August 23, 2018 / 12:56 PM / 9 months ago

Intesa sells first Italian bank bond since May's market turmoil

* Intesa aims to reopen funding channel for Italian banks

* Lender’s five-year bond attracts healthy demand but costs soar

* Italy sell-off began when new govt’s anti-austerity plans leaked

By Valentina Za

MILAN, Aug 23 (Reuters) - Intesa Sanpaolo offered a five-year bond on Thursday, seeking to reopen the funding market for Italian lenders after a violent sell-off of the country’s assets in past months.

Intesa is the first Italian bank to raise unsecured funds since a new anti-establishment coalition scared off foreign investors by pledging to boost public spending and unwind previous structural reforms.

Foreigners dumped 56.5 billion euros in Italian bonds in May-June, central bank data showed, pushing Rome’s 10-year debt costs to a four-year high of 3.2 percent from less than 2 percent in mid-May, when markets first got wind of the new coalition’s plans.

Lenders’ funding costs, which are tied to sovereign yields, shot up and markets shut up for Italian issuers. Traders said at the time heavyweights such as Intesa and UniCredit would have to issue again first before others could follow.

“Everyone was waiting for Intesa,” an official at an Italian bank’s debt syndication desk said. “They have a strong name and had to go ahead.”

Intesa is taking advantage of a market respite before a new possible bout of turbulence when rating agency Fitch reviews Italy’s sovereign rating on Aug. 31 and the government updates its multi-year deficit and growth forecasts in September and tensions over the 2019 budget intensify.

Italian banks are vulnerable because they hold nearly one fifth of the country’s 2 trillion euros in bonds. Italy’s banking index has slumped 26 percent since mid-May.

Intesa’s five-year senior preferred bond has attracted healthy demand with orders worth around 1.8 billion euros by mid-day, a person close the transaction said.

An initial yield guidance of 200 basis points over the mid-swap rate has been lowered to around 190 basis points, the person added.

However, a comparison with the last bond Intesa issued soon after March’s inconclusive election shows the extent of the damage to banks’ funding costs.

In March Intesa sold a 10-year senior bond at 77 basis points, less than half the current spread for a maturity which is twice as long.

Deutsche Bank also tapped markets on Thursday, issuing a five-year senior preferred bond at an expected yield of 90 basis points over mid-swap, IFR reported.

Italy’s five-year debt costs stand at 2.3 percent compared with Germany’s minus 0.28 percent.

Second-quarter results at Italian lenders highlighted the blow to their capital levels from the falling value of their sovereign bond holdings. Analysts warn of the possible hit to funding costs down the road.

“They have only issued covered bond instruments at increasing costs since the crisis started,” HSBC analysts said in a recent note.

Italian banks had sufficient liquidity that they could afford to wait out for better market conditions, they wrote.

“However, being present in the funding market and issuing at the right conditions are both factors that relate to the viability of the business model of a bank.”

Banca IMI, Deutsche Bank, JPMorgan, Societe Generale and UBS managed Intesa’s issue. (Reporting by Valentina Za Editing by Alexandra Hudson)

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