The spread has widened this morning post Italian referendum.

We don’t believe that conversion will happen, and at these levels we end up flat on the spread.

We put on the trade in February, and the spread didn’t come to the 10%-15% levels that we were expecting, so we are ready to close this trade and finish flat after we paid 0.1% tax on buys and witholding tax on the short dividend takes almost 1% out of the spread.

We continue to see fair value around 10% with low probability of conversion which would at the best we offered 1:1 which would also justify a discount when announced with the TITR IM conversion break putting people off.

We might revisit the idea at the later time.

Closing for +0.2%.



Tuesday • 09 February 2016 • 11:37

In the current market environment, we see +ISP IM / -ISPR IM <5.5% as a good market neutral trade, with attractive risk-rewards potential. We see upside 10-15%, with very limited downside.

Conversion speculation has driven the spread for years.

Earnings on Friday did not mention anything about a conversion. Since December when the TIT conversion plans broke the ISP conversion speculation gained some new legs.

Big selloff in the Italian banking sector spurring the spec as converting the savers would improve ISP’s capital ratio.

We believe the current spread is far too tight even though we believe a conversion would make sense. A potential conversion ratio is ultimately down to what the Ords offer the Savers which makes it highly unlikely the terms would be better than 1 for 1.

With conversions in Italy usually taking around 6-8 months from announcement until completion and the recent broken TIT conversion weighting in with an uncertainty factor we believe the downside in a Chinese trade (+ISP/-ISPR) is 2-3%.

In the more likely scenario that conversion doesn’t happen and focus turns back to the spread, we see the spread widening back out to its median premium of 15-20%.

Volumes in ISPR is decent at USD 16.6m in ADV, while ISP’s ADV is USD 400m.

1 year average 11%,
3 year average 15.42%,
3 year low 4.65%,
3 year high 23.22%,

Currently 5.5% ord premium.