Italy's Banco Agricola Mantovana (BAM) recently brought to market the largest collateralised bond obligation (CBO) to come out of Europe.

Called Gonzaga Finance, the EURO748.6 million ($642.9 million) deal securitizes a portfolio of over 80 bonds and credit default swaps and is the first public-funded CBO to be launched under the Italian Securitization Law. BNP Paribas and Finanziaria Internazionale were brought in to arrange the transaction for which Paribas also acted as bookrunner.

Amongst the reasons given by BAM for its venture into the market were to free up regulatory capital, to simplify its own security portfolio and to create room so that it can focus on its core activity as a retail bank.

The underlying portfolio is valued at EURO738 million and is made up of 72 bonds owned by BAM and 15 credit default swaps linked to reference bonds - worth EURO110 million - that were structured into the deal to improve geographical and business sector diversity.

Of the bonds included, the average rating is A3 with Moody's Investors Service and A-minus with Standard & Poor's. Just fewer than 3% of the bonds are below investment-grade with nine not rated at all by either agency.

The deal was split into six publicly rated tranches, four of which were floating rate and two that carry fixed coupons. The four classes of A-notes were all rated Aaa by Moody's and AAA by S&P.

The EURO67.4 million A1 notes carry 1.58 year average lives and a spread of 20 basis points over three month Euribor. The EURO61.14 million A2 tranche pays a fixed coupon of 5.5% with 4.76-year average lives. The remaining A-class notes are both floaters: the EURO365.2 million A3 notes paying 40 over Euribor, with 4.86 year average lives, and the EURO135 million A4 notes carrying 8.26 year average lives and paying 45 over.

Also included was the EURO44.8 million B tranche - rated Aa3 by Moody's and AA-minus by S&P - which pays a fixed rate of 6.50% and has an average life of 9.51 years. The EURO28.5 million C notes carry 9.61 year average lives with a spread of 200 over, and were rated Baa3 and BBB-minus.

Two unrated subordinated tranches totaling EURO46.7 million were structured in to provide credit enhancement, which will also come from any excess spread accrued on the notes.

According to Paribas, the majority of bonds (75%) were placed with banks. Other participants included funds (20%) and insurance companies (5%). After roadshows that took place across Europe, it was unsurprising to see a good geographical spread on the continent. French investors took the biggest share (25%), followed by the U.K. (16%), Germany and Italy (both 15%), the Benelux region (10%), Ireland (9%), Spain and even Japan (both 5%).

A syndicate official at Paribas was happy with the execution of the deal. "It was oversubscribed across all the tranches and in particular there was very strong demand for the A3 tranche which is the most liquid," he said. "In terms of pricing, it was a classic case of book-building and we found the level at which the deal sold. I think the pricing is very fair in line with comparable CBOs."

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