Italy

A new world order in debt markets could soon be ushered in with the first covered bond new issue to be priced through domestic government bonds, investors and bankers were forecasting this week.

Moody’s placed Banca Popolare di Milano’s covered bonds on review for possible downgrade on Monday, because of a corresponding rating action taken on the bank itself.

Amid growing concern over peripheral euro sovereigns, covered bond analysts are focusing on the exposure to the troubled periphery of public sector cover pools in core jurisdictions.

Banque Populaire Caisse d’Epargne restarted benchmark issuance on Tuesday, launching the first euro denominated Obligations á l’Habitat. The inaugural Eu2bn deal was well received by a cash rich investor base that has had to make do with secondary market purchases since April 14. Though there was no further primary issuance, UniCredit Bank Austria and Sweden’s Stadshypotek mandated leads for three and five year deals respectively, to be launched in the near future.

After two weeks without benchmark issuance market participants are looking past the UK royal wedding and May Day holiday to a resumption of primary market activity on Tuesday. Syndicate officials were modest in their expectations however as, with peripheral markets effectively closed and some core names in blackout, prospective issuance from for core jurisdictions appears sparse.

Secondary trading has picked up pace in light of limited primary issuance. An attractive rates environment has ensured continued demand for long dated French paper, while selling has increased in peripheral covered bonds now flat to the government curve.

French, UK and German names were active on Wednesday, continuing the shift away from southern jurisdictions. Lloyds launched its second euro deal of the year and Nordea became the latest borrower to tap the dollar market. UniCredit ensured peripheral Europe was represented, mandating for a Eu500m tap of an outstanding 2017 trade.

Obtaining funding for a single-A rated entity from a peripheral jurisdiction was never going to be a stroll in the park — in senior unsecured it has, at times this year, been impossible. Italy’s Banco Popolare raised Eu1.25bn from a 4.75 March 2016 issue via Banca Aletti, BNP Paribas, Goldman Sachs, RBS and UBS on Tuesday, showing how strategically important the covered bond market is, not just for the issuer, but for the health of the entire banking system.

The primary market has got off to a very strong start, with books building on as many as four deals across four jurisdictions. The transactions, which include two tier two borrowers from peripheral markets, have attracted a total of 440 orders worth a combined Eu8bn. The strong showing bodes well for new peripheral tier two borrowers who are said to be lining up with deals this week.

Spanish and Italian banks are expected to take advantage of the bid for peripheral covered bonds, as witnessed last week by the strength of demand in Banca Carige’s trade, two taps from peripheral issuers and Santander’s blow-out deal. La Caixa has mandated for a four year as other Spanish borrowers line up and Italy's Banco Popolare has mandated.

After Bankinter and Banca Popolare Di Milano successfully issued taps on Wednesday, Banca Carige will today price an Eu500m deal on the back of Eu1.2bn demand. Given that the order book and deal size could have been heavily increased, lingering doubts over tier two borrowers’ access to the covered bond market should be dispelled.

The primary market opened with a bang on Monday morning as books on the newly announced Santander four year exploded with Eu4bn of orders. But the strength of demand for this national champion is likely to provide an interesting contrast to Banca Carige, which has embarked on a three day roadshow.