UniCredit Strikes While the Iron is Hot

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In Italy they say if you want to take advantage of a positive situation you should “battere il ferro finche e caldo”; give the iron a good walloping while it’s hot. For Italian lender UniCredit, selling its second bond in as many days, the iron is clearly sizzling.

Despite all the worries about the euro-zone debt crisis and concerns about Italy being the next potential domino looming after Spain, yield-hungry investors are clambering to increase their exposure to the region, and UniCredit is evidently only too happy to sate their appetite.

The bank is seeking to sell a €750 million ($977.5 million) five-year senior unsecured bond Tuesday, just a day after adding €250 million to its recent 10-year subordinated bond–a riskier type of debt that sits further down the queue in the event of default.

Since the start of the year, the cost of insuring UniCredit’s senior debt against default has almost halved to 2.85%, or 285 basis points, according to Markit, highlighting how far the perception of risk has eased towards the bank. Borrowing costs have tumbled likewise.

Monday’s tap of its subordinated bond priced at 498 percentage points over the reference midswap rate, 0.12 percentage points cheaper compared with what the bank paid for the original deal in October.

Tuesday’s senior unsecured bond is set to price at 2.55 percentage points over midswaps, around 0.15 percentage points less than initially indicated, and attracting north of €2.3 billion in demand–well above the amount on offer.

To put that rate in perspective, the nearest Italian government bonds are trading at around 2.38-2.45 percentage points over midswaps, according to Tradeweb, hinting that investors are treating UniCredit not too differently to Italy itself–not bad, considering the current two-year lows in Italy’s government borrowing costs.

The proximity shouldn’t be too surprising though. In August, UniCredit sold covered bonds, a type of debt secured against assets such as residential mortgages, at a rate almost a full percentage point less than where Italian government bonds of a similar maturity were trading.

The fact UniCredit is a national champion obviously helps: second-tier Italian lender Banco Popolare had to scrap a 3.5-year deal in October due to a lack of demand, suggesting the scramble for Italian paper has its limits unless the price is right.

But for UniCredit, the iron doesn’t look like it will be cooling down anytime soon.

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