Reuters: Bankruptcy News: Italy's UniCredit offers taste of peripheral Tier 2

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Italy's UniCredit offers taste of peripheral Tier 2 Oct 22nd 2012, 13:04 By Aimee Donnellan Mon Oct 22, 2012 9:04am EDT LONDON, Oct 22 (IFR) - Italy's UniCredit SpA is set to become the first European peripheral bank to price a subordinated debt issue in over a year later on Monday having opened books on a new 10-year Tier 2 euro benchmark bond. UniCredit itself was the last peripheral issuer to raise Tier 2 debt back in April last year, and is also the first bank to test investor appetite for peripheral sub debt which has an explicit reference to looming bail-in regimes. The only banks that have priced these types of deals in Europe have been the likes of Nordea, DNB Bank and more recently SEB, as investors favoured safer credits in core jurisdictions. The Milan-based borrower is seeking to take advantage of the credit rally that followed Draghi's promise in July to do whatever it takes to prevent the break-up of the euro Lead managers Credit Suisse, Goldman Sachs and UniCredit began testing investor appetite for the bullet trade at mid-swaps plus 530bp area, before revising guidance sharply tighter to plus 510bp/515bp after orders topped EUR4bn. At the lead update, the leads said UniCredit would raise EUR1.25bn at the tight end of revised guidance. UniCredit's outstanding 6.125% April 2021 Tier 2 issue was trading at a z-spread of around 470bp, having been quoted at 580bp over in early September. The iTraxx Subordinated Financials index has tightened to 289bp from around 417bp over the same period. Lead managers also looked to the Milan-based issuer's 2017 deal, which was quoted at a z-spread of 453bp. Those two deals suggest a new issue premium of around 60bp was offered during the initial marketing of the new paper. LOOMING BAIL-INS One banker explained the new issue concession was offered to compensate investors for the reference to the European Crisis Management Directive (CMD) which is set to come into force in 2015 and will give regulators powers to imposes losses on bondholders in a resolution situation. Similar to Austrian bank Raiffeisen Bank International, reference to the CMD and statutory loss absorption language is included in the risk factors rather than in the terms and conditions of the bond. ABN Amro by contrast included the reference in the terms and conditions, which is seen by investors as a more aggressive approach and hence a more costly one for issuers. The new UniCredit deal follows a week-long investor roadshow that saw the borrower meet with some 50 investors, many of whom had concerns about peripheral debt. "There have been a lot of questions about Italian sub debt but I think in general most accounts are comfortable with the UniCredit name," said a banker. Fears about peripheral subordinated debt were ignited in recent months by news out of Spain that subordinated debt issued by the country's banks could suffer losses in a restructuring even before owners of hybrid instruments - usually treated as junior - are fully wiped out. New legislation suggests that further losses would be split "proportionately" between the next most junior instruments (hybrids such as convertible or preference shares) and subordinated debt. For the Tier 2 deal, a 10-year bullet structure was chosen, as one lead manager said that while Asian investors are comfortable with callable bonds, European buyers prefer the security and higher yield associated with a bullet. The deal is expected to be rated Baa3/BBB/BBB+, all with negative outlook. The Moody's rating is on the cusp of sub-investment-grade, whereas S&P and Fitch offer something of a buffer. There is also only a one to two notch differential to the issuer's Baa2/BBB+/A- senior ratings, which is in contrast to Austrian bank Erste, rated BBB by S&P for subordinated debt, but three notches higher at A at the senior level. (Reporting by Aimee Donnellan, Editing by Helene Durand, Julian Baker) Link this Share this Digg this Email Reprints

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