Italy’s high yield market: back to business after a tricky 2015
The last time a newly rated Italian issuer tried to issue a corporate high yield bond was in May — but take a step back and the wider picture points at a resilient, vibrant market with an investor base up for the challenge. Victor Jimenez reports.
The backbone of Italian high yield bond supply, the country’s mid-size companies, is alive and well, grazie mille, even if the market has been engulfed by the volatility of European markets, pushing newcomers aside.
This is what happened to Società Italiana per Condotte d’Acqua, a construction company. Condotte came to the market with fresh ratings of B2/B+ and €300m of senior unsecured notes just before the summer break. After five days of roadshows, it had to withdraw the offer because of an intractable mix of insufficient demand and steep new issue premiums.
Condotte had missed the window of opportunity for lower credit costs, analysts and bankers believe.
It is far from the exception. Since 2013, the volume of bonds issued by newly high yield rated Italian companies has decreased sharply. Issuance has fallen from €4.6bn two years ago to €1bn in 2014, to nil in 2015.
By November this year, total high yield bond issuance compared to 2014’s tally had fallen from €10bn down to just €6.6bn, Moody’s research shows.
But market participants should stay confident: there is more to Italian high yield than meets the eye and the market is fighting back.
“Issuance volume numbers can be misleading depending on what is considered as high yield paper, whether you include unrated companies, crossover names, fallen angels or actually high yield rated borrowers,” says Edoardo Rava, executive director at Goldman Sachs.
“Despite the general trend of volatility that has affected all markets in Europe, 2015 has been a reasonably good year for Italian high yield.” And others see a recovery in the offing. “Although issuance from Italian new high yield borrowers has halted in 2015, potential new issuers are getting ready to access the market when conditions improve,” says Paolo Leschiutta, senior credit officer at Moody’s. “We expect some recovery for the next year to the extent that Europe’s high yield market improves.”
Italy’s high yield market enjoys a greater concentration of small and medium size enterprises (SMEs) than other European markets, according to Moody’s data, and repeat issuers among them are set to bring more action to the table.
“Domestic issuers have a loyal investor base, and neither part are known to end up entangled in sterile discussions over terms and pricings,” says Silvio Capone, from the corporate DCM origination team at Banca IMI in Milan.
At Société Générale, head of high yield capital markets Tanneguy de Carné agrees. “Italy has many successful mid-sized companies operating globally or locally which will be attractive to high yield bond investors as they come to market to finance their growth,” he says.
New issuers will be daring the market again, he adds. “The growing Italian investor base will further support those inaugural issuers going forward. In particular we have seen an increased appetite to go down the credit spectrum from Italian insurance companies which are desperately chasing for yield. We also note the general trend of internationalisation of Italian SMEs, especially in Asia and the US, because of the ability to raise sizeable acquisition financing with significant flexibility. This is a clear positive for high yield.”
Ticking the boxes
Rather than follow Condotte, the way ahead is that of Italian gambling technology company GTech. It raised €4.4bn in euros and dollars to fund its acquisition of Las Vegas-based International Gaming Technology in February 2015.
The GTech deal ticked all the right boxes. “It is the inaugural issuance in the US and the first time we have launched a global deal, very large in size, and we were oversubscribed,” said Alberto Fornaro, GTech’s chief financial officer, at the time of the deal.
Proof of the Italian high yield market’s vitality seem to be more than circumstantial, says Goldman Sachs’ Rava. “A case in point would the €1.1bn PIK toggle note sold in November by Istituto Centrale delle Banche Italiane, a real high yield deal that was a great success,” he adds.
The Italian banking payments group was acquired by Advent International, Bain Capital and Clessidra from a consortium of local banks.
Investors in London praised this senior secured PIK note, which combined fixed and floating rate tranches for the first time in the European high yield market. It was innovative, it had an unconventional structure and a complex coupon distribution. “As market leader, we have an eye in all European markets and the fact is that there’s a healthy pipeline in the Italian high yield market,” says Rava.
Furthermore, despite the pronounced slowdown of 2015, the Italian market’s top five high yield borrowers have provided regular activity. Fiat, (36% of all Italian high yield issuance), Wind Telecomunicazioni (32%), Telecom Italia, Cerved Technologies and Astaldi have all remained prominent during the past five years.
In April, Fiat sold €2.7bn of new bonds to partially buy back an old bond maturing in 2019. In March, Telecom Italia had completed two bond redemptions with a €2bn equity-linked issue.
“Perceptions about the high yield market are improving,” says Rava, “and the new regulation in place since 2012 is conducive of growth as unlisted companies can now tap the capital markets without the constrictions of the past.”
Antonio Guadagnino, head of DCM for Italy at Société Générale in Milan shares the same view: “As the corporate high yield bond market develops and the product is better understood by companies, the negative perception of high yield is changing.”
Nevertheless, the ride in 2016 will not be smooth. Goldman Sachs points out that market performance in the next 12 months will still depend on, for instance, the impact of the European Central bank’s decision to extend its bond purchasing programme, and the behaviour of banks, some of which have started to lend in earnest, again.
“Certainly, we have already seen competition from bank lending and also the private placement market, one that to some extent shares the same investor base as the high yield space,” says Rava.
Steffen Wasserhess, head of high yield syndicate a UniCredit says: “Our expectation for 2016 is that the high yield bond market in Europe may contract by up to 10% and volatility will remain a feature of the market. This means in fact that we have had a change of trend in terms of issuance volumes since the peak in 2014: in a market that has been growing during the past years, we are seeing now contractions in 2015 and possibly 2016. Our projections for a further contraction in the high yield bond market is driven by expected continuous market volatility benefitting the more stable loan market and a limited number of scheduled redemptions in 2016.”
Reliance on bank lending is stronger in Italy than in other European markets, Moody’s analyst Leschiutta says.
While banking system crises together with a more favourable regulatory environment have resulted in more corporates accessing the bond market over the last few years, “a degree of recovery in the banking system means greater availability to lend to corporate in recent months, and a reduction at an issuance level”, says Leschiutta.
But make no mistake, Italy has learned to love high yield. “In the last five years, Italian SMEs have discovered new capital markets funding instruments,” says Société Genérale’s de Carné. “It has partially contributed to a cultural change in mid-sized corporates.”
High yield is now a crucial feature of Italy’s debt capital market panorama.