Analysis: Dearth of Italian bond deals flashes long-term debt danger
FILE PHOTO: Duomo cathedral and Porta Nuova financial district are seen in Milan, Italy, May 16, 2018. REUTERS/Stefano Rellandini/File Photo ·Reuters·Reuters
By Abhinav Ramnarayan and Giulio Piovaccari
By Abhinav Ramnarayan and Giulio Piovaccari
LONDON/MILAN (Reuters) - Just eight months into a period of intense political strife, Italy's debt profile is starting to deteriorate as the country is forced to depend on shorter-dated local bond auctions and small individual savers to raise money.
Staggering under a debt ratio of 130 percent of annual economic output and one of the world's biggest bond issuance programmes, Italy needs its borrowing to be low-cost but also long-maturity; generally, the longer the tenor of the debt, the lower the risk of repayment difficulties.
Until recently it was succeeding -- the average maturity of Italian government debt reached 6.96 years in February, the highest in five years. But since then, it has been falling and stands now at 6.79 years, an 18-month low, according to a BBVA analysis of Italian Treasury data.
The reason is that Italy has not recently been able to attempt a debt syndication -- a deal structure in which borrowers appoint banks to sell debt directly to international investors, instead of just running bond auctions at home.
Such deals offer access to a far wider, deep-pocketed investor pool and allow borrowers to raise more money in one hit, often with longer tenors. But the populist government in Rome and its row with the European Union over budget spending have sapped appetite for Italian bonds.
"Syndications allow you to open up new lines, such as the 50-year bond Italy issued in 2016, which helps them lock in low borrowing costs for many years to come," said a banker at one of Italy's three primary dealers, banks appointed by governments to manage their debt issuance.
Without regularly conducting syndications to sell long-dated debt, Italy's average debt maturity will likely drop further, bankers at Italy's two other primary dealers agreed.
"(A syndicated bond deal) is a also a strong signal that you have market access. If Italy was to go the rest of the year without a syndication, it doesn't look good. If they still can't come in January (2019) - that looks very, very bad," the banker said.
He asked to remain anonymous as he is not authorised to speak about his clients.
Since May, Italian borrowing costs have marched steadily higher and yield spreads over Germany -- effectively the premium investors demand to hold Italian risk -- has doubled.
Foreigners have shed a net 69 billion euros ($79 billion) in Italian government bonds since May when the right-wing League and anti-establishment 5-Star Movement first joined forces.
As a result, the Treasury has had to rely heavily on bond auctions, where it has limited control over the price and timing and is typically restricted to tapping existing bonds.
Average maturity tends to be shorter too, as the auctions are a mix of shorter and longer-dated debt. The Nov. 13 auction for instance raised 5.5 billion euros via three-year, seven-year and 20-year bonds. [nZYN22FU00]
This week, the Treasury even turned to small savers to try to raise money, tapping a type of bond it first used during the 2011-2012 crisis. But bourse data showed retail investors were unenthusiastic, submitting orders for just 481.35 million euros on the first day. [nL8N1XU2OM]
"I wouldn't say that Italy is immediately in trouble because they aren't issuing any long bonds but it is still part of a big issue," said Marie Owens Thomsen, global head of economic research at Indosuez Wealth Management.
"Many countries that have record debt levels and how they are going to manage this record debt, what the profile is going to be, what the average maturity is going to be, is an issue."
TERMING OUT
Italy undoubtedly benefited in recent years from investors' hunt for yield. As the European Central Bank's 2.6 trillion-euro bond-buying scheme depressed borrowing costs, investors sought out longer and longer maturities for a few additional basis points of return.
Euro zone countries enjoyed not just record low borrowing costs but also were able to issue long-dated debt to smoothen out debt profiles swollen during the debt crisis.
Between 2014 and 2017, Italy completed three syndications a year, mostly selling long-dated bonds including a blockbuster 9 billion euro 30-year deal in February 2016 and a 5 billion-euro 50-year bond in October the same year.
This year, however, it has only completed one syndication, a 9 billion-euro, 20-year deal in January.
Spain, on the other hand, has raised 27 billion euros from four syndications this year already. That has helped it stretch its average debt maturity this year to 7.47 years, just off the 7.58-year record hit in July, according to data from the Spanish Treasury.
The primary dealers told Reuters Italy had been monitoring bond markets for a post-summer syndication, potentially a 30-year bond, but the government's contentious draft budget ruled this out.
Italy's 30-year borrowing costs are close to their highest level in half a decade at 4.13 percent. The coupon on its last 30-year bond syndication, a March 2048 note, was 3.45 percent. <IT0005273013>
Rome may still try next year to revive plans for a syndicated 30- or 15-year bond, said Filippo Mormando, a strategist at MPS Capital Services, the investment banking arm of Banca Monte dei Paschi di Siena and one of Italy's primary dealers.
But if political tensions are still simmering, the debt agency may have to rely more on retail bonds, Mormando said.
"What might be missing is more 'creative' stuff, like bonds in foreign currency, longer-dated inflation linked, green bonds like the one France is doing, social bonds and stuff like that," he added.
(Reporting by Abhinav Ramnarayan, Additional reporting by Giulio Piovaccari in MILAN; Editing by Robin Pomeroy)
