Europe News

UniCredit Plans $32.6 Billion Covered Bond Issue

By Rachel Sanderson, Financial Times
WATCH LIVE

UniCredit is planning to raise up to €25 billion ($32.6 billion) through the issue of so-called covered bonds as Italy’s largest bank by assets seeks to open up a new stream of funding amid ongoing pressures on bank liquidity in the euro zone.

Keith Brofsky | Photodisc | Getty Images

The Italian bank, one of Europe’s most systemicwith operations across 22 countries, is already in the middle of a €7.5 billion rights issue undertaken at the behest of regulators to shore up its capital strength.

Shares in UniCredit have risen 51 percent in a fortnight on reports that the rights issue would be fully subscribed and thanks to a broader European banking stock rally as concerns over the sector’s capitalization requirements have receded.

In documents deposited with the Luxembourg Stock Exchange, UniCredit said the proceeds of the covered bond issuance will be used “for general funding purposes including the funding of the mortgage loans business of the group”.

Covered bonds are backed by pools of mortgages or other assets that remain on the issuer’s balance sheet. They have become increasingly popular with investors in longer-term debt as the notes are ringfenced for investors even in bankruptcy.

A person close to the bank said UniCredit had seen an opportunity to accelerate its issuance of covered bonds to take advantage of current demand with investors.

The bank also did not rule out retaining some funding to be used as collateral for liquidity from the European Central Bank.

Italian banks, among other lenders hit by the sovereign crisis in the euro zone periphery , have stepped up issuing covered bonds to offset prohibitively high funding costs in the public markets.

In a separate prospectus filed with the Luxembourg bourse, Banco Popolare Societa Cooperativa, a large Italian regional lender, said it had established a program to issue up to €5 billion in covered bonds.

Italian banks, led by UniCredit, have also been the biggest users of a special three-year funding mechanism launched by the ECB in December. It has allowed Italy’s top three lenders, UniCredit, Intesa Sanpaolo and Monte dei Paschi di Siena, to cover 90 percent of their funding needs for 2012, according to Morgan Stanley.

Thanks to the ECB funding facility and renewed investor appetite for debt, including covered bonds, UniCredit expects its funding squeeze to ease, according to people close to the bank.

The lender faced a critical funding squeeze at the end of last year as the spreads between Italian and German sovereign debt reached record highs. A downgrade by Fitch, the rating agency, of its long term debt to A- from A put a significant strain on its counterbalancing facility, according to people close to the bank.

Standard & Poor’s is expected to also downgrade its rating on UniCredit debt in the coming days following on from a cut on Italian sovereign debt to BBB+ this month.

Its rights issue, which is being seen as a bellwether for cash calls by a host of euro zone banks, closes on Friday. It is fully underwritten by a consortium led by Bank of America Merrill Lynch. Shares in UniCredit rose 2.5 percent in Milan to €3.75.