Italy paves the way for revived covered bond issuance

Italy’s full transposition of the EU Covered Bond Directive paves the way for Italian issuers to return to the covered bond market. The updated legal framework is credit neutral to our governance support, allowing issuers to achieve the highest ratings.

Italian covered bond issuers had to step aside amid record covered bond issuance volumes in 2022 and already more than EUR 100bn of benchmark issuance so far in 2023 because the country’s secondary legislation only became effective on 31 March this year. Meanwhile, Italian banks are updating their covered bond prospectuses. Before they can issue, they first have to confirm to the Bank of Italy that programme documentation has been updated and only after the 30-day minimum notification period they can restart issuance activity.

“Italian covered bonds are, in our view, a systemically important funding product. The ability to again make use of this liquidity backstop will add to financial stability in Italy,” said Reber Acar, associate director in Scope’s covered bonds team. “But the market environment for covered bonds has become more challenging since the end of the ECB’s Covered Bond Purchase Programme, brief fears of a revived banking crisis and the in-process cycle of interest-rate rises.”

Reinstating covered bond issuance will ease Italian banks’ path to redeeming their EUR 320bn of maturing TLTRO funding and will once again give Italian covered bond issuers access to more predictable and less volatile funding. Ever since the European sovereign crisis, OBGs have been trading at lower spreads than BTPs and investor appetite remains strong as OBG’s provide a spread pick-up to other European covered bonds.

“The legal framework for OBGs is strong and robust and the legal update is credit neutral to our assessment of the legal framework-driven uplift,” said Mathias Pleissner, deputy head of Scope’s covered bonds team. “Our governance support assessment confirms that Italian covered bonds can receive the maximum possible support uplift. In combination with our cover-pool assessment, Italian covered bonds can achieve the highest ratings and benefit from up to nine notches of credit differentiation between the issuer rating and the covered bond rating.”

Debt investors will benefit from an improved first line of defence as Italian banks’ credit quality, funding and liquidity positions are solid (see Italian banks: funding and liquidity solid against challenging backdrop). The legal update to the covered bond legal framework has now fortified the second line of defence. Prime OBG collateral is sound: the Italian residential mortgage market remains relatively stable and is not expected to exhibit significant price corrections. Meanwhile, Italian borrowers benefit from better debt affordability compared to other European countries.

Download the full OBG framework assessment here.

Scope has public ratings on the following Italian banks:

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