priced out of the primary.

UniCredit has rewritten the rulebook this week by pricing a covered bond 100bp tighter than where the Republic of Italy can fund itself. But, other than Intesa Sanpaolo, it is unlikely any other issuer could follow suit.

UniCredit drew a stellar reception for the first Italian benchmark in almost a year on Tuesday, with the vote of confidence for peripheral risk raising hopes for follow on trades from Italian and Spanish names.

Covered bonds are more stable, higher yielding and offer better protection than sovereign paper, according to Barclays analysts. But liquidity and security also drive investment decisions, and negative government bond yields show how much the market values both, an investor told The Cover.

An asset manager in Frankfurt tells The Cover about breaking the link between covered bonds and their respective sovereigns, investing in peripheral markets, and the problem with regulatory favouritism.

Moody’s cut one Italian covered bond programme but left another unscathed this week, after the issuers amended their programmes to loosen ratings triggers. The rating agency believes relaxing programme standards hurts investors, but at least one borrower has been able to prevent downgrades through sufficient overcollateralisation.

Not so long ago, it was commonly accepted that bank resolution regimes would hobble senior unsecured issuance. Unlike holders of fully protected covered bonds, which cannot be bailed in, senior noteholders faced the threat of haircuts in the event of bank insolvencies.

Covered bond issuers in core Europe have been taking steps to protect their southern European subsidiaries from currency reform should Spain or Italy be forced to abandon the euro.

European covered bond issuers, along with senior unsecured financials and investment grade corporates, were this week presented with excellent funding conditions, despite a ratcheting-up of pressure on Spain and Italy in the early part of the week.

Fitch has resolved its rating watch on Italian covered bonds, downgrading four programmes to between double-A and triple-B. This round of cuts was driven solely by new overcollateralisation requirements, but Fitch is bringing in a new methodology and could look at Obbligazioni Bancarie Garantite (OBGs) again soon.