Italy back in the game for global investors

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Italian companies are poised to issue bonds quickly as growing investor confidence creates significant opportunities to access the market, writes Andrea Soro, RBS Country Executive, Italy.

Corporates and banks have only been able to access capital markets intermittently due to the country’s political turmoil and fragile economy.

A more opportunistic investor appetite, along with the regulatory squeeze on bank lending, led to tighter financial planning, stricter cost controls and the emergence of new funding sources like mini bonds, project bonds and equity-linked convertibles.

But with early signs of the economic environment improving, more windows of opportunity into traditional capital markets are opening up.

As European Central Bank president Mario Draghi noted earlier this month: “Economic activity has bottomed out in the first part of this year and we see an infant recovery starting.”

Half the investors interested in buying Italian bonds come from beyond the country’s borders, according to RBS’s own Syndicate Desk – a good sign of growing, if cautious, confidence in the market. Access remains volatile though, so corporates and financial institutions must stay focused and be ready to issue at the right time.

They need a good story, good preparation and good timing.

The Italian economy, while by no means out of the woods yet, is clearly improving. It bottomed out earlier this year and is heading back in the right direction.

The Bank of Italy and International Monetary Fund have updated their GDP growth estimates to around 1 per cent next year, the first rise in three years. The country’s 10-year yield gap over German bund has stayed stable – floating at around 250 basis points even at the peak of the recent political crisis.

On the opposite side, a number of export-led businesses are performing strongly and enjoying top and bottom line double-digit growth. UNCTAD’s Trade Performance Index shows that during the downturn, Italy has remained the world’s top ranking exporter in textiles, clothing and leather goods and second for non-electronic machinery and manufacturing. We have seen increased investor appetite from around the world across a range of assets including industrials, energy and utilities.

The success of this gradual recovery hinges on the newly-formed coalition government’s ability to push through its three most important priorities – electoral, labour and tax reforms. Achieving these reforms is crucial to protecting the long-term productive backbone of the country.

It’s going to be tough – politicians from the centre left and centre right working together is always challenging – but everyone knows what has to be done and there is a real will to do it.

The politicians also know that the voters are watching to see how well they sort it out. The economy has taken centre stage. Ten years ago most people didn’t know the state of the country’s finances and voted purely based on their social position. They are now firmly focused on the finances, which is why we saw so many protest votes in the recent election that led to a coalition.

The government has the backing it needs from the European authorities. A big change from the past is that today’s economic problems are no longer about just one market. There is a shift of responsibility to a much bigger group. The troika – the European Union, European Central Bank (ECB) and International Monetary Fund – is playing its part to help get weaker countries back on track.

This sense of harmonisation across the continent, most recently seen with the development of a banking union, can only be a good thing. A lack of unity impaired Europe’s ability to recover after the Lehman collapse. The US was able to bounce back faster because it reacted as a single market, with the Federal Reserve and other key organisations bringing some firms together and providing certain extraordinary liquidity facilities. A similar approach would have been virtually impossible in the Euro area at the time, and so we have witnessed sporadic and less effective attempts to save banks.

The shift of power in Europe’s banking sector towards central governance and oversight should create a more level playing field and enable us to act as one single market.

A good example is the ECB’s asset quality review (AQR) and stress test of eurozone banks and bond issuers, due next year. It should make the market much more transparent and bring far greater confidence to international investors.

There is still a huge amount of deleveraging going on in the market and the asset quality reviews will put pressure on banks to get their capital ratios right.

While there will be winners from the asset quality reviews and stress tests, it is likely there will also be casualties.

Large, global banks that have deleveraged and diversified are expected to do well and their corporate customers will likewise benefit from those strengths. On the other hand, small-to medium enterprises and smaller banks that are largely domestic are likely to be hit hard because they are still suffering from recession.

There are exceptions to this in the technology, mechanical, fashion and food industries where even smaller players are doing well and enjoying strong growth through good access to international markets.

Across the corporate and financial arenas, Italy has the track record, the determination, the means and the support to return its economy to a position of strength – domestically and abroad.

The country’s businesses need to ensure they are ready to seize the opportunities when the time is right.


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