Ticker and trading information for Pacific Investment Management Co. (PIMCO) are displayed on a screen at the New York Stock Exchange (NYSE) in New York, U.S., April 5, 2018. REUTERS/Brendan McDermid
November 28, 2018
By Elvira Pollina and Valentina Za
MILAN/NEW YORK (Reuters) – U.S. fund Pacific Investment Management Co (Pimco) has bought all of a $3 billion, five-year bond offered with a hefty return by Italy’s top bank UniCredit <CRDI.MI> to comply with capital buffer rules, two sources familiar with the matter said.
In comments to the Financial Times, UniCredit Chief Executive Jean Pierre Mustier said the price of the issue was “not ideal” but was worth it to secure demand at a time when Italian banks are under siege due to the government’s battle with European authorities over next year’s budget.
“And by doing such a large transaction with a single investor, it also conserves the capacity of the market for new transactions,” he was quoted as saying.
UniCredit is Italy’s only globally systemically important bank and as such is subject to rules that require lenders to issue securities that can be written down or converted into equity to cover potential losses.
A sell-off of Italian assets has sent borrowing costs soaring for the country’s lenders and shut all but the strongest names out of international funding markets.
UniCredit took advantage of a partial respite in market pressure this week following reports that the government may seek a compromise with the European Union over the budget.
Since the sell-off started in mid-May, only rival heavyweight Intesa SanPaolo <ISP.MI> has issued unsecured debt.
Back in January, UniCredit sold Italy’s first senior-non preferred bond, placing 1.5 billion euros in five-year notes at a premium of 70 basis points (bps) over the swap rate – a spread which has now swelled to 320 bps on the secondary market.
The latest bond was issued at 420 bps over the swap rate, commanding an 80 bps new issue premium when adjusting the duration of the two bonds.
A Milan-based debt banker said the decision to place the bond with a single buyer had spared UniCredit the need for roadshow presentations with investors, reducing market risks.
Pimco oversaw $1.72 trillion in assets under management, as of September 2018. Pimco remains cautious on Italy and underweighted in Italian risk. But Pimco’s purchase of UniCredit reflects a “good, narrow, opportunistic” trade, one of the sources familiar with the situation said on Wednesday. The source also said the $3 billion UniCredit bond will be spread across Pimco portfolios, which will amount to less than 1 percent exposure.
Normally bonds are sold to a number of buyers through a syndicate of banks that gathers orders from investors. Caught up in the market storm, UniCredit had stalled the launch of its senior non-preferred bond.
In presenting its third-quarter earnings earlier this month, the bank’s chief financial officer said UniCredit aimed to sell between 3-5 billion euros of loss-absorbing securities by the first quarter of next year.
Mustier had said at the time that meetings with investors confirmed strong interest for the bank’s debt.
Pimco already has a relationship with UniCredit as together with rival Fortress, the U.S. asset manager, it last year invested in a jumbo 17.7 billion-euro bad loan securitization sale carried out by the Italian bank.
News of Pimco buying the bond was first reported by Il Sole 24 Ore daily. A Pimco spokesperson declined to comment.
(Reporting by Elvira Pollina and Valentina Za; Additionally reporting by Jennifer Ablan; Editing by Alexander Smith, Elaine Hardcastle and Jonathan Oatis)