No other local authorities in the world have embraced the Euro-MTN market so whole-heartedly or in such a groundbreaking way as the regions of Italy. All of the nine regions in the Euro-MTN market have signed their debt facilities within the last five years, reflecting the increasingly popular trend towards alternative finance in Italy. The success of the regions' Euro-MTN shelves has not surprised Niccolo Ragnini, head of Italian public sector at UBS Warburg (UBS). He says: "At first, the market was somewhat of a cultural shock to the regions - dealing with rating agencies and fixed-income investors. It asked different questions to what they had heard previously. But none of the regions are disappointed that they have signed MTN programmes. Like any new product, it has proved very stimulating." Italian regions have only been allowed by law to issue eurobonds for the last five years. The Region of Lazio was the first to sign up in 1997 and set an example for the whole sector. One of its trades was the first securitization by a European sub-sovereign entity. Following that, the Region of Umbria signed the first wholly underwritten Euro-MTN programme in the market in 1999. And last December, Lombardy broke down more barriers when it became the first region in the EMU to be rated above the sovereign ceiling by all three main agencies. "Lombardy represents 15% of the Italian population, generates more than 20% of the Italian GDP and exhibits wealth indicators fully comparable with the major and wealthiest EU regions," says Raffaele Carnevale, public finance at Standard & Poor's. "Altogether, this highlights the region's national and international high profile." After a constitutional change in 1996, the regions have gained much greater responsibility and autonomy for their own funding. Because the regions are public entities there has traditionally been a lot of complex legislation involved in their funding instruments. But the trend towards decentralization has broken down this bureaucracy. It has also allowed the regions to break away from their traditional source of funding - the domestic loan market. As Ragnini, at UBS, explains, this was a much-needed move. He says: "The domestic banks knew the regions were reliant on them for funding, so they began pushing up their levels and spreads began widening. It was difficult for the poorer regions, such as Sicily, to obtain loans at their levels. As the loan markets dried up they had to come to the capital markets to promote their name and to stimulate investor demand." Ragnini believes that the Lombardy ratings (AA+/Aa2/AA) have proven the success of the changes to the law. He says: "The ratings really proved that the whole process of decentralization has been working. The agencies took the view that Lombardy was autonomous, so instead of aligning its rating with the sovereign, it aligned it with the EU's sovereign ceiling - an unprecedented step. Lombardy is now in a position to issue at very attractive levels." This targeting of the international capital markets has brought widespread investor attention. There has been lots of interest particularly from pension funds and insurance companies who have a desire for longer-dated paper. "Demand for the regions' paper is very strong," says Daniele Borrega, who works on Italian origination at Merrill Lynch. "The regions' big customers are the German banks who find their 20% risk-weighting very attractive." The sector's growth is set to continue. The Region of Tuscany is due to sign its Euro-MTN programme on March 6 (see front page). And the regions' have prompted renewed interest in the Euro-MTN market from elsewhere in Italy. "There are still more regions that will come to the market but the major interest at the moment is coming from the cities and provinces who have seen the success enjoyed by the regions," says Ragnini at UBS. This is likely, with market rumours suggesting that the City of Venice and Province of Milan will sign Euro-MTN facilities in the near future.
February 15, 2002
