Italian renaissance: more banks to join in bond boom

* Mid-tier banks like UBI sold CoCo bonds in Jan * More CoCo sales may follow after full-year earnings * BPER, Intesa, Mediobanca seen as potential candidates By Abhinav Ramnarayan, Valentina Za and Maiya Keidan LONDON/MILAN, Feb 3 () – More Italian banks are set to line up to sell high-risk debt in the coming weeks, taking advantage of a booming bond market and investors’ new-found confidence in what has been a troubled corner of Europe’s financial sector. A storming reception from investors for high-risk bonds sold in January by mid-sized banks UBI and Banco BPM could spur other second-tier rivals such as BPER Banca to follow suit, several bankers said. These bonds, known Additional Tier 1 (AT1) bonds, are a form of contingent convertible or “CoCo” bonds and count towards a bank’s Tier 1 capital. They can be converted into ordinary shares or be written down in case of losses to beef up core capital buffers. The vigorous investor demand also allowed Monte dei Paschi di Siena to sell a long-delayed Tier 2 subordinated bond, which while not a CoCo bond marks a big step forward for a bank rescued by the state in 2017. Also A-list names such as Intesa SanPaolo and Mediobanca are seen as potential candidates. Mediobanca is yet to issue its first AT1 bond while Intesa may take advantage of record-low debt costs to do some pre-funding ahead of a call option on 1.25 billion euros of AT1 bonds coming up in January 2021, two bankers said. BPER, Intesa and Mediobanca declined to comment. The earnings season kicks off this week for Italian banks, which may provide fresh impetus for a new issuance round, Marco Spano, head of debt capital markets at Mediobanca, said. “Italian banks have made massive progress in cleaning up their balance sheets in recent years, and the improvement in their asset quality is reflected in the stock performance among other factors – including a more stable political environment,” he said. “Investor mood and demand for AT1 bonds have certainly benefited from the stock rally.” The Italian banking stock index is up 20% from its August 2019 trough. Full-year earnings should provide the latest evidence of clean-up efforts which have more than halved Italian banks’ problem loans from a 2016 peak of 360 billion euros ($397.58 billion). Italy’s banks, which are large holders of their own country’s debt, have also drawn support from a rally in government bonds after a coalition between the mainstream PD party and the 5-Star Movement took over from a eurosceptic government. Against this backdrop, UBI issued 400 million euros of CoCos at a 5.875% yield, inspiring Banco BPM to hit the market the next day and raising a similar sum in CoCo debt at 6.125%. “Those two banks were in London in December giving investors a credit update, explaining their non-performing loan situation and so on, so the market was prepared when they launched,” said Filippo Alloatti, a senior credit analyst at Hermes. “If you look at the broader political picture and the risk-on environment, these levels are not obscene even though it’s a deeply subordinated obligation,” Alloatti said, referring to the coupon levels on the bonds. Some investors however are also counting on a long-awaited round of mergers to finally kick off among mid-sized Italian banks which would strengthen the sector. “We think the EU will force mergers to reduce risks of bank defaults,” Louis Gargour, chief investment officer at LNG Capital, a hedge fund that has bought Italian debt in the past, but now believes it is not sufficiently cheap. For Italian banks, however, it makes absolute sense to keep pressing the button, according to bankers. “Anyone can see how good the market is right now,” said one Italian banking official. $1 = 0.9055 euros
Reporting by Valentina Za in MILAN, Abhinav Ramnarayan and
Maiya Keidan in LONDON; Editing by Jane MerrimanOur Standards:The Thomson Trust Principles.