IFR International - 08.09.2018

n FRONT STORY SOVEREIGNS

Italy’s return in the balance

Syndication remains challenging as volatility lingers

Further ratings announcements awaited

ITALY saw one of the hurdles to a potential

syndicated bond market return fall last

month, after Fitch opined on its rating. But

with other agencies yet to report and a

looming budget, it may have to wait a bit

longer.

The sovereign has been conspicuous by

its absence since early January, when it

raised a €9bn September 2038 trade on

over €31bn of investor demand.

This long hiatus in using the syndication

method marks a break from previous

years, when it would have completed at

least two syndications of conventional

bonds by this stage in the year.

“They’ve had calls with banks but the

feeling I have is that they’re probably a bit

more relaxed than the market is,” said a

DCM banker.

“They’re considering their options but

I’d say it’s probably a bit early for them to

go and it’s unlikely that they would come

before the rating agencies have had their

say. We all know they need to do

something at some point and I’m sure they

will.”

Fitch is now out of the way. It revised its

outlook on the sovereign’s BBB rating from

stable to negative, citing expectations that

the new coalition government’s fiscal

loosening would leave the country’s high

levels of debt more exposed to potential

shocks.

However, the market has yet to hear

from S&P, which announces Italy’s BBB

rating review on October 26, while

Moody’s has delayed its decision until the

end of that month on whether to cut its

Baa2 rating to Baa3.

“If the tone recovers, then there’s a high

likelihood that we’ll see them,” said a head

of SSA syndicate.

“They still have a huge amount of

funding to do. If we have a bit more

clarity and see a rally in Italian spreads,

then it would lower execution risk

somewhat. I think Italy would like to do

one, and the market would like to see

one.”

Italy has €54bn of gross supply left to

raise in three-year and longer maturities

between September and December out of

a €224bn gross need for 2018, according to

Citigroup analysts.

But while more certainty around ratings

could give the sovereign a more stable

footing in the market, its Economic and

Financial Document due to be released on

September 27 will provide a guideline on

what to expect from its 2019 budget. The

draft will be presented to the European

Commission in Brussels on October 15

before needing to be approved by Italy’s

parliament.

“There is a lot of volatility in Italy until

we have news on the budget and the

market will be hard on the credit,” said

Isabelle Vic-Philippe, head of euro rates

and inflation at Amundi.

“The views haven’t changed much since

the beginning of summer, as we don’t

know what they want to do political-wise.

We all know it’s not possible for the

government to implement all the [election]

promises, so there will be arbitrage on the

political landscape at some point. It is all

about which measures the government

will implement and how.”

ROUGH RIDE

For those investors who piled into the

January syndication, the ride has been

rough. The September 2038 note that

priced at a yield of 2.987% was quoted at

3.69% on Monday, having mainly been on

an upward trajectory since mid-May.

Other parts of the curve have suffered as

well, and the sovereign has seen the

spread over 10-year Bunds widen by more

than 130bp since January to currently

stand at 283.7bp, according to Tradeweb.

For Mauro Vittorangeli, CIO conviction

fixed income at Allianz Global Investors,

the real measure of the Italian fever is the

two-year maturity, which has suffered

much more than the long end of the curve.

“In May, you had the two-years rallying to

2.50%, so I don’t think the possibility of a

syndication now exists as the 50-year remains

liquid, but there could always be some

opportunistic reopening. However, it has

become very expensive compared with the

30-years and the rest of the curve,” he said.

If the volatility persists, the market view

is that Italy will have to offer some pricing

concession to take into account political

uncertainty.

“The last auction went well; there is a

redemption of an inflation-linked bond in

September. They have to raise money: they

can keep on tapping the existing bonds if

they feel the timing is not appropriate for

a syndication. It is debt management,

really, so I don’t see a problem for them

coming to the market,” said Vic-Philippe.

“If you are a European investor, where

would you go – especially if Italy is

included in your benchmark? Italy is very

high yielding today,” she added.

Priscila Azevedo Rocha

International Financing Review September 8 2018 25

BONDS

SSAR 27 Corporates 30 FIG 35 Covered Bonds 39 High-Yield 41 Structured Finance 44

“They’ve had calls with banks

but the feeling I have is that

they’re probably a bit more

relaxed than the market is”

“There is a lot of volatility in

Italy until we have news on the

budget and the market will be

hard on the credit”

Source: IFR

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Excludes linkers

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FALLING SHORT

ITALY’S YEARLY SYNDICATION VOLUMES

6 Bonds 2250 p25-55.indd 25 07/09/2018 19:29:57