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Capital Markets

Covered bonds: Keep the champagne on ice in Italy

CHAMPAGNE CORKS WERE popping in Lisbon to herald the smooth passage of Portugal’s covered bond legislation. So Europe has yet another covered bond market, news that will have been greeted with a certain amount of resignation in Italy by both banks and regulators. It all looks so easy, but somehow Italy has made it look very, very difficult.

CHAMPAGNE CORKS WERE popping in Lisbon on October 2 to herald the smooth passage of Portugal’s covered bond legislation.

The country certainly took an unusual approach right from the start when it decided to kick off the process by passing a law that applies to one issuer alone, Cassa Depositi e Prestiti. This law (article 5/18 of Law 296) was passed in September 2003 but it was not until March 2005 that CDP’s debut issue was launched – and panned. Widely criticized as late and far too aggressively priced for its 20% risk weighting, the debut deal from CDP’s €20 billion covered bond programme managed just €1 billion in size and was far from the benchmark that the market had been hoping for.

The issuer’s reputation was, however, subsequently salvaged with a successful €3 billion seven-year issue in October 2005 and a €2 billion three-year trade in February this year.

It was, by any measure, not a great start. But CDP’s rocky road to covered bond issuance was just a foretaste of what was to come for the passage of wider covered bond legislation in Italy. Potential legislation has been under discussion for years, but a straightforward Pfandbrief-style market was always unlikely because of the nature of the underlyings: most loan agreements in Italy include a negative pledge, which means that the borrower or issuer cannot grant security over its assets.

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