In pricing its five year Obbligazioni Bancarie Garantite (OBG) at 290bp over mid swaps, UniCredit has shown that that it is perfectly possible for an issuer to detach from its sovereign — but only if the circumstances are right.
And for UniCredit, the circumstances are unique.
Unlike any other Italian borrower, its revenues are internationally diversified, so it is far less correlated to pure Italian risk than any other domestic bank.
Intesa Sanpaolo might be able to follow suit, but at a spreads much closer to the sovereign. Like UniCredit, it is a systemically important, strong domestic credit that boasts a large retail deposit base and its OBGs are also backed by pristine collateral. OBGs benefit from regular asset coverage tests, giving confidence to the value of assets.
By contrast, Spain’s tumbling house prices have left its collateral looking overvalued — particularly in the absence of asset coverage tests.
Apart from which, the volume of outstanding OBGs is tiny relative to Cédulas.
Many OBGs have become technically squeezed and it is almost impossible to find offers in the secondary market, meaning OBGs are often very expensive to fund in the bilateral repo market, while Cédulas offers are easy to come by.
But whether Intesa Sanpaolo would choose to lock in a loss, and fund its mortgage assets with liabilities likely to be around 2% more expensive, remains to be seen. It is certainly not a sustainable business model to fund at these prohibitive levels — even if they’re cheaper than BTPs.
Prohibitively expensive as they are, the situation is even worse for Spanish issuers. Take Santander and BBVA for example: though 70% of their revenues are generated outside Spain, their outstanding bonds trade at almost 500bp over mid-swaps in the five year.
That would suggest they could be locking in losses of around 4% on the underlying cover pool assets.
Even if they did take the plunge and issue Cédulas, it would probably destroy their senior unsecured funding, which trades around the same level as their Cédulas.
For existing holders of their senior bonds it would make perfect sense to switch into the newly issued Cédulas at around the same level, given much better protection.
But with no natural buyers to absorb the senior bonds being sold, spreads would blow out.