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Corporate Bonds

Under lockdown, Italian banks try to reassure companies

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Italy’s capital markets bankers are keeping calm amid the coronavirus crisis, getting used to working from home, and trying to support clients as well as they can, while wishing for help from Europe and the European Central Bank. But they are not allowing themselves to hope the worst is over. The health crisis is acute and getting worse.

The whole of Italy is now under quarantine orders, with large public gatherings banned and travel discouraged, or banned across regional boundaries. The government announced another 168 virus-related deaths on Tuesday, bringing the total to 631.

Bankers and citizens in Milan report that “you can get everything you need in the shops” after a phase a few weeks ago when supermarket shelves were empty — but Rome is now suffering shortages as the reaction to the virus is newer there.

One banker referred to hospitals “collapsing” because there were not enough intensive care beds and doctors were having to choose whom to save.

“The measures taken by the government seem necessary, but they’ve brought the country to an economic standstill and asset prices have suffered as a result,” said a fixed income investment director in London. “Monetary policy can only go so far in supporting and boosting economic growth, so fiscal stimulus is needed. They’ve approved an emergency measure of €8bn. I don’t expect any pushback from the European Commission. Now is not the time to focus on Italy’s budget constraints.”

The FTSE MIB share index rallied 3.7% on Tuesday morning, but, asked whether he was encouraged by this, a debt capital markets banker in Milan said: “Not really. I think the situation yesterday [when Milan’s market fell 11%] was the combination of oil plus virus — the most deadly combination ever. The oil today is better, but is not completely solved, and the virus is still there.”

The best guess, he thought, was “a heavy recession” in the second quarter followed by recovery in the third and fourth quarters. But he added: “Who knows? Till now it is the most likely scenario but I don’t think anybody is ready to bet on it.”

For the time being, no capital raising of any size is going on in Europe’s markets, except by sovereign and supranational borrowers. But as happened last week, bond issuance could resume as soon as there is a patch of calm. “We just need to stabilise,” the banker said. “When it’s too volatile it’s too difficult to put a price. As soon as we stabilise for a few sessions, you will see capital markets [deals].”

As if to prove his point, by 5pm in Milan the stockmarket had tumbled again to a 3.3% fall for the day.

A competitor was a little less optimistic. “Probably the rebound [last week] was due to expectation that this could stabilise,” he said on Monday. “Now my perception is that this could be even more severe in the West in general.”

Banks are far from idle, however. Even equity capital markets bankers are still working on preparing IPOs, and have not given up hope of bringing them to market by the end of the year, although plans for the coming months are off (see separate article).

Going to work is still allowed by law. But the major banks with operations in Milan have told as many as possible of their staff to work at home.

One firm, which last week was advising staff to work from home if they could, changed its policy at the weekend so that staff must now prove to senior managers that they cannot complete their tasks at home before being allowed to go to the office.

“A lot of effort has been put into making working from home possible,” said the second banker. “Yes, it’s more difficult to work because everybody is at home — nobody is in the bank. But yes, dialogue is open [with issuers].”

Out of office

Banks are using back-up sites, not because these are any better than ordinary offices for avoiding virus transmission, but so that they have an alternative base in case the HQ gets a case and has to be closed for disinfection.

They have also been giving out laptops to as many staff as possible to enable them to work remotely. The banker said he thought most investors and the bigger issuers would have done the same, though he was less sure about smaller issuers.

“The situation is serious,” said a finance executive at an Italian company. “We have sent to smart working more than 50% of our colleagues. We are limiting the contact between each other and staying at home with the family as much as possible.”

However, it is clear that this is not disrupting the functioning of markets. Trading on the stock exchange has continued.

A capital markets banker said there was no technological reason why all the bank’s functions could not be performed remotely. “We are working on compliance for trading,” he added, meaning the only obstacle was regulators requiring some traders to be in the office. “But it’s much better than I thought.

“I feel younger,” he joked, because technology had slowed down. “You go back to the days when you were not checking everything on your smartphone every second, but maybe had a meeting in a meeting room, then after half an hour go back to your desk and check your emails.”

Technical links were working, but home PCs could not always run Bloomberg, Skype, email and other systems all at once without crashing.

Investors are clearly cooling towards Italian risk, but there has not been panic selling. The 10 year BTP yield was 1.37% on Tuesday, up from 0.82% on February 17. Over the same time, the Bund has tightened from minus 0.44% to minus 0.81%.

“We have had worse shocks,” said one banker. “Our spread can rise vis a vis other governments, but the absolute level remains very low.”

As GlobalCapital reported on Monday, Italian investment grade corporate spreads had widened as much as 50bp, against up to 30bp for other names.

“Italy is a special situation and may become a bit of a signpost for what it might look like for other places in Europe if the situation gets as severe as it is there,” said a bond strategist at an investment manager in London. “There will be significant volatility in Italy for a long while, with spreads moving in a volatile range. It’s hard to say where they will be tomorrow, let alone in a week. We are underweight Italian credit and expect to be for some time. At least a few months.”

Although the investment director thought the EU would be lenient with Italy if its deficit and debt rose, he said: “Nevertheless, debt sustainability is an issue. When you look at debt to GDP, the numerator is stable or growing, but the denominator is much lower. As a result, we’re underweight Italy. We believe there’s more volatility coming up. It's going to be more expensive for Italy to finance itself, but it will still be able to do it, although it will need the help of the central bank to ensure that funding costs don’t get out of hand.”

Friends in Frankfurt?

Bankers in Italy are hoping the European Central Bank’s policy meeting on Thursday produces something to help the country. “I don’t know what they will do, but I doubt they will do nothing,” said one DCM executive. “My dream is that they also buy banks’ bonds, because banks are the engine of the economy. We have to keep giving money to companies that are in trouble. If you require me to double the capital in a dropping market, for lending to somebody who normally I would not like to, because I can see that it’s going sour… I think support on that side would be very helpful, also as a symbol. Even if it’s starting with senior [bonds], it would help.”

Orders from the top of his bank were to keep supporting clients. Corporate clients, he said, were “shocked, surprised — everybody is trying to work on plans, like we’ve been doing for the last three weeks. And then they look for support. They want to be shown support — that if there is a problem you are there.”

He had not heard of companies wanting to draw down on their revolving credit facilities, but said: “For the time being they are asking for normal term loans.”

He said these were not “special loans because companies are in trouble,” but “everybody was trying to get rid of liquidity, given that it was negative rates. Now instead they are looking for some liquidity.”

Therefore, a few companies had asked for new term loans to give them that liquidity. The banker had seen no loss of risk appetite among banks. “We’ve been asked to reprice a bit, but asked to stay [with] clients,” he said.

Market participants are hoping the government will come to the rescue. “We hope to see fiscal measures that help Italy at the corporate level too,” said the investment director — “forbearance on mortgages and loans, where the government can act as a bridge for the financial sector. We’re going to see NPLs go higher because of the circumstances, so the government stepping in would help reduce the effect on lenders’ balance sheets.”

Additional reporting by Mike Turner, Toby Fildes and Sam Kerr

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