A dual-tranche deal for Italy's Cassa Depositi e Prestiti highlighted how treacherous market conditions can be for the country's borrowers looking to raise funding as volatility engulfs the country once again.
Italy's corporates, banks and public sector issuers have not raised funding in public bond markets since the end of February, according to IFR data, when it became the first nation outside China to be hit hard by Covid-19.
The country also again found itself at the centre of a row with the European Union, though this time over how to best tackle the economic devastation that is expected to result from the measures put in place to deal with the spread of the novel coronavirus.
The country's prime minister, Giuseppe Conte, criticised a deal reached by eurozone finance ministers over a rescue of the bloc's economies and has instead been pushing for the issuance of mutually guaranteed debt.
The spat sent the gap between 10-year German and Italian bonds wider by more than 70bp from the end of March, reaching 229bp on Wednesday, according to Tradeweb, and still hovering around that level on Friday.
UNENTHUSIASTIC REACTION
Against this unpromising backdrop, CDP started marketing three and seven-year Covid-19 social response bonds in the 45bp and 50bp area over BTPs, respectively, via Banca IMI, BNP Paribas, Morgan Stanley, MPS, Santander, Societe Generale and UniCredit. Both tranches were for €500m.
At the first update, combined order books had passed €1.4bn, an unenthusiastic reaction that was in contrast to multi-billion order books for public sector issuers from the eurozone core in recent weeks and smaller than the more than €5bn gathered for its €750m 10-year social housing bond in February.
"It was a decent outcome but clearly some deals are a lot more painful to execute than others," a banker said.
"This wasn't the level they were aspiring to achieve when the process started but it was particularly complicated this week with everything that was happening with Italy. Just look at the numbers. Greece's debt-to-GDP was 160% when they failed and Italy is not far off."
Think tank Prometeia said at the end of March that it expected the sovereign debt of the eurozone’s third-largest economy to rise to 150% of GDP at the end of the year.
A banker involved in the trade said investors had a mix of concerns around Italian credits and expectations of large supply coming from the sovereign.
"But certainly more clarity on the Eurogroup front would help to stabilise this volatility in the periphery," he added.
POSITIVE SIGN
Taking a cheerier view, another banker close to the trade said that if anything, the transaction should be taken as a positive sign.
"BTPs widened by 45bp during the marketing process," he said. "We certainly didn't know how bad it could have been when we started the process. So to manage what was a basically a twice covered book and this level of oversubscription is a very good outcome."
He added that he had no doubt that other Italian issuers, including banks and corporates had access to the market.
"The appetite is there," he said. "Especially if their securities are eligible for the ECB purchase programmes."
How to approach the marketing process is likely to be key to a transaction's success.
In the case of CDP, the decision to market the tranches over BTPs instead of mid-swaps proved to be a shrewd one, as it effectively helped insulate the deal from some of the volatility.
"With hindsight, that was definitely the right choice," the second banker close to the trade added. "By marketing versus BTPs instead of mid-swaps, it meant we didn't have to adjust the spread wider. Had we done the marketing versus mid-swaps, execution would have been a lot more difficult."
RAMPING UP
While CDP gave a glimpse of investors' appetite for Italian debt, the real test will be a sovereign syndication.
"I don't think you can draw conclusions from the CDP deal and what it means for Italy," a DCM banker said. "If anything, maybe CDP should have waited for Italy to do a syndication."
Since the explosion of the virus, the sovereign has stuck to auctions, though it is likely to turn to syndication issuance soon, possibly as early as this week, according to some DCM bankers.
The Tesoro announced last Tuesday it would consider syndicated placement of new benchmark securities, even for maturities different from those traditionally reserved for this type of issuance.
The Tesoro said it "did not exclude the possibility of resorting to syndicated placement for the issuance of new benchmarks, both nominal and inflation-linked, with maturities equal to or lower than 10 years".
Italy has raised more than €30bn via auctions since February. "That's a pretty strong signal if anyone doubted their ability to fund themselves," another banker said.
"But it's smart and very wise of them to take the flexibility of using syndications as well, even at 10 years and shorter. The advantage is that you can establish a very big benchmark on day one. That gives you a headstart and helps with future auctions."
The Tesoro will also lean on its home investors and plans to offer a new "BTP Italia" bond that pays a coupon tied to the domestic inflation rate with maturities ranging from four to eight years.