UniCredit Secures €1 Billion in Tier2 Debt as Italian Issuers Tap Strong Early 2024 Demand

UniCredit, Italy’s leading bank, successfully raised €1 billion ($1.1 billion) in subordinated, or Tier2, debt on Tuesday, attracting nearly three times the amount in orders. This move aligns with a broader trend of Italian issuers capitalizing on robust demand at the beginning of 2024, compensating for a slower 2023 marked by high rates that limited issuance.

In December, bankers and investors had anticipated a surge in issuance at the start of the year, as Italian corporations sought to benefit from favorable market conditions. The positive response to UniCredit’s Tier2 debt issuance reflects the appetite among investors for higher-yielding assets.

UniCredit’s smaller peer, BPER Banca, also made a strategic move on Tuesday by launching its first Additional Tier 1 (AT1) bond. AT1 bonds represent the riskiest category of bank debt, contributing to a lender’s Tier 1 capital. BPER Banca’s decision follows its private placement of the only previous AT1 issue in 2019, signaling a proactive approach to bolstering its capital structure.

UniCredit’s latest Tier2 bond issuance comes after its last sale in January 2020, where it priced a 12-year bond with the option to redeem it after seven years at a spread of 280 basis points over the seven-year swap rate. The current bond also offers a 280 basis point spread over the equivalent swap rate but has a longer maturity of 10.25 years, with an option for the issuer to call it after 5.25 years.

Tier2 debt holders hold a subordinate position to senior bondholders in the event of a default but rank above investors in AT1 debt, which functions as a semi-equity capital instrument. In November, Moody’s credit ratings agency downgraded UniCredit’s subordinated debt to Ba1 from Baa3, while affirming its senior debt at Baa3. The downgrade was attributed to lower-than-expected issuance of AT1 paper, exposing subordinated bondholders to higher potential losses.

The AT1 market experienced a setback in the previous year when Credit Suisse’s AT1 debt holders faced significant losses in the Swiss bank’s rescue. However, the market showed signs of recovery toward the end of 2023.

UniCredit’s June achievement of supervisory approval to redeem a €1.25 billion AT1 bond without replacement demonstrated its robust capital position. CEO Andrea Orcel had communicated at a conference that the bank would refrain from issuing more AT1 debt until the market stabilized, emphasizing a prudent and cautious approach to capital management.

UniCredit’s successful Tier2 debt issuance contributes to enhancing its capital structure, aligning with broader market dynamics. The positive response from investors underscores the confidence in the bank’s financial health and strategic decisions. As Italian issuers continue to navigate evolving market conditions, proactive measures such as debt issuances will play a crucial role in fortifying financial positions and capital resilience.