UniCredit bonds trading as junk

LONDON - Bonds of UniCredit SpA, the Italian bank that posted a surprise 10.6-billion-euro ($14.3 billion) third-quarter loss this week, are trading as junk as the lender prepares to refinance $51 billion of debt coming due next year.

Fixed-income investors are pricing the Milan-based lender's bonds at levels that imply a rating of B1, four levels below investment grade and eight steps lower than its A2 ranking, according to Moody's Analytics. The 13.4 billion euros of UniCredit debt securities that are contained in Bank of America Merrill Lynch's Euro Corporates Banking index have lost 2.8 billion euros since the start of June.

UniCredit, Italy's biggest bank, has the highest amount of bonds maturing in 2012 by a major European lender, according to data compiled by Bloomberg. Concern that Italy will struggle to cut Europe's second-highest debt load and tame the sovereign crisis drove the country's debt yields to eurozone records, infecting UniCredit's 40 billion euros of Italian bonds.

"It's an Italian bank and given what's going on in Italy, there would be a tendency to downgrade," said Otto Dichtl, a credit analyst for financial companies at Knight Capital Europe Ltd.

The record loss prompted Moody's to put the bank's rating under review for a downgrade, saying that while UniCredit has "considerable liquidity", it faces pressure from "volatilities in the Italian and European operating environment".

Rating previously cut

"Any notable weakening in its funding and liquidity profile, or any significant effect of the current operating environment challenges," will weigh on UniCredit's ratings, Moody's said in a report.

The company had already cut UniCredit last month from Aa3. The bank has an equivalent A at Standard & Poor's and Fitch Ratings, which also have "negative" outlooks on the lender.

The average coupon on the bank's bonds issued this year is 3.15 percent, 40 basis points more than the 2.75 percent average for the securities coming due by the end of next year, Bloomberg data show. A UniCredit spokeswoman in Rome, who declined to be identified citing company policy, wouldn't comment.

UniCredit's bonds yield 9.8 percent on average, the highest in Bank of America Merrill Lynch's Euro Corporates Banking index. That's more than the measure's 5.1 percent average, and compares with 9.3 percent for securities issued by Milan-based Intesa Sanpaolo SpA, Italy's second-biggest bank, and 5.9 percent on the debt of BNP Paribas SA in Paris.

Bank spreads

The extra yield investors demand to hold European bank debt rather than government securities has risen 11 basis points since the start of the month to 347 basis points, Bank of America Merrill Lynch's index shows. The spread widened to 411 basis points on Oct 5, the biggest gap since May 2009.

UniCredit has about 37.6 billion euros of securities maturing next year, according to data compiled by Bloomberg.

The Italian bank has completed its funding plan for this year and is raising money to refinance debt maturing next year, UniCredit on Monday said in its earnings statement and a related investor presentation.

UniCredit isn't dependent on wholesale funding markets and senior unsecured bond sales aren't "embedded" in its fundraising plans, it said in a separate planning presentation.

Write-downs

The company's third-quarter loss, its biggest ever, came as the bank wrote down acquisitions by its investment bank and businesses in Ukraine and Kazakhstan.

UniCredit is planning to raise as much as 7.5 billion euros from a rights offering in the first quarter of 2012 to plug the biggest capital shortfall among Italy's lenders. The move may ease some concerns about UniCredit's capital levels, according to Hank Calenti, head of bank credit research at Societe Generale SA in London.

"You have a combination of things at UniCredit, the capital needs and the sovereign issue, so the share sale may go a way to addressing one of those two," Calenti said.

'Not surprised'

Credit default swaps tied to UniCredit's senior debt soared to a record 546.3 basis points on Wednesday, according to CMA, which is owned by CME Group Inc and compiles prices quoted by dealers in the privately negotiated market. A basis point on a default swap protecting $10 million of debt from default for five years is equivalent to $1,000 a year.

"I'm frankly not surprised if some Italian banks drift into a junk-rating category because there is potentially liquidity, solvency and asset-quality risk," said Paul Owens, who helps manage the equivalent of about $8.2 billion as co-head of research at Avoca Capital Holdings Ltd in London.

Investors are increasingly concerned that Italy won't be able to lower its 1.9 trillion euros of debt and stimulate economic growth.

Yields on 10-year Italian debt climbed to a euro-era record of 7.48 percent on Nov 9 before dropping below 6.5 percent after the country's Senate approved debt-reduction measures that led to the departure of Silvio Berlusconi as prime minister. The yield climbed back above 7 percent this week.

"Sovereign debt concerns hover over UniCredit on both sides, keeping up their funding costs and also keeping people worried about whether they have to take an asset-side hit," said John Raymond, a London-based analyst at CreditSights Inc.

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