Iccrea Banca was unable to move the pricing of a €500m four-year obbligazioni bancarie garantite transaction on Tuesday despite offering a decent new issue concession and a pick-up to BTPs, an outcome that puzzled market participants – although the deal did benefit from a late demand boost after final terms were set.
“It looked fine [at the initial guidance], from the outside, but markets are super-tricky these days,” said a banker away from the trade. “Some transactions work really well, others don't and you understand why. But sometimes there are transactions where you may not understand all the reasons why it looked a bit weak.”
Iccrea announced the mandate for its deal – the second euro benchmark OBG issued in October – on Monday. Bankers away from the leads looked at the €500m five-year OBG launched by compatriot Banca Popolare di Sondrio on October 17 as a marker for where Iccrea should price and how the deal may fare.
Sondrio landed its deal at mid-swaps plus 81bp, inside 83bp area guidance, and drew over €730m in orders (including €50m of lead participation). That trade was quoted around 78bp on Tuesday, according to LSEG data.
Iccrea picked a shorter tenor – recent OBG supply having been crowded around the five-year spot – and started at a level that offered an initial new issue premium of roughly 10bp–18bp, according to bankers on and away from the deal.
Joint bookrunners ABN AMRO, Barclays, Citigroup, Commerzbank and UniCredit began marketing the trade at mid-swaps plus 75bp.
“That’s a nice shorter tenor, which might be attractive to investors, and also the starting level looks quite good, especially when you compared this to govvies," said the first banker. “Investors have been demanding some pick-up versus BTPs … here in the shorter tenor BTPs trade tighter, so 75bp [over mid-swaps] looks like a nice pick-up of around 15bp–18bp versus BTPs.”
A lead banker argued the spread over BTPs was smaller, within a range of 10bp to the low teens – similar, he said, to the pick-up other OBG issuers paid when the market reopened in June and the same as Iccrea paid back in July for a €500m 5.5-year OBG.
The pace of the deal's execution was slow, with the first book update taking over three hours to be released. The leads fixed the spread in line with guidance at 75bp as orders stood above €500m (lead interest excluded).
Iccrea's book grew further once the spread was set and closed above €720m. But onlookers said its inability to tighten pricing was unexpected.
“I was a bit surprised to be honest that they didn’t manage to move,” said a second banker away from the trade, adding that the pricing level should not have been an issue since the new issue premium was in line with if not higher than those conceded by other recent Italian OBGs.
”Recently, most covered bonds from Italy have been in the context of low single digits up to 10bp new issue concession,” he said. “Maybe the benchmark size wording didn’t help … maybe it scared some people who may have thought that this was going to be a €750m trade, and there is definitely a difference between a €500m versus a €750m tranche in this market, especially for covered bonds,” he said.
The first banker also noted that Iccrea had already tapped the market in July with a €500m 5.5-year OBG. “Maybe [some] investors weren’t able to increase their limits to participate in this transaction,” he said.
In response, the lead banker pointed out that the majority of OBG issuers have printed €500m size trades this year and that other Italian names have also tapped the market more than once.
“It’s definitely easier to do a proper first trade where there is an abundance of lines but that’s not a clear detriment to [subsequent] transactions,” he said.