Italy

All eyes are on the Greek vote this Wednesday and the start of the new quarter on Friday. Until then, the primary market is likely to be quiet. Aside from those issuers that have already mandated, there are rumours that two or three German borrowers are lining up to do dollar denominated benchmarks. The secondary market has seen some flow, and after recent heavy selling, interest has been more two way with some clients tentatively picking up cheap peripheral bonds and others tempted to pick up long dated core paper yielding over 4%.

Moody’s has placed five Italian covered bond programmes on review for downgrade along with the long term debt and deposit ratings of 16 Italian banks. Its negative rating action suggests the prospect of a double A Italian covered bond market is nearing.

The spotlight remains firmly on the Greek tragedy with bankers anxiously awaiting fresh developments in the hope that there may be some sort of reprieve. Issuers are well funded and can probably sit it out for now but the omens do not look promising. Bank traders say that selling pressure on the peripheral covered bond markets has continued unabated and, with many banks believed to be sitting on significant inventory, there is an increased risk of near term spread widening.

Abbey, Compagnie de Financement Foncier (CFF), Dexia Kommunalbank AG, Erste Bank, La Caixa and UniCredit all made presentations to UK based investors at an event sponsored by Crédit Agricole CIB this week. Whilst it was clear that many issuers are well advanced in their funding for this year, and seem to have plenty of liquidity to draw on, it is also clear that when the funding window re-opens, issuance is likely to take-off.

Fitch downgraded Italy’s Banco Popolare from A- to BBB+, on stable outlook, because the agency believes it will be difficult for the bank to improve profitability in an unfavourable market, and because of the bank’s high level of impaired loans.

Issuers are waiting for some better news out of Greece before deciding whether to press on with transactions, despite most receiving strong interest during roadshows. After selling in the secondary market on Thursday, sovereign spreads on Friday tightened on rumours of an aid package for Greece. But with market sentiment yo-yoing from one day to the next, any window for issuance before the summer lull is likely to be narrow, and perhaps too risky for first time euro borrowers such as ANZ Bank.

While Finland dominated the primary market on Tuesday, pressure on peripheral names was still the story in the secondary. Italian borrowers are lining up, with a trio of issuers said to be monitoring the market, though a difficult backdrop may mean postponement until next week.

Demand from insurance companies and pension funds for covered bonds has increased this year, according to Barclays research, while interest from central banks and asset managers has fallen. Germany and Austria are the only regions where overall investor interest for covered bonds has decreased noticeably, though in some jurisdictions investors have participated far less in issuance from certain countries.

Germany’s Aareal Bank kicked off covered issuance this week with a triple-A Pfandbrief on Tuesday, while UniCredit mandated banks for a seven year OBG which was launched the same day.

UniCredit launched the latest deal from the fastest growing euro segment in the covered bond world on Tuesday, a Eu1bn no-grow benchmark which in keeping with other Italian deals this year was highly oversubscribed.

After the activity and drama of the first part of the week, Ascension Day holidays across most of Europe have lent a quiet tone to the market and a more sedate close is anticipated. But with as many as five deals mandated and a few others rumoured, the pace is likely to pick up next week.

UniCredit’s German entity, HVB, on Tuesday issued its first benchmark Pfandbrief since January. The Eu1bn five year deal benefitted from an enduring safe haven bid and investors’ confidence that, despite its headquarters in a peripheral European country, it remains a German name with the advantages that status bestows.