Saba’s Weinstein Favors Italian Government Bonds Over Nation’s Bank Debt
Boaz Weinstein, who runs Saba Capital Management LP, said the debt of Italian banks is overpriced relative to the country’s bonds as European leaders seek to prevent the region’s debt crisis from spiraling out of control.
“The bank debt, even though it’s much riskier than the sovereign debt, is trading at pretty much the same level,” Weinstein, who founded the New York-based hedge fund in 2009 and now manages $5 billion, said in an interview aired today on Bloomberg Television. “If you look at history, you won’t find too many examples where a country defaulted and its banks were OK, especially banks that have a lot of exposure to the sovereign.”
Weinstein, 38, whose so-called long/short credit fund typically avoids large bets on the direction of an economy and profits from pricing dislocations between securities, said at a conference last month that he was buying Italian bonds while betting against the banks. He said at the time that he was finding examples where some of the nation’s bank bonds were yielding less than its sovereign debt.
Five-year credit-default swaps on Italian lender Intesa Sanpaolo SpA (ISP) traded yesterday at about 489 basis points, about 27 basis points lower than contracts protecting against a default by the government, according to data provider CMA. Swaps on Milan-based UniCredit SpA (UCG), the nation’s biggest bank, traded at 521 basis points.
UniCredit shares have plunged 40 percent since the end of December after it priced a 7.5 billion-euro ($9.5 billion) rights offer at a discount and fueled concern that the region’s banks will struggle to raise funds in equity markets.
The company decided to sell new shares after the European Banking Authority gave the region’s lenders until June 30 to raise 115 billion euros to increase core Tier 1 capital to 9 percent as a buffer against a continued plunge in sovereign-debt prices. Those that fail to raise enough capital on their own will have to turn to their governments, or, as a last resort, the European Financial Stability Facility.
“If a bank has to offer a 43 percent discount to get investors to potentially care on buying new shares, after the stock had already dropped 70 percent for the year, it suggests that the banks are going to have a very tough time meeting the capital-raising needs that have been set out for them,” Weinstein said in the Bloomberg Television interview.
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