In the third week of May, the peripheral eurozone sovereign bond markets, having rallied all year, reached a new high as first Portugal sold 10-year debt, then Spain did so, before Italy capped the week with a 30-year bond offering, sold through a syndicate of banks led by BNP Paribas, Citigroup, Deutsche Bank, UBS and UniCredit.
|Maria Cannata, director general of the Italian Dipartimento del Tesoro|
It might now seem half a lifetime ago that Italian 10-year bonds were yielding 6.6%. In fact, it was just 10 months ago.
The 30-year deal attracted plenty of demand even at tight terms. Italy targets a minimum size of 3 billion for a new benchmark bond. The 30-year was capped at 6 billion after investors submitted orders for 12.7 billion.
Having been out of favour for much of 2011 and 2012, the debt management offices of the southern European sovereigns are suddenly tripping over each other to sell low-yielding, long-dated debt to voracious investor demand.
Waiting for Spain
Cannata tells Euromoney: "There was no direct dialogue with Spain, although of course we knew they had been roadshowing and the banks told us that Spain would launch a deal. We decided that we should not both be in the market together and that investors should have just one major benchmark transaction at a time to focus on. So we waited for the Spanish deal to close and then announced ours."
Italy uses syndicates of banks, rather than a traditional auction, to sell new benchmark deals of longer than 10 years maturity. It did this successfully in January with a 15-year deal, its first syndication for two years. The Tesoro is keen to extend the average maturity of Italian government liabilities once more, having seen it decline from over seven years in 2009 to six-and-a-half years at the start of this year. Cannata had been keen to do a 30-year deal, but it was delayed by uncertainty over the election result.
She says: "In the last couple of weeks before launch we had seen a marked improvement in Italian yields and then a period of stabilization. We decided this was the right time to go."
Although DCM bankers often complain that having more than two or three lead banks hinders deal management, Cannata was impressed with the execution. "I was particularly pleased that we were able to announce and then price before the market close and to allocate, all so quickly, with good coordination between the banks and no time-wasting."
The deal was allocated among 170 institutional investors, with some 40% of those being long-term real-money accounts, mainly insurance companies and also some pension funds. Fund managers took another 39% and banks 13%, with hedge funds taking 4% and central banks the rest. Just under half the deal was sold to Italian investors, with investors in the UK and Ireland taking 26% and eurozone and Scandinavian investors 16%. US investors took 9% of the 30-year deal, compared with the 6.5% they took of the similarly sized 15-year deal at the start of the year. US orders were submitted equivalent to 13% of the 30-year transaction.
"The missing component is Asian demand," says Cannata, "although Asian investors are rarely seen in 30-year deals. Ive visited investors in Japan and China, met them in London and had delegations visit here. Its clear that they want some reassurance on the governments ability to address crucial points in the real economy, but the sentiment is positive."
Encouraged by US demand for Italys long-dated debt, the Tesoro is considering a dollar deal. Cannata says: "We are monitoring the US dollar market and the currency arbitrage. I am not sure if an opportunity will arise. If it does it will almost certainly be at between three and five years, because it is difficult to achieve the after-swap cost target when you go farther out towards 10 years."
The Tesoro is also considering refinements to the process for another domestic retail-targeted BTP Italia issue, following the huge oversubscription of its 18 billion offering last year . "We need to look at some mechanism for rationing demand," says Cannata. It sounds an extraordinary concept for a country with so much debt to refinance, but Cannata is serious. "Were looking at ways to put in some kind of filter to distinguish between small orders from genuine end retail investors and larger more professional orders."
Meanwhile the Tesoro has been working hard to reassure investors that there will be a liquid secondary market in which to sell all this Italian debt. "It was difficult in much of 2012 but secondary liquidity has improved noticeably since October last year, especially if you look at bid-offer spreads on the MTS platform," says Cannata. "There is still some work to do on volume, but that is improving month by month. To provide an incentive to our primary dealers, we have included a noncompetitive tap of up to 5% of our auctions to be made available to our top-10-performing dealers."