Italy’s agencies must pedal hard to catch the spread leaders
New funding entities could help Italy but benefit will be magnified with tighter spreads
Italy is not known for its government agency bond markets. But a crop of new — and nearly new — agencies is appearing to join the familiar national development bank Cassa Depositi e Prestiti. How they handle their bond market journeys could determine how useful they are to the state.
A recent string of bond deals from Italian quasi-agency issuers should bode well for the country’s economic development as well as its debt-ridden balance sheet.
They are an encouraging sign that money is flowing to a diverse set of Italian state-led funding initiatives, despite market volatility and the rising yields on the nation’s debt.
However, for these new issuers to turn into meaningful vehicles for funding social or energy policies they will need to find ways to rein in their credit spreads — arguably halving them from present levels.
Last week CDP Reti resumed issuing bonds after a long hiatus, printing a €500m five year deal at 200bp over BTPs.
It is a holding company with substantial ownership in Snam, the Italian gas grid, and Terna, the power network.
CDP Reti is 59.1% owned by CDP and 35% by State Grid Corp of China. The remaining 5.9% is held by Italian institutional investors.
CDP Reti’s deal was priced over mid-swaps, the usual benchmark for corporate borrowers, but also against BTPs, because of its close links to CDP, which in turn is 84% owned by the Italian Ministry of Economy and Finance.
Similar logic was applied to the debut deal this week by Istituto per il Credito Sportivo, a credit institution which finances sports infrastructure and cultural heritage preservation in Italy. ICS has supported projects such as the new Juventus football stadium and works related to the 2026 Winter Olympics in Milan.
Since ICS is 80.4% owned by MEF, BTPs were once again used as the pricing reference.
ICS's lead managers also started marketing its deal using CDP Reti’s bond as a pricing reference.
Initial price guidance was 200bp over BTPs and the €300m three year social bond was priced at 190bp.
By the time ICS’s deal was launched into marketing, CDP Reti’s trade had tightened to 165bp-168bp over BTPs, though its spread over swaps had only narrowed by about 10bp.
This price development was encouraging for Italian issuers and for investors. ICS probably saved some money on its funding cost because CDP Reti had tightened.
Domestic investors — more familiar with the two credits — may also have been tempted by expecting a similar performance from ICS.
Sharing the load
Creating a group of Italian agencies — or quasi-agencies in the case of ICS, which is formally a bank — and using the bond market to fund their activities, could help national development.
France is an obvious model. Its array of national agencies, funding themselves independently, allows the government to push forward with various social and infrastructure initiatives without recognising further debt on the national balance sheet.
For Italy, the most indebted country in Europe, any chance to share the debt burden with other shoulders is worth exploring.
Despite some projected decline in its debt, Moody’s expects Italy to finish 2022 with debt of 145% of GDP. France's ratio is forecast at 109%, Belgium's at 105%.
The company structures of ICS, CDP Reti and SGA (also known as Asset Management Co or Amco), a vehicle for managing Italian banks’ impaired loans, also allow the government to shift some risk to private investors.
Invitalia, a national agency promoting inward investment and economic development, is the next issuer hunting for cash in the bond market. It plans to issue a three or a four year debut deal.
Amco is the most established issuer of this pack. Its nearly full state ownership of 99.78% has helped it print a handful of bonds. Its latest was a €500m 3.5 year, priced on September 20 at 127bp over BTPs.
But the levels at which Amco and all the other new agencies are funding are still a far cry from where CDP debt trades.
The senior agency’s last €750m five year benchmark in mid-September paid 45bp over BTPs — more like the pick-up French agencies have to pay over their sovereign.
A week after CDP, Caisse d'Amortissement de la Dette Sociale printed a €5bn long 10 year bond at 35bp over OATs — though this was a much more ambitious size and maturity than CDP's.
A day after Cades, the smaller Caisse Centrale du Crédit Immobilier de France (3CIF) raised €500m with a five year bond at 48bp over OATs.
Then Action Logement Services issued a €750m 15 year social bond even wider, at 53bp over.
Since then, amid adverse market conditions, French agencies have been forced to widen their spreads. Caisse des Dépôts et Consignations and Agence Française de Développement issued five and 10 year bonds, respectively, in mid-October at 57bp and 55bp over OATs.
Win friends and save money
Creating new agencies could be healthy for Italy, if they are able to tackle specific and specialised tasks more carefully and with better flexibility than the government — as well as just splitting off some of the public sector's debt into entities that do not show up in that gloomily towering debt-to-GDP ratio.
But to get the full benefit for the country, the agencies' next legwork must be to start reducing their funding spreads.
Like ICS, Amco occupies a grey zone between an agency and a financial institution issuer. That, arguably, justifies some premium in its bond spread, as does their lack of explicit state support.
Bankers have suggested that, had it been an established agency issuer, fully owned and guaranteed by the state, ICS could have, issued at around 20bp-30bp over BTPs.
That sounds like wishful thinking. Even KfW, guaranteed by Germany, has been funding at 50bp over Bunds since at least August. Its latest €4bn three year deal last week paid 74.5bp.
These are stressed times, and that is an understatement. But as the French and German agencies show, investors will pay for familiarity and size.
Italy’s new posse of agencies will have to win the market's trust. They have started well, by aiming to create a following among domestic investors before wooing international buyers. And CDP's following shows what they can aim for. The first target should be to get their spreads over BTPs down below 100bp.