Republic of Italy

  • 07 Nov 2003
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Republic of Italy
Rating: Aa2/AA/AA
Amount: $3bn
Maturity: December 15, 2006
Issue/re-offer price: 99.901
Coupon: 2.75%
Spread at re-offer: 49bp over the 2.375% August 2006 UST (indicated: 48bp-50bp)
Launched: Tuesday November 4
Joint books: Deutsche Bank, Goldman Sachs, Merrill Lynch

Borrower's comment:
We are indeed delighted with the deal. The result has been tremendous for our last transaction of the year.

We were long undecided on the tenor because, in terms of the economics of the market, we had good opportunities elsewhere on the curve.

However, when we evaluate the market, although we look at economics, we study investor preferences and demand, and, in this case, we had to favour the three year sector - even though the arbitrage against BTPs was not as good as in other parts of the curve.

However the result has been good and we were rewarded by strong investor participation in the transaction.

In Libor terms, we achieved a level of minus 11bp, which is an excellent result because it meant that the transaction priced at secondary levels, which was deemed as fair. The first indications I have is that the deal immediately tightened by a basis point or so in early trading - another indication that the price was fair on our side.

We were keen to ensure that the transaction would perform well. This year all our issues have been performing strongly in the secondary market and I wanted to keep this good impression going for our deals.

The response from central banks has been excellent with more than 60% of the book being made by central banks in Asia and elsewhere in the world.

We made a lot of market making efforts to include such accounts in our deals as it provides a strong investor base of holders and is the seal for performance in the secondary market.

Of course the three year tenor is the preferred maturity for central banks. But having said that, their participation has been massive in this transaction. Usually we see somewhere in the region of 45%-50% but this time it was 63%.

This was the last deal for us in 2003.

We have raised a lot of funds in the US dollar market this year. We announced at the beginning of the year that we would raise at least $10bn and we have been able to raise $13bn, which is at the upper end of the range we had in mind.

We are pleased with the result because the overall programme has been successful. We have been able to issue across the yield curve in all maturities, even out to 30 years.

We are the only sovereign to issue in dollars in 30 years and we can make a case of being a highly visible borrower in the global markets and in the dollar market in particular.

We have already started to put together some concepts to guide us for our 2004 programme. Despite redemptions from the republic's programme being low - we are only going to pay down $2bn for one bond in January 2004 - I still expect the total size of the programme to be in the region of $10bn.

We are still working on setting up the strategy to achieve that but my expectation is that, on the back of the success of the current year, we are encouraged to continue along the same lines.

Bookrunners' comments:
Deutsche - This has been a bigger success than anyone expected in a market that had become particularly volatile following the release of the US GDP figures and consequent pressure on the Treasury market. But we felt that the short end of the market was well supported and Italy decided to move ahead, initially having in mind a $2bn transaction.

However the bookbuilding was so strong with so many high quality orders coming into the book we were able to launch a $3bn deal and still be oversubscribed. The book in the end was around $3.6bn.

Of this issue 63% was placed with central banks, which is the highest proportion of central banks I've ever seen in a book - clearly this is just the kind of instrument they were looking for.

Funds were also big takers with insurance and pension money representing 7% and asset managers 18%, and we had small ticket participation as well with around 40 tickets below $5m.

Distribution was well spread across the globe, the US representing 14%, Japan 12%, non-Japan Asia 28%, Europe, the Middle East and Africa 30% and elsewhere 2%.

The cash situation in the market is good and, with the uncertainty that prevails in the dollar market, investors prefer to stay in shorter maturities.

There has not been a lot of three year supply away from the US agencies and a European sovereign with a stable outlook, a good track record and a liquid deal was the ideal instrument to soak up liquidity. Also, this is probably the last big liquid deal of 2003 and investors were keen to take that opportunity.

The pricing was seen as fair at Treasuries plus 49bp, which equated to Libor minus 10bp-10.5bp, being in line with Italy's curve.

The issue has already started to perform, closing the day (Wednesday) at 48bp/47bp over Treasuries.

Goldman Sachs - This was an elegant way for Italy to conclude its 2003 programme. It has raised $12bn off its global programme, which was more than it had planned, because the market responded extremely well.

Every deal launched by Italy in dollars and euros has been successful and this is a nice conclusion.

The response was above our expectations. We had roughly $3.5bn of orders for a deal that was initially announced as a minimum of $2bn. The quantity - and especially the quality - of the orders was such that we felt compelled to increase the deal to $3bn.

In this volatile rate and spread environment, investors prefer to be conservative and a three year euro zone sovereign attracted strong demand.

We have been talking to the republic on a regular basis and our recommendation has moved around as the market has moved. However, we settled on the short end, particularly following the GDP release out of the US last Thursday.

We went out with price talk of 48bp-50bp over Treasuries, launched at 49bp area and priced at 49bp. Given the strength and quality of the order book, it would have been possible to price tighter but the issuer really wanted to guarantee performance, especially being its last deal of the year.

We were hoping to get a good response from the central banks, but it surpassed our expectations with 63% going into central banks and government agencies around the world with non-Japan Asia in the lead, accounting for 28% of the book. Europe, the Middle East and Africa took 30%, the UK 13%, US 14% and Japan 12%.

It was a very much an institutionally placed deal. There were around 100 orders in the lead book, which controlled 92% of the transaction.

To a large extent, orders were for cash or, if they were on switch, it was against Treasuries or US agencies.

Merrill Lynch - This was an extremely successful way for Italy to end a fruitful year for its dollar global programme.

Italy is the only international borrower to have tapped all four major benchmark maturities in the dollar sector, providing investors with a liquid yield curve in threes, fives, 10s and 30s. Its approach this year has been highly investor driven and the same attitude was used in formulating the new bond.

Due to the volatile state of the market, Italy took the prudent step of asking a few global investors about their preference on maturity. The feedback clearly indicated that three years was the tenor of choice and the borrower decided, even though it has a very flat Libor curve and perhaps the economics would have been more attractive in a longer maturity, to listen to the needs of the investor base.

The republic also took the wise decision to approach the market initially with a $2bn minimum size and a price range of 48bp-50bp over the three year Treasury, which equated to approximately mid-swaps minus 10bp-12bp.

We spent two and a half days in marketing the transaction. Japan was out on the Monday but even so the book developed steadily throughout the marketing process with orders of the highest quality coming from all regions.

There was little price sensitivity in the book but some key orders pointed towards 49bp as being the correct level.

The book was more than 20% oversubscribed on $3bn and Italy took the opportunity to size the deal accordingly to ensure performance and enable us to allocate prudently.

The bonds closed at 47bp bid on the first day, rewarding investors for their participation in the republic's dollar programme.

Market appraisal:
"...Italy had analysed the market carefully and spoken to a lot of people before choosing which maturity to tap and, as a result, they have a successful deal.

The process seems to have been smooth with the deal attracting widespread interest from different geographic regions. We certainly had no problem dispatching our allocation of $30m.

The pricing was completely fair. I made it a tiny bit rich to the secondary curve, which is totally justifiable for a new liquid current coupon piece of paper.

We talked to the borrower as everyone did about the merits and otherwise of lots of different tenors and we felt there was a successful trade to be had in any one of them.

However, they wanted to do a deal that was well subscribed with good prospects for immediate performance and ultimately size was a factor. It would have been tough for instance to get $3bn done in the 10 year sector in the current environment. A three year however is the sector where there is maximum liquidity so it was well chosen."

"...the right deal. The price talk and the size guidance were both set at appropriate levels, so it never looked as if the deal was over-ambitious. That was wise as Italy has in the past been a bit over-ambitious in sizing its deals, particularly in 10 years.

This hit the right part of the curve and they managed to build a comfortably oversubscribed book. We could find buyers immediately."

"...three years is exactly the maturity investors are looking for. There is still concern over the long end and over agencies so non-agency product is well bid. As a result a euro area sovereign with a big liquid deal hit the spot.

We saw strong demand for paper from European investors and the issue has performed in the secondary market. A nice ending for the republic, which has had such a good year in the dollar market, as well as the euro market."

  • 07 Nov 2003

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