Republic of Italy

  • 28 Jan 2005
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Rating: Aa2/AA-/AA
Amount: Eu5bn BTPei
Maturity: 15 September 2010
Issue/re-offer price: 99.903
Coupon: 0.95%
Spread at re-offer:
Launch date: Wednesday January 26
Payment date: 31 January
Joint books: BNP Paribas, Caboto, Banca IMI, UBS

Borrower's comment:

We decided to do this deal because the old September 2008 BTPei was now more or less only a three year and as a result was too short. There was no 2010 in the market.

We had the impression that there was demand for the deal. The bookbuilding process confirmed that impression. The book increased regularly and rapidly.

Between the lead managers' book and the contribution of the co-leads, both impressive, we had a combined, and high quality, book of Eu9bn.

During this process we had given guidelines and specified to the bookrunners that we wanted to stay at fair value because we did not want to put excess pressure on the market.

This is a period in which we do not have particular cash needs ? and in any case we do not want the market to pay a premium for this because we are careful about the performance of our bonds in the secondary market.

We managed to stay at fair value, the trading since we priced has been satisfactory. Our goal has been reached.

The total number of investors was 167. Some of which were new investors. There was a large component of banks, as is natural for this maturity, particularly in Italy and France.

Asset managers took 30% of the paper, and there was also good participation from insurance companies and pension funds, which are not the most obvious buyers of this product.

Our intention is to launch the first tranche of our deals through syndication and, for 30 years, the second tranche as well. But thereafter to tap the bond using the auction process.

Our borrowing requirement for 2005 is around Eu10bn-Eu15bn less than 2004, our cash needs are similar, but the redemption flow is less.

Bookrunner's comment:

This syndicated transaction is the first inflation linked supply from the Republic of Italy this year and represents the first syndicated European inflation supply of 2005.

Demand and supply imbalances in the European inflation linked market continue to support overall European demand and particularly at the short end of the real curve ? in particular pent-up interest from mutual funds and banks (retail and derivative desks) complements the natural needs of core inflation buyers.

The market has faced a shortage of supply of five year European linkers and the last supply in this sector was Italy's tap of BTPei 2008 in March 2004. Specifically, this transaction fills a lacuna on the real curve between the outstanding BTPei 1.65% September 2008 and the OATei 3% July 2012.

With this transaction, Italy continues to affirm its role as principal provider of European inflation-linked liquidity at the five year point.

There is a gap in the inflation curve, and not just for Italy. There has been strong cash buying in five years, but there have also been a lot of structured inflation products sold in five years, which has led to a lot of receivers in the five year part of the curve. So a new benchmark was needed.

We went out on Monday with a minimum size of Eu3bn for a 2010 linker. We marketed it on a breakeven basis versus the 5.5% November 2010 nominal bond. We used an interpolation between the breakeven of the September 2008 and the OATei of July 2012.

We used fair value and went out with a breakeven spread of 216bp-220bp versus the September 2010, and we priced the transaction at 218bp, which was flat to fair value.

We saw it tighten by 2bp in the secondary market.

Bookbuilding took 36 hours and at the end of the first day we had a lead managers book that was slightly short of Eu5bn, by the end it was Eu7.5bn.

All the co-leads participated and were allocated bonds. They had a further Eu1.67bn, which makes the total book over Eu9bn.

On Tuesday we refined the price guidance to 218bp-219bp and launched the deal there. On Tuesday we saw some cheapening in the breakeven market and we priced at 218bp.

Because we had been so oversubscribed, the quality of the final book was very high.

The allocated distribution reflects the balanced regional support for this new BTPei, including all of the major inflation buying areas, including Italy 42.9%; France 27%; Benelux 4.3%, UK 13.7%, Asia 2.4%, Germany/Austria 2.1%, US 4.5%, other 3.1%.

Distribution across types of investors consisted of: investment managers/funds 31.3%, insurance companies and pension funds 8.2%; banks and bank portfolios 58%, official institutions 2.4% and corporates 0.1%.

There was an exceptional outcome for France, notwithstanding the generalised orientation of these investors toward longer duration purchases.

In Germany and Austria there was a total of 10 orders, totalling more than 2% of the allocated securities. Increasing appetite for inflation product across German investors is an important trend for this year in the real yield market.

German and Austrian investors were slow to get involved in inflation linked product, but they are more interested now as rumours of issuance by the Finanzagentur pick up.

Retail demand from Italian banks was an important support, providing the bulk of bank based demand. It is worth noting that an allocated distribution of less than 14% to the UK reflects the balanced nature of demand, being without reliance on a single class of investors (eg. leveraged accounts).

Market appraisal:

 ?...Italy went well. There is good demand for inflation and we sold our bonds easily. It is difficult as an outsider to understand the dynamics of this deal, but it came at a larger size than expected so it must have gone well.?

  • 28 Jan 2005

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