Italy

Fitch revised its outlook on Intesa Sanpaolo from stable to negative, on Wednesday, and affirmed the issuer rating at AA-

Secondary markets broadly remain under pressure, though there are cracks of light appearing here and there. The long end of the French market seems to be stabilising, there have been some buyers of Cédulas and there is still a smattering of interest in selective Scandinavian names. But the outlook remains dim and relative value against other sectors suggests covered bonds are expensive.

Italian CDS reached a record wide on Thursday morning as confidence in the country’s credit health and political response to the crisis decline. Covered bond analysts have altered their stance on Italian covered bonds, with a stagnant housing market, weak economic prospects and a lack of political consensus making the outlook increasingly negative.

Italian covered bonds have widened further following Standard & Poor’s downgrade of the sovereign’s credit rating from A+ to A on Tuesday but the covered bonds issued by UniCredit and Intesa Sanpaolo have outperformed BTPs, although in a very illiquid market.

Markets opened poorly on Monday morning and hit record wides in some indices, after concerns about Greece’s ability to meet its austerity commitments dominated weekend headlines. Syndicate bankers touted Tuesday as the day to bring a deal if market conditions were constructive, but the volatility means they expect no primary supply this week.

A UK based covered bond investor spoke to The Cover about the sovereign crisis. He believes the primary market should still be able to function, though the group of issuers capable of doing a deal will be much smaller. Greece is beyond hope, but he says the rest of Europe can still be saved.

UniCredit brought the Italian covered bond market back to life in dramatic fashion on Thursday, offering hopes of market access to other issuers from the jurisdiction. In addition to boasting a record high spread for an Italian issuer, UniCredit reports that the €1bn 10 year trade also carried the tightest ever spread to BTPs, pricing flat to the sovereign curve.

UniCredit reopened the Italian market once again on Thursday, to the surprise of market participants. After almost three months without Italian supply, the national champion followed ING into the 10 year segment, launching a €1bn no grow benchmark. Syndicate officials disagreed over where the deal priced relative to BTPs, with estimates ranging from flat to 10bp over.

ING on Wednesday confounded predictions that a German or Nordic name would end almost two months of inactivity in the covered bond market. The borrower launched a bold €1.75bn 10 year transaction, which offered investors a generous 15bp concession over its outstanding curve, providing the market with an indicator of the higher premiums now needed to print deals.

Prospective buyers of peripheral paper are waiting for imminent Spanish and Italian auctions to indicate market sentiment, said syndicate officials. Meanwhile the covered bond market would benefit from more attention to credit fundamentals, as opposed to an exclusive focus on underlying government bonds, said Morgan Stanley analysts.

A steady supply of high quality Germany SSA paper continues to give the covered bond market hope it will be next in line to reopen. Raiffeisen Landesbank Steiermark is understood to be preparing for a covered trade in early September, and syndicate officials said high quality names from several jurisdictions are assured market access. In the secondary, however, peripheral covered bonds still lag the debt of their respective sovereigns.

EFSF guaranteed covered bonds could be one solution to dwindling access to term funding among Europe’s banks. Even if markets reopen in September, costs are likely to be high across asset classes, particularly senior unsecured, said market participants. Funding constraints may lead banks to shrink their balance sheets, and if unchecked could lead to a grinding credit crunch in the southern eurozone.