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Cannata: positively surprised by
investor response |
The Republic of Italy launched a €6 billion 30-year transaction in October against an inauspicious backdrop. The deal had been talked about since the start of the year and many market observers concluded that Italy had missed its window of opportunity. The trade was especially bold because the news surrounding Italy has been far from positive in recent months. Standard & Poor’s signalled that the sovereign would struggle to remain a double-A rated credit. Then there is the fallout over Banca Popolare Italiana’s attempted purchase of Antonveneta. The central bank governor refused to resign after he was accused of favouring BPI’s bid; the finance minister decided this was intolerable, so himself quit. And a public spat between the replacement finance minister and the central bank governor at the IMF/World Bank meetings overshadowed all else.
Maria Cannata, director general of the public debt management office at the Italian treasury, explains the timing of the issue. “At the beginning of the year we thought the market was extraordinarily crowded with supply of long-dated bonds,” she says. Difficult market conditions in April and May further reduced options. “We were ready in September but the market was characterized by excessive volatility.”
Lead managers CSFB, Deutsche Bank, Goldman Sachs, JPMorgan and UBM approached investors with indications of a €3 billion to €5 billion transaction with spread guidance of three to six basis points over the BTP due 2034. The bond, due February 2037, printed 3bp over the reference BTP despite being increased in size by €1 billion as a result of one very large single order.
“What is striking about the new issue is that it managed to achieve a benchmark premium at launch,” says James Garvey, head of investment-grade business at Goldman Sachs. Market participants away from the deal say it priced 0.5bp through the extrapolated Italian yield curve.
“We were positively surprised, to be frank, by the response. Indeed our maximum target was for €5 billion,” says Cannata. With a €14.3 billion order book it would have been easy to tighten the pricing but Cannata says: “The performance in the following days is very important, we want our investors to be happy.”
Only 14% of the deal was purchased by leveraged investors, although it is clear that they contributed to a large proportion of the total order book. Even when the spread was narrowed to 3bp from plus 3bp to 4bp there was still to €12 billion-worth of orders.
“When we looked at the quality of the order book we decided it would be better to increase the size of the transaction,” says Cannata. But the decision was questioned by observers, who suggested that a good number of bonds traded with the brokers. They suggested that the increase caught out some investors as they were suddenly allocated more than they were expecting to get.
Although the deal did edge wider by half a basis point in the grey market as the 2034 BPT was squeezed, the deal did ultimately settle down at the reoffer spread.
Garvey attributes the deal’s success to the continued bid for duration from investors. “I think there is potential for another borrower to do a long-dated deal,” he says. “The problem is finding a borrower!”