Having too much demand for its paper might seem like a luxury for an issuer like Italy, which at the height of the eurozone sovereign debt crisis struggled to place paper at all but at the most punitive of prices. But that is exactly the situation it is in now.
The overwhelming success of the BTP Italia product — a domestic inflation-linked, retail focused bond — since its introduction in early 2012 has forced the Italian Treasury’s hand in ensuring sizes do not get too large.
After raising €18bn, €17bn and €22bn in the last three placements of BTP Italias before last week’s €20.6bn print, Italy was left with a series of lumps in its redemption profile. The Treasury attempted to keep interest for the bonds limited to the retail investors for which they were intended by introducing optional early closures to the four day open period in the €17bn and €22bn deals, but they still ballooned.
In part, that was because there was a promise to fill every order so no mamma or papa investors were left disappointed, but with no way to tell an investor’s identity, the bond sizes grew.
Intermediaries selling the latest bond were required to identify whether buy instructions came from an individual or an institution. Only individuals could take part in the first three days of orders, while the Treasury had the right to close early, with at most two days of selling.
Institutions — or other buyers whose identity cannot be confirmed — were only be able to place orders on the fourth day and books could be shut with just 30 minutes’ notice.
But despite the second phase closing at 9.40am Italian time — just 40 minutes after opening — the total turnover of €10.5bn actually outdid the €10.1bn that retail investors mustered in their two and a half days of buying.
While another change with this BTP Italia — six years in tenor as opposed to the four years of the previous issues — means there’s a bit of breathing space between it and the other large redemptions, the sovereign’s maturity profile is still looking lumpy.
That’s especially true for a country that only ever seems a whisker away from a political crisis. While the government of current prime minister Enrico Renzi looks pretty stable for the time being, by the time the first BTP Italias start redeeming in 2016 it could be a different story.
A government collapse just before a €20bn redemption comes up is unlikely to be welcomed by anyone in the Italian Treasury or further afield in the corridors of Brussels.
With the sovereign unlikely to adjust its issuance calendar elsewhere, it looks like buybacks or switches towards the end of this year might be necessary to stamp down some of those humps.
But such methods are never the most efficient way of addressing these problems. Prevention is better than cure.
With Italy now able to discern between retail and institutional investors in the BTP Italias, and another of the instruments scheduled to be sold later this year, the Tesoro should seriously consider whether it’s worth letting institutional investors get involved at all.