The transaction is the first Australian dollar bond by a foreign sovereign since 1998, apart from a solitary A$400m five year Euromarket issue from New Zealand last May.
It is also easily the largest Aussie dollar sovereign bond, apart from a A$1bn four year zero coupon issue by the Kingdom of Sweden in October 1995.
Joint bookrunners Deutsche Bank and UBS began marketing the issue on Wednesday and were immediately swamped by orders as investors seized the opportunity to get a slice of such a rare deal.
The two bookrunners notched up A$1.4bn of orders within 24 hours, allowing Italy to double the deal size and price it a day early.
Italy's initial intention was to test the market's demand, so it was delighted with the response.
"We were not too ambitious to start off with," said Domenico Nardelli, head of derivatives and international funding at the Italian Treasury in Rome. "But the transaction proved extremely popular with investors. This was encouraging for both Italy and the banks.
"It has been an incredibly rewarding experience, particularly because we received this response without a roadshow, which was remarkable."
A syndicate official at Deutsche Bank in London said the transaction was a tremendous success in terms of speed of execution, size and rarity.
"We originally started marketing a A$500m bond on Wednesday and were planning to price on Friday," he said. "But the orders came in so quickly that we doubled the size and priced a day early. It is a good sign of the volume that the Australian dollar bond market can handle."
The bond is the most prominent example of the surge of offshore borrowers taking advantage of the appealing basis swap spread in Australian dollars and the wide disparity between government bond and swap spreads ? two favourable technical factors.
The combination has meant high grade offshore borrowers have been able to raise competitive funding at spreads very enticing for Australian investors.
A host of triple-A rated international borrowers have accessed the Australian investor base this year, including Eksportfinans, Eurofima and the European Investment Bank.
But Italy is the first sovereign, and its bond was at least twice the size of the supranational deals. The only bigger deal this year was Citigroup's A$1.15bn Kangaroo bond last week.
Bankers said Italy had been considering a bond in Australian dollars since late 2003.
"For a global borrower like Italy, diversification is important ? we try to be proactive in finding new sources of funding," said Nardelli.
The proactive approach
"International markets have been difficult for most high grade issuers this year and Italy was keen to diversify its investor base, so it chose to access the Australian investor base," said a syndicate banker at UBS in London.
"There hasn't been a fixed rate vanilla sovereign bond like it in this market for many years, and for Italy to get 30% Australian distribution was a great result."
The Deutsche official said Italy decided on a global because it does not have a Kangaroo bond programme in place and a Eurobond would have precluded Australian investors from participating.
"We went for the global format because that was in line with the way we try to market our paper as a global borrower," said Nardelli. "We did not embark on a Kangaroo bond because it would have entailed new documentation."
Italy began to market the issue with price guidance flat to mid-swaps, and stuck to this pricing as it doubled the size of its issue.
"Pricing the deal was another good test of the market," said Nardelli. "We priced it exactly where we had marketed it. Even when the deal doubled in size, we had no resistance from investors."
The transaction was priced at 99.803 to yield 5.925% on the 5.875% coupon ? a spread flat to mid-market swaps or 40bp over the August 2008 CGS.
This was equivalent to a premium of 25bp over domestic five year semi-government bonds, an attractive spread for domestic Australian accounts.
"The premium that Italy's bond offered over Australian government bonds was an important factor for onshore and offshore investors," said another syndicate official at UBS in Sydney. "Many offshore investors buy government Australian dollar bonds and they saw this issue from a name they recognise that offered a big premium to those bonds. It was a good story for them, too." The deal quickly tightened to 38bp/37bp over CGS.
The pricing was appealing to Italy because the spread was tighter on a swapped basis than its own five year BTP, which swaps to about 4bp under Euribor.
Bankers at the co-managers were also effusive about the result. "While this was a total pot deal, which made it tougher to get and allocate bonds, the investor demand was very good," said a syndicate banker at one co-manager. "Italy tends to price about 10bp through in Europe, so that means that given the basis swap spread the final pricing was in line with its pricing ability."
Other sovereigns may follow
The deal was sold to 55 investors, and the bookrunners were pleased that 95% of orders were on a cash re-offer basis, rather than switching from other Italy bonds.
Australian investors took 30% of the bonds, Asians 18%, the UK 16%, Germany 9%, Switzerland 8%, the US 8%, Italy 6% and the rest of Europe 5%.
By investor type, asset managers received 61%, insurance companies 21%, central banks and public institutions 16% and retail 2%.
Given the bond's success, bankers said other sovereigns might also take advantage of the swap spread disparity in Australian dollars.
"There is absolutely an opportunity for other sovereign borrowers to enter the market," said the London syndicate banker at UBS. "Many sovereigns and supranationals will have looked closely at this transaction and they are unlikely to need much more priming. Italy is very responsive to investor demands, too and given the success of this issue it is likely to keep monitoring the markets closely."
BOS International preceded the sovereign into the market with a A$575m two tranche domestic bond on Wednesday. The Australian subsidiary was fully guaranteed by HBOS, the parent company.
Commonwealth Bank of Australia and National Australia Bank (NAB) were joint bookrunners, and had originally targeted a A$500m launch size.
"BOS's deal went well and we had strong interest from fund managers and financial institutions," said a syndicate official at CBA in Sydney. "This is BOS's second domestic bond and it wanted to do more issues, but it has been busy with its plans to increase its stake in BankWest.
"However, given the level of investor liquidity and the fact that the bank is 20% risk weighted, the deal gained good demand."
After being marketed at 19bp-20bp over swaps and BBSW, the issue was split between a A$175m fixed rate issue and a A$400m floating rate note.
"Citigroup had priced a A$1.15bn fixed rate bond just last week which sucked most of the demand for fixed rate issuance from the market, but there was plenty of floating rate interest that BOS International benefited from," said a senior origination banker at NAB in Sydney.
The fixed rate portion was priced at 99.405 to yield 6.14% on the 6% coupon or 20bp over swaps, while the A$400m floating rate note was priced at par to pay 20bp over three month BBSW.
Compared to this level, the identically rated Citigroup's bond was priced at 24bp over swaps last week, while NAB has a 4.875% June 2008 transaction that was trading at 17bp over.
About 25% of BOS International's issue was placed offshore, of which 12% was distributed to Asia and 13% to European accounts.
More than 25 investors were allocated bonds.
