By Anil Mayre
LONDON, Sept 17 (IFR) - Italy's UniCredit and Ireland's Permanent TSB launched surprise securitisation tender offers last week, despite complying with their respective stress tests, on the back of a massive rally in bond prices that restrict capital gains.
The offer to buy back Italian RMBS and leasing paper is the first such exercise from that jurisdiction since January 2010, when UniCredit itself reclaimed EUR2bn of bonds.
The last Irish offer was at the end of 2011, when Bank of Ireland remedied its EUR350m core Tier 1 capital shortfall with a sub-par buyback.
That Irish offer, and previous Iberian buybacks, worked well for banks that were looking to improve capital ratios at a time when ABS prices were still depressed for peripheral bonds, particularly junior debt.
Current market levels are significantly higher than the second quarter, but both offers progressed nonetheless. UniCredit may be less sensitive to price movements given the size of the bank and that it still had funding options open to it.
But for bailed out Permanent TSB, it is a different scenario complicated by the fact that it also launched a consent solicitation process to amend the deal documents. All of this takes time, and time means money, especially as the market has moved so significantly over the summer.
One illustration is where Permanent TSB is offering to buy back Class B of Fastnet 2. The issuer is offering a minimum 50% for that tranche (which includes a 3% bonus for holders tendering before September 28 2012). In May, the second best price achieved on a BWIC was just 18.15%.
Italian ABS has also made progress, but it traded higher than Italian paper anyway. Cordusio 4 D, for example, covered at 35% one month ago, and UniCredit is offering a minimum 43% for that now. Its senior bonds have been in the 90s for some time.
Junior tranches tend to be small and so the gain is not substantial, even at low prices, but they contribute to precious capital ratios and originators are still willing to buy senior tranches because they are eligible for ECB repo.
UniCredit said the buyback was not just about topping up its capital levels.
"The reason for launching the offer is that we want to support our own securitisations and to optimise the balance sheet while providing investors with the possibility of selling at a fair price,2 said Federico Ravera, head of strategic portfolio at UniCredit.
And the recent tightening does not appear to be too much of a hindrance for the issuer.
"Prices are better than two months ago but they are still quite attractive as they are between 37% and 95% circa. At the same time, the offer provides investors with the possibility of benefiting from the recent market rally," Ravera added.
Predicting where prices will peak or trough is almost impossible, and the senior Cordusio RMBS tranches were already well into the 90s before the tender was announced, so capital gain was always going to be limited.
If UniCredit fills the orders at the minimum price advertised it will stand to make about EUR165m from the EUR1bn it said it would repurchase.
The motivation for Permanent TSB, on the other hand, is clear.
"The rationale for the offers is to strengthen the quality of the purchaser's capital base and to contribute to improving the purchaser's regulatory capital position, thereby allowing the purchaser to meet its minimum capital requirements imposed by the regulator," the offer statement reads.
The issuer complies with its capital target, but this tender could provide it with as much as EUR400m more. This figure is based on it repurchasing the EUR1.2bn of Fastnet 2 outstanding at the minimum prices excluding the 3% early deadline bonus.
It has not specified exact targets, but will take out all offers that come in at the minimum price, and may scale back those that want to tender above the minimum.
This can go some way to explain why it chose a modified Dutch auction. If investors see the levels as reasonable and meet the bonus deadline, they will be taken out at the same level anyway.
UniCredit, meanwhile, has capped amounts for each tranche, ranging from 13% to 27% of the notes outstanding.
"There is a specific cap for each single tranche based on our internal approval process. We believe it is sufficient to provide enough liquidity to investors interested in selling their positions," said Ravera.
"We have been transparent in communicating our internal credit limits as well as a minimum tender price to the market because we wanted to be perceived as being as investor friendly as possible. We wanted to disclose the relevant information to the market so that investors can decide whether to tender. They can make an informed decision," he continued.
UniCredit employs an unmodified auction - which means it assesses each bid separately rather than averaging them out.
"The unmodified Dutch auction provides a high degree of flexibility while achieving the goals of providing liquidity at a fair price to investors," said Ravera.
Regardless of the choice of option, debt purchases have to be funded. UniCredit rejected the idea that LTRO money or bond proceeds from the EUR1bn three-year issue sold two weeks ago (it settled the same day the offer was announced) would be used as it could meet its targets."
Funding these buybacks is not a major problem considering the size of the tender cap compared with the balance sheet of the bank," Ravera said.
Permanent TSB, on the other hand, is state-owned, but a source involved in the process said it had liquidity on hand to fund the purchases.
It is tempting investors to tender their notes early, including a 3% premium that pushes the minimum price up to 72.5% for Class A2, 50% for Class B, 40% for Class C and 30% for Class D.
It is also wants to amend the terms on the transaction, introducing new rating triggers.