August 23, 2018 / 3:52 PM / in 3 months

UPDATE 1-Intesa sells first Italian bank bond since May sell-off at hefty premium

* 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

* UniCredit expected to raise loss-absorbing debt this year (Updates with final conditions)

By Valentina Za

MILAN, Aug 23 (Reuters) - Intesa Sanpaolo sold a 1 billion euro ($1.1 billion), five-year bond on Thursday, paying a hefty premium 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 3.4 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 after Moody’s this week said it was pushing back to the end of October a deadline to decide whether to cut Italy’s ratings.

Italy faces a possible fresh bout of turbulence when Fitch reviews Rome’s debt ratings on Aug. 31 and the government updates its multi-year deficit and growth forecasts in September, amid intensifying tensions over the 2019 budget.

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 drew healthy demand with orders totalling more than 1.7 billion euros.

After a tightening of the initial terms, the issue was priced to yield 188 basis points over the mid-swap rate, or 2.15 percent.

That is below Italy’s five-year yield, which stood at 2.32 percent on Thursday. But a comparison with the last bond Intesa issued soon after March’s inconclusive election shows the extent of the damage to banks’ funding costs.

Intesa in March sold a 10-year bond at 77 basis points, less than half Thursday’s premium for a maturity which is twice as long.

Italian banks are at a disadvantage to European rivals. Deutsche Bank issued a senior preferred five-year bond on Thursday at a spread of 90 basis points, which is already well above what rival Commerzbank paid earlier in the week on the same maturity.

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.”

HSBC said it expected UniCredit to tap markets before the end of the year to comply with obligations to issue debt that can be wiped out in the event of a loss. UniCredit is subject to such requirements as Italy’s only globally systemically-important 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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