Unipol : Issuance Focus

UnipolSai is returning to the bond market after three years of absence to issue a € 500m Tier 2 02/2028 bond rated in the high yield category at Ba1/BB.Although the group made a net loss in 2017, the measures taken were necessary and improve the group’s outlook: its entire insurance business has been grouped together under UnipolSai, and Unipol Banca’s balance sheet has been cleaned out. These measures are positive for long-term profitability, even if they have compromised the group’s ability to meet some of the targets of its 2016-2018 strategic plan.This year will also be marked by the end of the distribution partnership with Banco BPM, which has certainly had an impact on sales of life insurance products. Unipol now needs to revive this activity to restore some balance to its business profile.We have a Stable opinion on the credit, since recent developments are fundamentally a move in the right direction, and the effects of the restructuring/rationalisation are not yet reflected in profitability levels. However, the ratings are capped by Italy’s sovereign rating, leaving little hope of an upgrade in the medium term.The purpose of this bond issue is: 1/ to restore UnipolSai's presence in the capital markets after a three-year hiatus (the last insurance bond issue was the 5.75% PerpNC14); 2/ to capitalise on favourable market conditions; 3/ to use part of the € 500m raised to refinance certain grandfathered subordinated loans agreements. No additional details regarding these has been leaked; and 4/ to improve capital quality by refinancing grandfathered loans through a Solvency II-compliant bond. The closest peer for the forthcoming 2028 issuance seems to be Cattolica: same business, same country, same 'Ba1' rating for USIMIT and 'BB+' for CASSIM. That said, the structure of the Unipol 2028 paper is more investor friendly, with: 1/ a fixed 02/2028 maturity vs. 12/2027 first call for Cattolica; and 2/ no optional coupon deferral provision unlike the Cattolica bond. >