Founded in1850, and recently rebranded as a National Promotional Institution (NPI), Cassa Depositi e Prestiti (CDP) has a multi-dimensional mandate. CDP’s mission, as Moody’s explains, is to support economic development and investment in competitiveness by financing long-term development activities, “acting as a counter-cyclical force in the event of market failures”. It also complements the financial system where private institutions have “limited interest in supporting projects that are considered critical to the Italian economy”.
Maurizio Gozzi, managing director of debt capital markets at Crédit Agricole in Milan, says: “CDP will remain an extremely important tool for any Italian government to promote growth both in industry, infrastructures and financial services.”
To play this role effectively, it is essential that CDP continues to retain its status as a quasi-government agency rated at the same level as the government by each of the leading ratings agencies. “We believe there is an almost certain likelihood that [CDP] would receive extraordinary support from the Italian government if needed, and we therefore equalize our long-term rating on CDP with our long-term rating on Italy,” noted Standard & Poor’s (S&P) at the end of October, when it upgraded CDP’s short term rating to BBB/A-2. This was not driven by any change in CDP’s fundamentals, but was in line with S&P’s upgrade of the sovereign a few days earlier.
Equally important, for Italy, is that CDP also retains its categorization by Eurostat as a market unit. This is because, as Scope Ratings explains in a recent analysis, “as long as its products and services are offered at market conditions, CDP is not considered part of the government sector and its debt is not consolidated into Italian government debt, leaving public debt statistics unaffected.”
Given Italy’s commitment to reducing its debt to GDP ratio to well below its current level of over 130%, it is easy enough to see why the government is eager to ensure that CDP’s debt remains unconsolidated and to maintain its operational autonomy. According to Scope, CDP’s governance structure protects it from excessive political interference. “CDP can only invest in projects deemed economically and financially sustainable and therefore cannot bail out unviable businesses,” says Scope.
The 2016-2020 plan
CDP’s financial and credit profile means that it is well equipped to implement an ambitious 2016-2020 strategic plan that is central to its mission of re-energising the Italian economy by mobilising €265bn of resources. Of this total, €160bn will come from CDP itself, with the remaining €105bn drawn from “national and foreign private and public resources”. The most notable of these are the resources made available under the European Fund for Strategic Investments (EFSI), the joint EIB/European Commission initiative to help overcome the current investment gap in the EU by mobilising private investment in projects which are strategically important for the EU. EFSI is a core component of the Investment Plan for Europe, also known as the Juncker Plan. This is critical for Italy, which has been the leading beneficiary of guarantees and equity made available by the EFSI, with CDP acting as the principal manager of funding under the Juncker programme.
The lion’s share of the €265bn total, accounting for €163bn (€117bn from CDP), is to be allocated to supporting “all phases of [the] life cycle of enterprises” and strengthening support for exporters. This represents a 73% increase in the mobilisation of funds for the enterprise sector from CDP, which amounted to €67bn between 2011 and 2015.
Specifically, the 2016-2020 business plan sets out CDP’s objectives of promoting innovation and development in the smaller companies sector by becoming a leading venture capital operator. It also includes a commitment to support medium-sized companies by providing growth capital, and helping with the acceleration of the listing process and the diversification of their financing sources.
Also in support of the corporate sector, under its 2016-2010 plan CDP is committed to “intervene in the capital of companies of national importance, safeguarding their economic sustainability” through long-term equity investments. Internationally, meanwhile, CDP’s mandate is to “significantly increase export support through the creation of a single dedicated hub”.
Of the remaining €102bn that the 2016-2020 business plan aims to mobilise, €68bn (€24bn from CDP) will contribute to what CDP describes as a “change of pace” in infrastructure development and environmental protection, via, for example, support for public private partnerships (PPP). A further €20bn (€15bn provided by CDP) is for local administration investment, with €15bn (€4bn from CDP) supporting the creation of value in “public real estate, social housing and tourism”.
Over the last 12 months, CDP has made notable progress in all the areas identified in its blueprint for 2016-2020. When it released its half-yearly results in August, CDP announced that over its first 18 months, €43bn (more than 25% of the resources earmarked for investment over the entire life of the plan) had already been mobilised.
Of the €13.1bn mobilised in the first half of 2017, €6.4bn was allocated to international expansion, with €4.8bn to enterprises, €1.8bn to government, public administration and infrastructure, and the remaining €1bn to real estate.
This was achieved against the backdrop of sharply improved profitability, with group gross income reaching €1.5bn in the first six months of 2017, compared with “practically nil” in the same period in 2016.
Supporting SMEs
While the resources mobilised in support of the corporate sector in Italy have been quite modest in proportion to the target outlined in the business plan, CDP has implemented a series of important initiatives helping to provide smaller and medium sized companies with access to funding.
One example is CDP’s continued participation alongside Germany’s KfW and the European Investment Fund (EIF) in the EIF-NPIs securitization initiative (ENSI), designed to stimulate access to finance for SMEs through the capital markets. In 2017, CDP and KfW closed a new round of credit securitization for SMEs originated by Alba Leasing. CDP reports that this was its fifth investment in the ENSI programme (and its fourth alongside KfW), which has brought the number of Italian SMEs supported by Alba to 2500.
A second important development in CDP’s support for smaller companies in 2017 was its acquisition in July of a 15% holding in Elite — the Italian Stock Exchange platform (within the London Stock Exchange Group) which supports capital raising for companies with high growth potential.
Established in 2012, Elite describes itself as “capital neutral” to any financing opportunity, providing access to private equity and venture capital funds as well as debt products. By early December, Elite reported that it had attracted over 700 companies, of which 437 were Italian, with aggregate sales of more than €50bn. Its aim, according to CDP, is to build a network of more than 1,000 companies by early 2019.
Another important initiative in 2017 was the signing of a guarantee agreement under the Investment Plan for Europe to support SMEs. The EFSI Thematic Investment Platform for Italian SMEs, the first in Europe to be promoted by the EIB together with an NPI, lays the foundations for the implementation of a series of guarantee and risk-sharing initiatives aiming to mobilise SME investment worth €6bn.
CDP states: “Using the Juncker Plan resources provided via the European Competitiveness of Enterprises and Small and Medium-sized Enterprises (COSME) programme supporting SMEs, CDP and the EIF will issue counter-guarantees to financial institutions in order to facilitate Italian businesses’ access to credit and support new investment.”
It adds that total allocated funds of €225m (€112.5m from COSME and an equal amount provided jointly by the Ministry of Economy and Finance and CDP) will have a notable multiplier effect, supporting “a significant amount of new investment.”
CDP has also mobilised Juncker Plan funding for much needed infrastructure investment in Italy. Last July, for example, it set out details of an investment of €113m under the European Investment Plan to reduce energy costs for Italian businesses by increasing the stability and security of the national power grid. Described by CDP as a “new milestone in promoting Italy’s infrastructure”, this project involves the construction by Terna, which is owned by CDP, of a new 190km electrical interconnection line between Italy and France, which is the longest of its kind in the world.
Diversified funding strategy
Another key component of CDP’s 2016-2020 business plan is the diversification of its funding. Historically, CDP’s principal source of funding has been retail liquidity sourced via postal savings, which today account for about 75% of its total funding. As Scope Ratings notes: “Postal savings are a stable and inexpensive source of funding, providing CDP with a key competitive advantage in its markets.”
CDP made a successful return to the international capital market last June, placing a €1bn seven year bond issue led by Banca IMI, BNP Paribas, Deutsche Bank, Goldman Sachs and JP Morgan, which generated total demand of €1.8bn, with 50% of the bonds placed outside Italy.
A more recent landmark for CDP in the international capital market was its first social bond, in November. Led by Barclays, Citi, Crédit Agricole, HSBC, Société Générale and UniCredit, this €500m five year issue broke new ground as the first ever social bond from any Italian borrower.
Proceeds of CDP’s social bond are earmarked to promote “sustainable growth, ensuring socioeconomic advancement, access to financial services and support to employment”. Another notable innovation for the broader SRI market was that it was the first social bond from a European borrower to specify that the proceeds would also be used for SMEs (and micro-enterprises) located in deprived areas of Italy and in areas affected by natural disasters.
This clearly resonated with dedicated SRI investors, who accounted for a notable share of the total final order book, which was in excess of €2.25bn. According to CDP, more than 70% of demand for the its social bond came from overseas buyers.