Step up calls may help Italian bond issuers

By Gabriella Bruschi

MILAN, April 22 (Reuters) - Credito Valtellinese's decision not to exercise a call option on a bond could start a trend for issuers, who might prefer to pay a higher coupon on existing bonds rather than raising fresh cash with costly new issues.

The corporate bond market is effectively shut for most issuers as current market turmoil makes the cost of credit more expensive but at the same time it means not repaying a bond ahead of maturity is no longer carrying a stigma.

Credito Valtellinese (PCVI.MI: Quote, Profile, Research) said recently it would not exercise a "step up" call option to repay a 150 million euro 10-year Lower Tier II bond after five years. As a consequence, the coupon paid will rise to 160 basis points on the three-month Euribor rate, from an initial spread of 100 basis points.

Step up call options give the issuer the facility to repay a bond ahead of its maturity or pay a higher coupon.

"Our decision stemmed from purely economic reasoning," said Tiziana Camozzi from investor relations at Credito Valtellinese.

"To replace the bond with a new one would have been more expensive given current market conditions."

A banking source said a new bond by Credito Valtellinese would likely have to offer a spread of around 300 basis points on the Euribor rate.

Credito Valtellinese is rated 'Baa1' by Moody's Investors Service with a positive outlook and 'A-' by Fitch Ratings with a stable outlook. "We don't have any liquidity problems," Camozzi said. "As we can decide on the repayment every three months, it's not a given that we won't change our mind."