Top news
Italy stays at home as volatility flares
Bonds Moody’s and S&P decisions loom as Italy takes domestic route
BY HELENE DURAND,
PRISCILA AZEVEDO ROCHA
The REPUBLIC OF ITALY turned to
the safety of its domestic retail
market to raise funding last
week, as the volatility that has
stalked markets for weeks
showed little sign of letting up.
The sovereign has not done
an internationally targeted
syndication since January,
when it raised €9bn via one
jumbo deal, leaving its total for
2018 well behind the amounts
raised in 2017 (€15.5bn) and
2016 (€23.6bn).
Last week’s deal raised more
than €3.7bn through the tap of
lVEû"40û)TALIAûBONDSûTHROUGHû
Banca IMI, MPS and UniCredit.
Retail investors have
certainly shown their
willingness to fund Italy. The
country tapped retail in May to
sell a €7.7bn May 2026
INmATION
LINKEDû"40û)TALIA û
although it was forced to raise
the bond’s coupon to 0.55%
from the initial 0.40%.
4HEûLATESTûEXERCISE ûWHICHû
also saw the sovereign buy
back €3.8bn of a BTP Italia
April 2020 and took bond
bankers by surprise, came as
the row between the country’s
government and the European
Commission over the 2019
budget escalated further.
“It is clear that there’s
more pressure in this period,
and the Italian Treasury is
using more instruments than
before. Normally they’re very
precise in announcing their
auctions at the beginning of
the year,” said Mauro
Vittorangeli, the CIO of
CONVICTIONûlXEDûINCOMEûATû
!LLIANZû'LOBALû)NVESTORSWARNING
The European Commission sent
a warning letter to Rome last
Thursday, saying the budget was
in serious breach of EU rules,
preparing the ground for what
would be an unprecedented
rejection of a member state’s
lSCALûPLAN
It asked Italy to respond by
October 22.
“Italy does these retail bonds
from time to time and I guess
they might think that there’s too
MUCHûEXECUTIONûRISKûINûDOINGûAû
syndication before the rating
agencies come out with their
revisions,” a head of SSA
syndicate said.
Moody’s, which has Italy’s
Baa2 rating on negative outlook,
ISûEXPECTEDûTOûDECIDEûWHETHERûORû
not to cut it by the end of
October, while S&P, which has
the country’s BBB rating onstable outlook, will opine on
October 26.
“The market is clearly waiting
for Moody’s and S&P’s decision.
Moody’s is potentially more
dangerous because they have
already put Italy on negative
outlook. If you look at the
market position, it is probably
not long Italy any more. The
overweight in peripheral bonds
has been by-and-large reduced,”
said Vittorangeli.
Bankers say that while Italy is
not locked out of the syndicated
market and would have access at
a price, that price would need to
incorporate headline risk,
political noise and potential
volatility – and would be one the
country is loath to pay.RISING TIDE
Italian 10-year bond yields rose
to 3.74% on Friday, their highestTurkey chooses cautious comeback
Emerging Markets Sovereign returns after tumultuous few months though tenor surprises
BY SUDIP ROY
TURKEY passed a major test with
its comeback trade to the
international bond markets on
Tuesday, though bankers were
PUZZLEDûBYûTHEûCHOICEûOFûAûlVE
year tenor, which was seen as
defensive.
The sovereign took
advantage of some recent
positive headlines to price a
53BNûû$ECEMBERûû
note issue at a yield of 7.50%.
That was 25bp inside initial
price talk.
4HEûTRANSACTIONûWASûTHEûlRSTû
test of Turkey’s credentials
with international investors
since the country appeared to
BEûHEADINGûTOWARDSûAûlNANCIALû
crisis just two months ago
when the lira nose-dived to a
record low of 7.2149 against
the US dollar.
But a series of policy measures
since, including a 625bp hike in
the main interest rate in
September and a promise of
STRONGERûlSCALûDISCIPLINE ûHAVEû
eased immediate fears – though
the economy still faces severe
challenges.
Investors have been further
comforted by the recent release
of American Christian pastor
Andrew Brunson, who had been
sentenced to prison on terrorism
charges, so defusing growing
tensions with the US.
The lira had appreciated to
5.76 against the dollar by last
Tuesday, while in the bond
market the sovereign’s debt had
rallied by more than 200bp from
mid-August.
The turnaround in sentiment
paved the way for the
SOVEREIGNSûlRSTûINTERNATIONALû
trade since April.
While bankers thought the
PRICINGûLOOKEDûlNEûANDûAûNEWû
issue concession of about 15bp
was a good outcome – albeit thelow cash prices on the nearest
outstanding bonds makes it
DIFlCULTûTOûBEûPRECISEûnûTHEYû
were surprised Turkey didn’t
choose a longer tenor.
h4HEûTIMINGûWASûlNEûBUTûITû
was very defensive to go with a
lVEûYEARû4HISûTRADEûWASûREALLYû
about making a statement and
they underwhelmed by going
very defensive with the tenor. It
could have been a stronger
statement,” said a banker away
from the deal.
Another banker not involved
in the deal agreed that a longer
tenor would have looked better.
“If they wanted to make a
statement, they made 70% of it,”
he said.
A source familiar with the
deal defended the strategy,
saying it wasn’t defensive. “They
had options. They could have
done a longer dated, there was
demand for that. However, a
shorter trade, from an interestcost perspective, offers a lower
absolute yield.”
A 10-year bond issue, for
EXAMPLE ûWOULDûPROBABLYûHAVEû
cost at least 8% in yield terms. As
AûTRADERûPOINTEDûOUTûlNANCEû
MINISTRYûOFlCIALSûAREûPROBABLYû
hoping that the new deal trades
well and then they can return
with a longer-dated transaction
ATûBETTERûLEVELSûNEXTûYEARPOSITIVE NOTE
Certainly the new issue, which
was lead-managed by Deutsche
Bank, Goldman Sachs and Societe
Generale, started life on a positive
note, trading up 75 cents by
Thursday from a reoffer price of
98.917. The deal also acted as a
catalyst for investors to charge
into other Turkish credits.
“The banks are trading very
well on the back of this,” said
the trader. “Many think this
issuance has opened the door
;FORûBANKS=ûTOûRElNANCEv