Embed Size (px)
Citation preview
THE VOICE OF THE MARKETS
ITALY IN THE CAPITAL MARKETSJanuary 2018
Sponsored by:
Italy in the Capital Markets | January 2018 | 1
THE BANKING SECTOR
IN APRIL 2016, the architects behind the private bank rescue fund known as Atlante came together to discuss some serious business.
The worry was that a number of Italian banks would fail to raise equi-ty from private investors and would then themselves fail, bringing about severe losses for investors and trigger-ing a systemic crisis in Italy.
Atlante’s creators were desperate-ly trying to think of a way to avoid a catastrophe and plug the sector with some sorely needed capital, without breaching Europe’s tough new rules on state aid.
But fast-forward less than two years and those heightened concerns are already starting to feel like distant memories.
Italy’s banking system witnessed a remarkable improvement in fortunes
following the controversial and dra-matic rescue of Banca Monte dei Pas-chi di Siena at the end of 2016.
The recapitalisation was able to tap into a near €4bn injection of taxpayer money and was criticised for break-ing the spirit of Europe’s new bank rescue regime, but the decisive action cleared up a major source of uncer-tainty that had been hanging like a dark cloud above Italian banks for the best part of a year.
In June, public funds were also called upon to smooth the liquidation processes for Banca Popolare di Vice-nza and Veneto Banca, whose futures had weighed heavily in the minds
of those involved with the original Atlante fund.
“These solutions were a turning point, not only for the Italian banks but for Italy in general,” says Antonio Foti, head of FIG DCM Italy at BNP Paribas in London. “It proved that the country could find a solution to its financial difficulties that wouldn’t disrupt for the entire market and, importantly, would minimise losses for retail bondholders.”
“There will likely be some addition-al problems with small lenders,” adds Lorenzo Codogno, head of LC Macro Advisors and former director-general at the Italian treasury, “but the sys-temic risk for Italian banks is basi-cally gone.”
The country’s largest and safest banks have also put considerable effort into cleaning up their acts.
UniCredit made important pro-gress with its turnaround plan in 2017, raising €13bn of equity in 2017 and putting itself on track to offload €17.7bn of bad loans. And Intesa Sanpaolo’s efforts to reduce its stock of non-performing loans have been similarly commendable.
It should not come as a surprise, then, that the nation’s lenders have been taking advantage of the newly positive backdrop by flooding back into the capital markets.
Italian banks managed to place about €35bn of new bonds in euros and dollars in 2017, according to Dealogic, more than doubling their efforts from a year earlier.
Rare issuers were included among the names of returning borrowers. Banca IFIS and Banca Sella both managed to raise tier two capital in the autumn, for example, while Banca Sistema tapped the market for senior debt.
“There was turnaround in sen-timent towards Italy in 2017,” says Maurizio Gozzi, managing director in debt capital markets Italy at Crédit Agricole in Milan. “Investors started to buy second and third tier banks,
which had previously been shut out of the capital markets.
“The Italian banking sector has largely been recapitalised. Investors have realised this and they have start-ed to position overweight on finan-cials versus corporates.”
Home or away?But Italian banks are hardly out of the woods yet.
Over the next four years, the coun-try’s lenders will have to raise very large quantities of senior funding as they look to comply with the Europe’s capital standard, the minimum requirement for own funds and eligi-ble liabilities (MREL).
Italian financial institutions will join many other EU countries in issu-ing these riskier, non-preferred senior instruments, which recognise explic-itly that resolution authorities have the power to bail them in should they need to.
And at the same time, the banks will no longer be able to take on cheap four year loans from the Euro-pean Central Bank as part of the tar-geted longer-term refinancing opera-tions (TLTROs).
This will represent a major shift in the funding profiles of some Italian banks, which have previously leaned on the TLTROs and the retail market as reliable sources of funding.
“Eventually I think the banks will get the funding that they need, but the problem is at what price they will get it,” says Codogno. “If the price is too high then it could undermine their long-term profitability. This is a very challenging issue in my opin-ion.”
In its most recent macroprudential bulletin, the European Central Bank said that foreign investment would be key in keeping MREL costs down.
The ECB expressed concern about “home bias”, noting that a large pro-portion of Italian bank bonds were held by other financial institutions, with most of those firms also residing
A remarkable year of recovery has put Italian banks in a far stronger position to raise huge quantities of bail-inable senior bonds and clean up their balance sheets. By Tyler Davies.
Italian banks return to the fold
“We have seen a lot of foreign demand
for Italian bonds in 2017, in particu-
lar from the UK. I expect that will
continue when the banks start issuing
non-preferred senior“
Antonio Foti, BNP Paribas
2 | January 2018 | Italy in the Capital Markets
THE BANKING SECTOR
in Italy.But Foti is confident that issu-
ers will be able to attract the invest-ment they need from international accounts without too much trouble.
“We have seen a lot of foreign demand for Italian bonds in 2017, in particular from the UK. I expect that will continue when the banks start issuing non-preferred senior.
“This year has proven that there is a lot of interest in Italian paper — we have seen a number of inaugural, sub-benchmark and even unrated transactions perform very well in the primary and secondary market.”
Italian issuers are likely to test the water for non-preferred senior bonds as soon as they can in 2018, given that they will be sidelined for full-year earnings blackouts in parts of the first quarter and may have to contend with volatility around the upcoming general election.
Fortunately, the Single Resolu-tion Board has signalled that banks will have up to four years to comply with MREL, with transition periods accounting for each bank’s specific financial situation.
And financial institutions may also be able to include an amount of old-style senior debt equivalent to up to 3.5% of their risk-weighted assets as part of their bail-in capital.
“Net interest margins are still suf-fering because of the rates environ-ment, and banks are going to have to start replacing what is maturing in the retail market by financing in the wholesale market,” says Gozzi. “With such a pressure on margins, issu-ers will likely go for cheaper funding sources of MREL. That doesn’t mean we won’t see supply of non-preferred senior next year, of course. But banks will be considering their options in the preferred senior asset class.”
Making a molehill out of a mountainAn even bigger challenge for Italian banks may be tending to the asset side of the balance sheet.
NPLs are one of the hottest top-ics in European finance, and Italy is home to a large proportion of the region’s bad debt.
Despite great progress in offload-ing NPLs in 2017, it is hardly likely to be an easy ride chipping away about €150bn of bad loans in the coming years.
“NPLs will be one of the main top-ics for Italian banks going forwards,” says Foti. “It remains to be seen how
different issuers will approach sell-ing their bad loans, but I think it is clear that we will see further use of the government guarantee scheme on NPL securitizations in 2018. It takes time, but gradually the problem will be fixed.”
Regulators also have the issue in their sights.
Market participants expect that a recently dismissed ECB proposal to make banks provide full coverage for the unsecured portion of new non-performing loans within two years could eventually come back and to bite the Italian lenders, for example.
And sandwiched between a series of positive updates from UniCredit at its latest capital market day appeared a warning that the European Bank-ing Authority’s guidelines concern-ing common standards for credit risk modelling may heap further pressure on the sector.
UniCredit said it would apply the guidelines ahead of time, shaving a hardly insignificant 80bp of capital from its common equity tier one ratio in 2018.
Given that the guidelines sug-gest that banks should be more con-servative when calculating the risk parameters of their loss-given default models, they could be particular-ly harmful for banks with high NPL ratios.
“You need to look case by case,” says Codogno. “Some banks can afford to keep their NPL positions and work on them internally. Other banks have no choice but to sell the positions. It is up to the regulator to look at each individual bank.”
Piecing the puzzle togetherBut over the past two years, Italy has put itself in a much stronger position to revitalise its financial system.
“The big elephant in the room for the country has always been the banking sector but bank balance sheets have improved, particularly after the ECB took over the moni-toring of the European banks,” says Andrea Iannelli, investment director at Fidelity International in London. “Lending towards the real economy has also improved and the cost of bor-rowing has fallen accordingly.”
Market participants are asking themselves how far the recovery can go in Italy, and how quickly it can take place.
To some extent, the country is still playing catch-up.
Foti notes that some senior unse-cured bonds from national champi-ons have started trading through Ital-ian government bonds.
But Italian government bonds are also still yielding some 30bp more than Spanish Bonos, despite political risks around Catalonia in Spain.
“What really puzzles me,” Gozzi says, “is that some Spanish banks are trading much, much tighter than their Italian counterparts. This is an opportunity for investors. The spread between the jurisdictions is too wide.”
And Italy’s lenders will be relying on the national economy strength-ening further in the coming years to underpin investors’ growing expecta-tions around profitability and asset quality.
“There has been a huge return of confidence in Italy,” says Codogno. “But there remains some doubt about the long term viability of the banks their equity valuations are still low compared with other institutions.
“You could look at this in two ways. On the one hand there is still potential, which is good. But on the other hand, the situation is not fully improved in Italy yet.” s
-1.2
-1.0
-0.8
-0.6
-0.4
-0.2
0.0
0.2
0.4
0.6
0.8
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
01/03/10
01/08/10
01/01/1
1
01/06/11
01/11/1
1
01/04/12
01/09/12
01/02/13
01/07/13
01/12/13
01/05/14
01/10/14
01/03/15
01/08/15
01/01/1
6
01/06/16
01/11/1
6
01/04/17
01/09/17
Rea
l GD
P g
row
th r
ate
(%)
New
bad
loan
rat
e (%
)
Source: Bank of Italy, Central Credit Register, Istat
New bad loan rate and GDP growth in Italy
New bad loan rate Real GDP growth rate
New bad loan rate and GDP growth in Italy
Source: Bank of Italy, Central Credit Register and Istat
building
successtogether
www.ca-cib.com
Créd
it Ag
ricol
e Co
rpor
ate
and
Inve
stm
ent B
ank
is a
utho
rised
by
the
Auto
rité
de C
ontrô
le P
rude
ntie
l et d
e Ré
solu
tion
(ACP
R) a
nd s
uper
vise
d by
the
Euro
pean
Cen
tral B
ank
(ECB
), th
e AC
PR a
nd th
e Au
torit
é de
s M
arch
és F
inan
cier
s (A
MF)
in F
ranc
e an
d su
bjec
t to
limite
d re
gula
tion
by th
e Fi
nanc
ial C
ondu
ct A
utho
rity
and
the
Prud
entia
l Reg
ulat
ion
Auth
ority
. Det
ails
abo
ut th
e ex
tent
of o
ur re
gula
tion
by th
e Fi
nanc
ial
Cond
uct A
utho
rity
and
the
Prud
entia
l Reg
ulat
ion
Auth
ority
are
ava
ilabl
e fro
m C
rédi
t Agr
icol
e Co
rpor
ate
and
Inve
stm
ent B
ank
Lond
on b
ranc
h on
requ
est.
Créd
it Ag
ricol
e Co
rpor
ate
and
Inve
stm
ent B
ank
is in
corp
orat
ed in
Fra
nce
with
lim
ited
liabi
lity
and
regi
ster
ed in
Eng
land
& W
ales
. Reg
iste
red
num
ber:
FC00
8194
. Bra
nch
No. B
R 19
75. R
egis
tere
d of
fice:
Bro
adw
alk
Hous
e, 5
App
old
Stre
et, L
ondo
n, E
C2A
2DA.
DECE
MBE
R 20
17
Joint Bookrunner
UNICREDIT SPA
EUR 1,000,000,0005.375% AT1
Perpetual NC7.5Additional Tier 1
JUNE
201
7
Joint Bookrunner
LEONARDO SPA
EUR 600,000,000
1.500% Senior UnsecuredDue 2024
JANU
ARY
2017
Joint Bookrunner
ATLANTIA SPA
EUR 750,000,000
1.625% Senior Unsecured Due 2025
NOVE
MBE
R 20
17
Joint Structuring Advisor & Bookrunner
FERROVIE DELLO STATO ITALIANE SPA
EUR 600,000,000Inaugural Green Bond
0.875% Senior Unsecured Due 2023
JUNE
201
7
Joint Bookrunner
INTESA SANPAOLO SPA
EUR 500,000,000Inaugural Green Bond
0.875% Senior Unsecured Due 2022
JANU
ARY
2017
Joint Bookrunner
ENEL FINANCE INTL. NV
EUR 1,250,000,000Inaugural Green Bond
1.000% Senior Unsecured Due 2024
NOVE
MBE
R 20
17
Joint Bookrunner
CASSA DEPOSITI E PRESTITI SPA
EUR 500,000,000Inaugural Social Bond
0.750% Senior Unsecured Due 2022
MAR
CH 2
017
Joint Bookrunner
CRÉDIT AGRICOLE CARIPARMA
EUR 750,000,0001.125% OBG Due 2025
JANU
ARY
2017
Joint Bookrunner
REPUBLIC OF ITALY
EUR 6,000,000,000
BTP 2.450%Due 2033
EUR 750,000,0001.625% OBG Due 2029
4 Italy in the Capital Markets
Tesoro Roundtable
: What’s the picture for ultra-long issu-ance in 2018? Will the scaling back of quantitative easing affect the environment?
Maria Cannata, Tesoro: Apparently, the demand for ultra-long remains quite good, even now. We don’t expect, at least in the first part of next year, any particu-lar change to that. The sentiment of investors is good. The appetite for long end paper is still there.
However, specifically for very long maturities, like our 50 year, we have noticed some interest in the mar-ket recently. We would likely tap the existing bond. We want to ensure the line is of sufficient size to ensure liquidity, although, as Davide can confirm, liquidity is already very good for the bond.
Davide Iacovoni, Tesoro: Compared with some other peers that have issued in similar maturities recently, we are pretty happy with the liquidity and the feedback
we’ve received from investors. The performance has also been extremely positive compared with our peers in Europe that have issued in that part of the curve.
Antonio Foti, BNP Paribas: Yes, the 50 year transac-tion was a great success, but I agree with Maria. That area of the curve needs more liquidity before accessing longer maturities.
Pietro Bianculli, UniCredit: 2016 was certainly the year of ultra-long. We had Italy, Spain, Belgium and France all hit the 50 year plus area. In 2017, there was a slow-down, although we did get the 100 year Austria trade.
I think there are two causes of this demand: firstly, the appetite for yield pushed investors to look at longer maturities and secondly, the demand for convexity. This in particular was the main driver for the 100 year out of Austria. The demand is still there. We are expecting there
Participants in the roundtable were:Pietro Bianculli, co-head of investment grade and CEEMEA bond syndicate, UniCredit
Maria Cannata, director general, public debt, treasury department, Italian Ministry of Economy & Finance
Antonio Foti, head of FIG DCM and SSA - Italy, BNP Paribas
Davide Iacovoni, deputy director general, public debt, treasury department, Italian Ministry of Economy & Finance
Gabriele Sacerdote, managing director, head of global markets Italy, Crédit Agricole CIB
Lewis McLellan, moderator, GlobalCapital
Tesoro ready to reap the benefits of Italy’s improving economy
Italy has weathered with remarkable resilience what was a profoundly turbulent year in European politics. While it still faces its own turmoils — an approaching parliamentary election in particular — its recovering economy and process of economic and political reforms have given investors the confidence to put money to work in Italian assets. The next 12 months will see the beginning of the reduced quantitative easing programme and a host of new regulatory challenges, but the Italian treasury is confident that it, and the banks with which it works, will be able to adapt to the new challenges and opportunities 2018 holds. GlobalCapital hosted this roundtable in mid-December.
Tesoro Roundtable
Italy in the Capital Markets 5
to be an opportunity in 2018 to tap the market again. For Italy, the question is whether or not to re-open
the existing line — it is really quite below par at present — or to print a new line. The demand is there for a suc-cessful transaction either way.
Gabriele Sacerdote, Crédit Agricole: Since the ECB will continue to expand its balance sheet, there is con-sensus in the market that rates will not be increased for a long while (at least until said expansion gets to an end). We therefore expect the monetary policy backdrop to support demand for ultra-long maturities and a 50 year BTP tap would be well received.
Cannata, Tesoro: Let me add that we are not consider-ing any ultra-long maturity beyond 50 years because demand beyond there is related to the shape of the curve and is quite opportunistic. Before extending the BTP, we want to be comfortable regarding the capability of assuring the liquidity of our current bonds, and the persistence of demand for an ultra-long maturity in the market.
Foti, BNP Paribas: We, and investors, would like to see a tap of the present 50 year. We can imagine a new benchmark in a couple of years but, before thinking about longer maturities, there must be enough liquidity for the present benchmark.
Sacerdote, Crédit Agricole: A tap is the best choice.
: The ECB has extended the purchase programme to September at least. How will that affect the market in 2018?
Sacerdote, Crédit Agricole: Investors will keep on searching for yield in a low inflation / monetary easing context. But I do not expect the purchase programme extension to incentivise investors to look away from Italy. On the contrary, said extension will consolidate investors’ demand counterbalancing a potential higher degree of market volatility as we get closer to the gen-eral elections.
Foti, BNP Paribas: The dovish tone from the ECB and Mr Draghi will help the European government bond market for sure. The prolonged QE at €30bn per month (plus reinvestment) will support mainly peripheral bonds and we expect some good interest from investors on the long end of the curve. The curve is quite steep, and investors still look for good pick-up.
Cannata, Tesoro: The focus has been particularly on the net purchases, but there are important redemptions in the ECB’s portfolio in 2018, which will be added to the ECB’s net €30bn of purchases. Their presence remains very important. This year, we have significantly fewer redemptions than in 2017. The buy-backs and bond exchange transactions we executed last year have further reduced this amount. So, our net borrower requirement for 2018 is lower than for 2017, which should mean it is a less issuing year.
: What are your issuance plans for next year?
Iacovoni, Tesoro: As we always do at this time of year, we have been running our simulation internally, and
having a lot of meetings with the primary dealers and other investors to assess our strategy. The feedback has been that our commitment to the longer part of the curve is appreciated. We need to be present in the 10 year plus area in order to standardise our curve as much as possible, to stabilise or increase the average life of our debt.
As Maria said, we have fewer redemptions, so it will be more difficult to increase the average life. That’s why we’ll need to make a particular effort to be present in the longer part of the curve.
For the rest of our strategy, we will maintain a regular presence in other maturities. We have been reducing treasury bills continuously up to 2017, a year when we probably reached the bottom. In 2018 we will likely issue something in line with what we did in 2017 to keep the stock the same size.
If the market allows, we hope to issue a bit more on our inflation-linked programme. In 2017 we issued a new 10 year inflation-linked bond, so we’ll see if there’s space to look at the short end of the curve for the new bonds as well as on the longer part of the curve. It’s a niche part of the market, so we have to assess the demand even more carefully than we do for vanilla bonds.
Cannata, Italy: Davide is particularly referring to the European inflation linkers while, for BTP Italia, we have no redemptions in 2018. We want to serve the domestic and retail base, so we’ll be doing at least one, perhaps two inflation linkers if there’s opportunity in the BTP Italia sector.
Bianculli, UniCredit: From a banking point of view, the transparency of the Italian treasury is always appreciated by investors. It adds value to its activities. The team also had the capacity to select when the right opportunity is available and explore new maturities. The new 20 and 50 year deals were opportunistic, because that’s what the market was demanding. With those done, the Treasury can be a bit more regular in standard maturi-ties.
We see the plan as consistent with the market’s expec-tation.
The topic of BTP Italia is interesting. Italian banks, in 2017, stopped issuing their own bonds, which has reduced the amount of assets available to retail inves-tors. Banks are offering insurance and asset management products but, whereas before Italian retail clients bought banking bonds, now BTP Italia is the main reference.
Davide Iacovoni Italian Ministry of Economy & Finance
Tesoro Roundtable
6 Italy in the Capital Markets
The fact that the last deal, with such a low coupon, had almost €4bn of retail demand is a clear indication that this is the retail benchmark and the Tesoro can rely on a dedicated distribution channel.
: How has the change in electoral law impacted the political outlook and market appetite?
Cannata, Tesoro: It’s less the change of electoral law that has led to the market being more relaxed. It’s more the awareness of the fact that the upcoming election should occur at the natural end of the legislature. Some type of transition period is expected, but that’s become normal throughout Europe, with the Netherlands, Germany and Spain. The market is prepared to live with this kind of uncertainty. The only probable consequence is that we will remain very regular and a little boring closer to the election in terms of issuance. February remains a traditionally favourable month in terms of demand to try to exploit this moment.
Foti, BNP Paribas: The perception from Italian investors is that the Five Star Movement isn’t market friendly, but at this stage, polls don’t indicate any chance that it will form a government, which is thanks to the change in electoral law. Currently, the centre right coalition is leading the polls and it’s very unlikely that the Five Star Movement will be able to overtake the coalition even if it is the most voted-for party.
Sacerdote, Crédit Agricole: The new electoral law is not the only factor that contributed to improving the market sentiment (as reflected in the recent positive evo-lution of the spread). We need to take into account also the important signals coming from the Italian economy (in terms of growth, investment outlook and employ-ment dynamics) and the recent upgrade by Standard & Poor’s. This being said, investors will keep on moni-toring the government’s commitment to focus on the reforms needed to pay down public debt, taking advan-tage of the current low rates environment.
: What has the perception been of Italy’s recovery story?
Cannata, Tesoro: The investors, after a long period when the promises seemed to deserve modest and less visible outcomes, have really appreciated the new vitality of the Italian economy. The upgrade from S&P, together with the ECB’s policy announcement have helped to support demand for our assets. This vitality has also been present in the secondary market, which is quite unusual towards the end of the year. The volume traded on electronic platforms grew a lot in November, which is a month in which we traditionally notice a meaningful decline. There is quite strong evidence that it’s a positive time in the market.
Iacovoni, Italy: There is debate about how much of this recovery is structural and how much is cyclical, relating to the fact that the rest of Europe is also recov-ering. We don’t know how much in Italy is cyclical or structural but, the feeling is that, looking at the compo-nents of the recovery where we are seeing important signs of resumption in domestic consumption and investment, the recovery is structurally supported and related to the reforms that have been enacted over the past few years.
Bianculli, UniCredit: Aside from the growth, the reforms have really created the right element of investor trust. The banking sector was the source of the biggest problems and, from the beginning of 2017, this problem has been solved.
You can observe this in the performance of Italian bonds across asset classes. We’ve rarely seen second and third tier banks approaching the market before, but they have a chance now. It’s a clear sign of a turn in the situ-ation.
Sacerdote, Crédit Agricole: Reforms have clearly been instrumental to consolidate the recovery of economic growth. Focus on the labour market, the education sys-tem and on public administration (to reduce the bureau-cracy workload) should be maintained in order to stop the brain drain and ultimately promote demography — demography being a key supporting factor for growth.
Foti, BNP Paribas: Investors are looking with favour on the improving economic data. It’s helping to con-solidate perception of the improving Italian banking system. What’s been done up to this point for the banks is considered a great help by domestic accounts, and as a result, the perception of the economy has improved a lot.
: We’ve touched on the S&P upgrade. Are you expecting any ratings changes in 2018?
Cannata, Tesoro: Of course, it’s difficult to say, but I don’t expect anything before the election. Afterwards, we’ll see. Perhaps the removal of the negative outlook from Moody’s. I’m surprised it’s still in place. The nega-tive outlook was put in place in December 2016, but none of the fears that prompted it have been realised.
They expected a weakness of the Gentiloni govern-ment, but it didn’t occur. They expected the implemen-tation of reforms to stop, but, on the contrary, several steps for completing the package of reforms were achieved. They expected low growth, but in the end, it was more than double their forecast. I would expect a stabilisation of their outlook. I think it would be in line with what the market expects. For the rest, I believe that will depend on the development of the situation after the election. I’m confident the performance of the real economy will continue to be strong.
: It’s been a while since Italy printed in a currency other than euros. Are you planning to return to dollars?
Pietro Bianculli UniCredit
Tesoro Roundtable
Italy in the Capital Markets 7
Cannata, Tesoro: Yes, probably next year Davide will launch the second wave of issuance in the dollar mar-ket. We have completed the process of regulation for assigning a CSA scheme for collateralising exchange rate exposures. The minister is soon to sign, so that in 2018 we will be ready. It will also depend on the eco-nomics and the relative conditions available between the dollar and the euro market, but the intention is to access the dollar market.
Foti, BNP Paribas: We need to see the cross-currency basis swap at an appropriate level, but it really opens up a much deeper market than euros. That’s what we’ve seen with corporates and financials. There is a lot of demand from Asia and the US that it would be useful for the Italian treasury to tap into.
: With condi-tions in euros so good, I suppose it isn’t necessar-ily a given that dollars will be economically worth-while?
Cannata, Tesoro: Yes, we always have to make sure the levels make sense.
Iacovoni, Tesoro: We need to assess the impact of mon-etary policy in the US and Europe. This is a factor we still need to understand. The rate hike cycle, which the US Federal reserve is engaged in, while the ECB is still in an expansionary phase, although at a slower pace, may affect how the exchange rate evolves and impact the basis swap rate. This will impact our decision process and the economics of new issuance.
Cannata, Tesoro: Nevertheless, there is now a channel of the market, and a potential base of investors that we have not tapped into since the sovereign debt crisis in Europe.
Bianculli, UniCredit: The opportunity to diversify is always a positive direction for a treasury. Exploring dif-ferent currencies and distribution channels, like with BTP Italia when it started, is always positive. It adds flexibility.
: Last year, there was discussion around turning Italy from a nation of savers into a nation of investors. How has this developed?
Sacerdote, Crédit Agricole: The Italian per capita wealth remains high compared to the rest of Europe, while household debt remains low. Given that situa-tion, the investment appetite has increased in the low rates environment.
This dynamic is reflected not only by the success story of the BTP Italia but also by interest raised by the so called “PIRs” (Piani Individuali di Risparmio) initiative.
The PIRs are investment schemes introduced one year ago to incentivise retail investments in SMEs. The original target was to raise €10bn and the latest statistics show that said target is now within reach.
: How is the primary dealer model working?
Cannata, Italy: It’s working well, but progress is always possible. We have the same 18 dealers that we have had since the beginning of 2016. Two left at the end of 2015 — one because it was leaving the business at a European level, and the other decided that it didn’t have the appropriate strength for distributing Italian government bonds. It’s an activity that needs strong commitment and solidity in assuring continuity of presence.
It’s a common question for every sovereign to keep the attractiveness of this kind of business and the reputa-tional value of remaining a primary dealer. It’s not easy, but we have a resilient group.
Iacovoni, Italy: It’s an increasingly challenging activity because there’s so much new regulation. MiFID II, for example, has a lot of impact in terms of secondary mar-ket trading. We are sure that all the players will adapt to the new environment, but we expect some adaptation period in January, that will likely strain primary dealers’ activities.
: With the syndicated market so healthy, do private placements still have a use for you?
Cannata, Tesoro: The private placement process is based on reverse enquiries. Last year we had none. There’s so much choice in the market with liquid bonds. I think the need for liquidity is even more relevant now than in the past. I don’t know if the change in the regulation has influenced the lack of appetite for private placements. In any case, it’s a part of our programme designed to satisfy demand.
We’re not interested in using complex structures. Last year, the supply in the public market was enough to sat-isfy demand.
Foti, BNP Paribas: We have seen, during the past year, fewer enquiries for private placements. With the inau-gural 50 year BTP and the new BTP 30 year syndicated transaction, investors have been keen to tap public transactions rather than enter long-dated private place-ments. In the past years, there were no syndications in that territory, so private placements were a good means of serving that demand. Today it’s definitely more appealing for investors to buy liquid transactions.
Bianculli, UniCredit: This is the feeling that we’ve had
Maria Cannata Italian Ministry of Economy & Finance
Antonio Foti BNP Paribas
Tesoro Roundtable
8 Italy in the Capital Markets
as well. In the past, private placements were primarily in the ultra-long part of the curve and often on inflation-linked bonds, but now that’s open to the public markets, investors prefer the more liquid options, even if it’s buy and hold investors.
: It’s been mentioned that liquidity was very good last year. What underpinned this?
Cannata, Tesoro: It’s difficult to say the cause, but the year was of two parts. Up until the French election, liquidity suffered but it improved after that. Iacovoni, Tesoro: I think that despite the turbulence, what underpinned liquidity last year was the efforts of market makers, even those beyond the primary dealer pool. There’s also the fact that there’s been a growing electrification of trades, bringing new impetus to the liquidity of the market.
We can’t compare the liquidity right now with the liquidity that we had before 2008. Nonetheless, we have to put things in comparative terms. The general feeling is that the Italian market is still able to provide a very good standard of liquidity on almost all products.
Cannata, Tesoro: It’s important that we have a strong cash market, but also a strong repo market. It’s not so common now in Europe. The Italian repo market is by far the largest one in Europe.
Foti, BNP Paribas: BTPs and Italian bonds remain very liquid, although we had a couple of events that affected liquidity last year. The market was, as Maria mentioned, a bit nervous before the first round of the French elec-tion but, overall, liquidity remained a strength of the Italian market. Primary dealers continue to support Italian bonds in the secondary market, which is appreci-ated by domestic and foreign investors.
We’re not concerned about changes in the future. I think that liquidity will remain good in BTPs and Italian govvies, which is important for investors to be involved in the market. Without liquidity, international investors cannot participate in BTPs.
I wanted to highlight the Tesoro’s efforts in primary auctions. Now that there’s no over-bidding in primary auctions, international investors can participate in them without fear of surprise in pricing.
Sacerdote, Crédit Agricole: The regulations coming into force in 2018 (MiFID II and IFRS 9) should not be detrimental for market liquidity. And the recent good news on Basel IV also represents a supporting factor: the new rules will enter into force in 2022 with a grandfa-thering period of five years and the risk weighting on government bonds has not been introduced.
The European Banking Authority calculated that the additional capital requirements for banks will be sig-nificantly lower (€40bn) than what originally estimated by the market (€800bn-€900bn). This being said, the overall cost of the regulatory framework will be increas-ingly punitive for market participants, and this might be reflected in terms of higher returns needed to justify an active presence in financial markets.
Bianculli, UniCredit: For sure, the regulation is the one that pushes some specialists to step out of the business. It comes back to the topic of liquidity. Predictability and liquidity are the two best aspects of the Italian treasury.
We expect something of a grace period at the beginning of 2018 for the MiFID II impact, not because people don’t understand the requirements, but simply because it takes time to set up.
Cannata, Tesoro: Yes, it’s technologically a demanding process, adapting the models to the new requirements.
: We have a French sovereign green bond and social bond from Cassa Depositi e Prestiti. Are there thoughts of an Italian sovereign green bond?
Cannata, Italy: We have not concluded our reflections on that. Honestly, the preliminary evidence indicates that Italy is not likely to approach the market soon. Most kinds of eligible expenditure take place at a local level. This has slowed our ideal path to enter the mar-ket. We have to assess if it is appropriate for the sover-eign because, in this market, the most important part is ensuring proper implementation, monitoring and reporting of the usage of the revenues of this type of issuance. If it’s disbursed at a local level, it’s not easy to report at a sovereign level. However, the analysis is not yet concluded.
Sacerdote, Crédit Agricole: When we talk about green bonds, the key point to be considered is the opportu-nity to diversify the investor base. The total SRI assets under management in Europe is estimated to be €12tr, of which the pure fixed income share is close to €8tr. The resultant gap between supply and potential demand should definitely be kept into account in a market con-test which is expected to become more volatile.
: How do you feel the reaction of the Italian press to the developments in the Italian economy has been?
Cannata, Tesoro: Generally speaking, the press have preferred to emphasise problems, rather than positive results, but it’s not a specific Italian problem. When I speak to my colleagues in other countries and complain about such a stance in the press, they tell me that it’s clear that I don’t read their newspapers.
Nevertheless, the progress in the performance of the economy is all positive and more neutral newspapers have started to give some evidence of this.
Still, we must not forget that we are now in an elec-toral campaign and that the tone of the debate is increas-ing noticeably and that this is reflected in the press.
Gabriele Sacerdote Crédit Agricole CIB
Italy in the Capital Markets | January 2018 | 9
SPONSORED ARTICLE: INDUSTRY 4.0
STATISTICS SAY THAT Italy is the second largest manufacturer in Europe, second only to Germany, and among the largest in the world. This may be a surprise given how other developed countries have retrenched manufacturing over time. It shouldn’t be. Italian firms are based on true ingenuity, and strong entrepreneurial spirit. As a result, they are front-runners in many sectors, and today many cli-ents all over the world still enjoy Italian products – either in the three “Fs” (fashion, food, and furni-ture) or in the less well-known sec-tors of machinery, the backbone of Italian exports, or pharmaceuticals. On many occasions, Italian indus-try proved to be resilient enough, not only to compete and innovate, but also to overcome various struc-tural difficulties. For example, Ital-ian companies sometimes struggled with scaling up. Nonetheless, they were able to develop industrial dis-tricts, a unique Italian ecosystem often used as a case study in the world’s leading business schools, and this environment has created a fertile ground for companies to prosper and compete with much larger players.
Yet, although the Italian indus-trial landscape has often been seen as the jewel in Italy’s economic crown and a hive of unique know-how, also Italian corporates are have to confront with the challenge of the upcoming fourth industrial revolution, so-called Industry 4.0, which is totally redesigning pro-duction paradigms. On one hand, it is a terrific opportunity. It allows, for example, product differentia-tion, quality, and scale efficiencies as never before in the past, with sig-nificant potential upside in terms of profitability. On the other hand, firms needs to be able to embrace new practices to remain competi-
tive. The problem is that the invest-ments needed to adopt Industry 4.0 are huge, and in many cases inde-pendent from the size of the com-pany.
Is Industry 4.0 a phenomenon that will spell the end for many Ital-ian companies? Not at all, since Ital-ian firms have both fundamental strengths and the prerequisites for success. The fundamentals, as out-lined before, are the Italian ingenu-ity that has created such a unique knowledge base, and long-lasting commercial relationships. Both of these cannot be wiped out over-night. The prerequisites for suc-cess are both a fertile environment in terms of institutional support – the Italian government launched a thorough plan to spur capex, and in fact today Italy is the second best country in the world in terms of fiscal incentives for these kinds of investments – as well as in terms of cost of funding, thanks to his-torically low interest rates which will likely persist for the next few months.
What is missing in this picture? An important step: the ability to choose the right financial partner that can support growth and ensure sustainability for the business. Ide-ally, such a partner should have two key pillars.
The first pillar is the ability to offer access to a solid pan-Europe-an Corporate and Investment Bank-ing product platform – a platform such UniCredit’s, having been at the top of key IB League Tables in Europe for many years. Industry 4.0 often requires a company to rethink its business models, and the man-agement therefore needs the sup-port of a financial partner that can assist and advise in the redesign, as well as find the right funding mix to implement the new strategy. As previously mentioned, necessary
investments are often huge, and scale matters. Therefore the right financial partner should be able to structure, and have the placing power, to syndicate large loans with other banks. If the plan requires M&A activity, the right financial partner in this case should have industry expertise and internation-al reach. Last but not least, access to capital markets, both debt and equity, is often a step that should be taken to underpin ambitious growth strategies. Here, the right financial partner is the one able to connect international investors with issuers. Regarding the latter point, Italy has notably been on the radar of several investors for the last few years. For example, UniCredit recently listed GIMA TT, a leading company in the design, manufacture and assem-bly of automatic open-architecture electronic machines for the pack-aging of both traditional tobacco products and new generation prod-ucts. The IPO was one of the most successful in Europe in 2017, with an oversubscription of 8x.
The second pillar is the capabil-ity to offer access to internation-al markets – Industry 4.0 is most effective when coupled with inter-national operations. However, working abroad may be difficult, and the complexity can sometimes be overwhelming. This is why the financial partner should be able to provide clients with thorough mar-ket insights, dedicated products, and, above all, experienced peo-ple. At UniCredit, this is possible thanks to fully-fledged banks in 14 pan-European countries, and to branches and representative offices in 16 other strategic markets in the world. In addition, with 4,000 cor-respondent banking relationships in over 175 countries, UniCredit is ideally positioned to support cli-ent’s international expansion. s
As Industry 4.0 radically alters the business world, Italian corporates are well placed to thrive thanks to a culture of ingenuity, a world-class knowledge base, long-lasting commercial relationships, and strong institutional support. Yet, for corporates to fully benefit from this revolution and enjoy international, sustainable growth, Vittorio Ogliengo, UniCredit’s Head of Corporate and Investment Banking in Italy, explains that choosing the right financial partner is key
Riding the wave – Industry 4.0 has Italian corporates poised for a new era of growth
10 | January 2018 | Italy in the Capital Markets
THE RETAIL INVESTOR BASE
ITALIAN CAPITAL markets have long been underpinned by healthy support from retail accounts.
Just as mom and pop investors have been an important feature of the equity markets in countries like the US, households in Italy have shown a strong preference towards investing in bonds — bolstered by favourable tax treatments.
“This familiarity with bonds dates back to a time of high interest on Ital-ian government bonds and continued in recent years, following the large volume of retail bonds issued by the Italian financial system,” explains Nicola Francia, head of private inves-tors products Italy at UniCredit in Milan.
But there has been a signifi-cant shake-up in the way that retail accounts have been investing their money in Italy.
In particular, investment in bank bonds has been drying up over the last few years.
Consob estimates that the amount of bank debt in Italian retail portfoli-os shrank by about 28% between 2015 and 2016, for example, accelerating a shift into other forms of investment.
Bank debt securities had become a very popular source of income for many Italians following the global financial crisis, but recent problems in the Italian banking system have eroded people’s confidence in the asset class.
The failure of Banca Marche, Banca Popolare dell’Etruria, CariChieti and CariFerrara in 2015 was perhaps the most important episode to demon-strate how easy it could be to lose money when investing in certain parts of a bank’s capital structure.
More than 15,000 subordinated bondholders suffered losses as part of a €3.6bn rescue of the four banks, and one investor, a pensioner, committed suicide following the collapse of the banks.
These ordinary Italians had been caught up in a new world for Euro-
pean banking regulation, in which the Bank Recovery and Resolution Directive (BRRD) and the minimum requirement for own funds and eli-gible liabilities (MREL) had spelt out how bail-ins should start replac-ing bail-outs — in other words, how investors should bear the brunt of bank failures in the place of taxpay-ers.
“The impact of European legis-lation on bail-ins together with the banking crisis affecting some Ital-ian banks may have had a nega-tive impact on retail appetite for banks by increasing the percep-tion of the riskiness of the sector,” says Maurizio Gozzi, managing director in debt capital markets Italy at Crédit Agricole in Milan.
But the banks themselves have also been losing their appetites for placing unsecured bonds with retail investors.
Issuers are being careful to make sure that liabilities can comply with MREL, which may require that senior bonds can be bailed-in nearly as easily by resolu-tion authorities as subordinated debt instruments.
Though the Single Resolution Board — Europe’s centralised reso-lution authority — has said explic-itly that it will not exclude retail exposures from a bank’s MREL cal-culation, the supervisor has also expressed doubts about whether or not these holdings would constitute “an impediment to resolvability”.
Indeed, much of the work that has been done on reforming bank creditor hierarchies in Europe in recent years has had the specific aim of making resolutions easier.
In 2018, for example, Italy will join other EU countries in issuing non-preferred senior bonds — a new asset class that has been designed with a bank’s failure in mind.
Because of the way in which Italian legislators have decided to implement the provisions of the Bank Recovery
and Resolution Directive into Italian law, these non-preferred senior debt instruments will have high minimum denominations that will exclude retail investors from the market.
“There is a strong view that these transactions should only be placed with institutional accounts,” says Denis Beltramini, private banks and distributors sales at BNP Paribas in London. “This is not the case with preferred senior bonds, which inves-tors might reconsider buying when
interest rates are more compelling. “But we have seen that banks have
already begun replacing much of this funding in the wholesale market.”
All changeIn the meantime, the Italian market for retail investments has been adapt-ing to the new operating environ-ment.
“It’s been quite a dramatic shift out of bonds,” observes Beltramini. “Most of the retail money has moved into asset management products, like funds, and some of it has also gone into current accounts.
“Italians are quite risk-averse in general. They are not willing to invest in the equity markets and they have become less willing to invest in bonds, given that yields are so low. Many have preferred to keep their money in current accounts, even if they are not being paid anything.”
Another alternative to bank bonds that has been gaining traction in
The Italian retail bond market is going through a major shake-up in which alternative investments are set to replace bank bonds among the securities of choice for Italian households. Tyler Davies reports.
Italian retail investment: out with the old, in with the new
“In the current low-yield bond environment,
investment certificates offer investors a defined
return, in the form of redemption value or a
periodical coupon, while allowing them to choose
their own risk profile”
Nicola Francia, UniCredit
Italy in the Capital Markets | January 2018 | 11
THE RETAIL INVESTOR BASE
recent years is a form of structured note or derivative known as an “investment certificate”.
The term investment certificate covers a broad range of securities that allow retail accounts to add expo-sure to any market by reference to an underlying asset — including com-modities, currencies, indices, interest rates and shares.
The certificates are traded on the securitized derivatives market of the Italian stock exchange (SeDeX), as well as the EuroTLX market, and tend to be issued by banks.
“They represent a hybrid invest-ment — combining the protection of bonds with the yield of the equity market,” says UniCredit’s Nicola Fran-cia. “The most popular certificates in the last few years have been those with full or partial capital protection, while more recently there has been a growing interest towards conditional-ly protected certificates.”
Sales of investment certificates have boomed in the last few years, according to UniCredit.
The Italian bank expects issuers to have placed €8.5bn of the securities by the end of 2017, with total turnover on the SeDeX and EuroTLX passing the €13bn mark. The market was half as large in the previous year.
“In the current low-yield bond environment, investment certificates offer investors a defined return, in the form of redemption value or a peri-odical coupon, while allowing them to choose their own risk profile,” says Francia.
Old wine in new bottles?But issuers of all types financial instruments — including bonds, investment certificates and asset management products — will likely find it more difficult to place their
securities in the hands of retail investors after the second Markets in Financial Instruments Directive (MiFID II) has come into effect in Jan-uary.
One key part of the new rules is the area on product governance, which aims to ensure that firms are acting in the best interests of their clients when selling new financial instru-ments.
The product governance framework stipulates that distributors should identify and assess the circumstances and needs of the clients they intend to focus on when designing a product, as well as when placing the securities in the market.
MiFID II will come into effect for the first time in 2018, alongside the Packaged Retail and Insurance-based Investment Products (PRIIPS) regula-tions, which require manufacturers — including issuers and underwrit-ers — to disclose information about investments within short and con-sumer-friendly Key Information Doc-uments (KIDs).
A combination of the two sets of rules will likely pile pressure on the retail bond market in Europe, raising the cost of issuance.
Responses to a public consulta-tion on the Capital Markets Union in June 2017 suggested that “PRIIPs and MiFID II product governance regimes will reduce the availability” of bonds to retail investors and even “consti-tute a barrier to selling products” to these types of buyers.
But the new regulations will not kill off the retail market in Italy, accord-ing to Emiliano La Sala, counsel at Allen & Overy in Milan.
Consob, the Italian securities mar-ket regulator, has played a key role in preparing the market for these sorts of changes.
“Consob has introduced a number of guidelines in recent years, aimed at filling the knowledge gap between issuers/intermediaries and retail investors as well as preventing con-flicts of interest in securities markets and strengthening the position of retail investors under MIFID I,” says La Sala. “The overall aim is for inter-mediaries to always act in the best interest of their clients.”
La Sala says that, in some cases, the guidelines have anticipated the impact of the incoming European legal framework of MIFID II and PRI-IPS.
For example, Consob made a series of recommendations in late 2014 aimed at issuers and financial inter-mediaries engaged in selling “com-plex financial products”.
Echoing a number of MiFID II pro-visions, the Italian regulator suggest-ed that intermediaries place certain restrictions on the sale of financial instruments deemed too complex for retail investors, like perpetual bonds, convertible securities and over-the-counter derivatives.
Consob’s guidelines are not com-pulsory, but they can exercise a strong influence on market practice.
“In light of this, the introduction of the new rules, even though it must not be underestimated, might not be as disruptive in Italy,” says La Sala. “Intermediaries already comply with some of the new provisions when looking to place securities with retail clients.”
There is no doubting, however, that MiFID II will have a big impact the shape and size of retail bond markets — even in Italy.
Once the rules have been intro-duced, everyone will have access to far more detailed disclosures around the sales of financial instruments.
“We will have to see how the cli-ents react to this,” says Beltramini. “They may well decide that the costs for some products are too high and switch into other products.”
Italian savers are largely adopt-ing a “wait and see strategy” for now, according to Beltramini, as interest rates hover around historic lows and recent bank bond losses remain fresh in the memory.
Deloitte, the accounting and con-sultancy firm, estimated in May that one-third of Italian investors’ money was parked in deposits and cash.
Putting this money to work will be crucial for establishing new invest-ment traditions for Italian savers. s
0
10
20
30
40
50
60
By 2018 2019 2020 2021 2022 2023 2027 Beyond 2027 Maturity
Source: Bank of Italy (Sep 2017)
Italian bank bonds by holder and maturity
Households Banks in the issuer's group Other Italian banks Other investors Volume (€bn)
Italian bank bonds by holder and maturity
Source: Bank of Italy (Sep 2017)
actively promoting
responsible
growth
Crédit Agricole Corporate and Investment Bank includes social and environmental criteria in its fi nancing policies, proving
its will to act in favor of responsible growth.
www.ca-cib.com
ww
w.pr
ofi l-
desi
gn.c
om
