* SME-backed covered bonds would unlock lending
* Commerzbank deal seen as pricing template
* French proposals under way to develop market
By Aimee Donnellan
FRANKFURT, May 17 (IFR) - Italy needs to change its covered
bond law so that the country's banks can provide cheaper funding
to the small and medium-sized enterprises (SMEs) that are the
backbone of the economy, bankers said.
Banks across Europe have been looking at SME-backed covered
bonds since Commerzbank sold the first such offering in February
- a EUR500m five-year at 47bp over mid-swaps.
"SME-backed covered bonds have already been successfully
sold elsewhere, so there's no reason why we shouldn't see the
same thing in Italy," Derry Hubbard, head of FIG syndicate at
BNP Paribas, said at an industry conference in Frankfurt on
"Why do we want to make the ECB the bad bank of Europe, when
we have a private-sector solution to a funding problem through
The introduction of an SME-backed covered bond framework has
the potential to transform SME lending across Italy, which
bankers say is needed.
Much like in Germany, Italy's SME market forms an integral
part of its economy in the eurozone. But companies in the
country have been struggling to repay loans.
Data this week showed bad debts held by Italian banks rose
to EUR131bn in March, while lenders further reduced loans to
households and businesses. The Italian banking association ABI
said bad loans grew by around EUR3.3bn from the end of February
and by 21.7% year-on-year.
Intesa Sanpaolo and UniCredit, the country's two biggest
banks, set aside a combined EUR14bn in 2012 to cover bad loans,
while smaller lenders have increased provisions after the
central bank audited around 20 institutions.
Banco Popolare, Italy's fourth biggest bank, issued a profit
warning after the audit prompted EUR684m of loan loss provisions
in the fourth quarter, more than the total it set aside in the
first nine months of the year.
To deal with this issue, and allow borrowers to roll over
funding, bankers say SME-backed covered bonds are the obvious
"Italian banks need to be motivated to lend to SMEs by being
able to access cheaper funding. SME-backed covered bonds are an
ideal way of achieving this," said Richard Kemmish, head of
covered bond origination at Credit Suisse.
Covered bonds have benefited from regulatory favour since
the crisis, with the ECB allocating EUR100bn to buy covered
bonds outright and setting haircut margins at favourable levels
against comparably-rated securitisations.
For this reason, investors are reluctant to see the covered
bond brand tainted in any way.
Although some investors are positive about the emergence of
a new product, they still want to be compensated for their risk.
"The pricing is still an issue," said Jozef Prokes, a
London-based fund manager at BlackRock.
"It can go into my ABS or credit portfolio, but I don't view
it as a real covered bond. And I know that many other investors
certainly have mandate restrictions that means they will be
unable to buy these instruments."
The ECB itself has struggled to assess the instruments
adequately. It initially wanted a haircut on the Commerzbank
bond as though it were senior unsecured bank debt, but changed
that in late March to give it full covered bond treatment.
With that now cleared up, BNPP 's Hubbard thinks that
Commerzbank has provided a useful pricing template that could be
applied to an Italian bank.
"In Italy you would need to look at where mortgage-backed
covered bonds are trading, senior debt, and bring in BTPs to
make sure investors feel like they are getting good value," he
SME fever is certainly taking hold elsewhere.
In France, the country's banks have already set about
establishing a market. They are working on a proposal with the
Banque de France to ease SME funding, using a structure similar
to covered bonds.
Banks keep the SME assets on balance sheet, but use them as
security for secured loans from a securitisation SPV, which
funds these in turn through untranched bond issues.
If the bank defaults, the SPV will use the covered bond law
to recover the assets from the bank balance sheet.
Overcollateralisation will come from haircutting loan
values, using a longstanding model from the Banque de France.
The resulting securities should be repo-eligible at the
central bank, and seen as secure assets in the private market.