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ITALY IN THE CAPITAL MARKETSFebruary 2018

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000 Italy Cover 2018.indd 1 05/02/2018 09:47

Italy in the Capital Markets | February 2018 | 1

ITALY IN THE CAPITAL MARKETS

2 FOREWORD BY ITALY’S FINANCE MINISTER Italy’s recovery: cyclical or structural?

4 POLITICAL AND ECONOMIC OVERVIEW Fixing Italy’s growth problem

8 BANK OF ITALY GOVERNOR INTERVIEW Visco: reforms must continue to sustain economic momentum

12 CASSA DEPOSITI E PRESTITI (CDP) CDP’s €250bn mission to reinvigorate Italy

14 CDP: FABIO GALLIA INTERVIEW CDP happy to support Italy from the ground up

16 ECONOMIC REFORM Italy’s five star political puzzle seeks March solution

18 CAPITAL MARKETS AND ECONOMIC GROWTH Italy’s capital markets: an engine of growth?

20 THE RETAIL INVESTOR BASE Italian retail: out with the old, in with the new

22 GOVERNMENT BONDS The Italian sovereign: growth, diversification and dollar return

24 TESORO ROUNDTABLE Tesoro ready to reap the benefits of Italy’s improving economy

29 THE BANKING SECTOR Italian renaissance allows banks to return to the fold

31 BANKS ROUNDTABLE Italian banks face up to MREL and SRI after year of progress

40 CORPORATE BONDS Italia SpA casts off the taint of the crisis years

42 COMPANIES ROUNDTABLE Where next for Italian corporate bond issuers after a stellar 2017?

48 FINANCE FOR SMEs Adding financial steel to Italy’s economic backbone

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001 Italy Contents.indd 1 05/02/2018 09:31

2 | February 2018 | Italy in the Capital Markets

FOREWORD BY ITALY’S FINANCE MINISTER

CYCLICAL OR STRUCTURAL? This is a question which I have often been asked about Italy’s economic recovery. Italy began showing some first signs of recovery in 2014, a year in which Italy posted a 0.1% increase in GDP after a double-dip recession between 2009-2013 which led to a 10% drop in the country’s output. In the following years the recov-ery grew stronger and now the economy is growing at a rate similar to that of other euro-area countries.

The cyclical components of Italy’s recovery are quite obvious: the European Central Bank’s expansive mone-tary policy and the recovery in international trade. These aspects of the current phase help explain fiscal consoli-dation and account for a share of exports. But Italian export performance vastly exceeds that of internation-al trade. This manufacturing success story is due to the growing competitiveness of Italian companies which, during the recession, engaged in business reorganisa-tion, invested to increase productivity and innovate their products, thereby improving their position in interna-tional markets.

Here we find the first of the structural components in Italy’s recovery: private sector investment encouraged through tax incentives induced businesses to choose new technology and state-of-the-art manufacturing para-digms falling within the Industry 4.0 category. Private sector investment is improving the competitiveness of Italy’s industrial base, as the age-old problem of poor productivity is being addressed.

The second structural component of recovery relates to the labour market, whose rules have been changed by the Jobs Act, a comprehensive set of measures that have also introduced active labour market policies to enable better matching of occupational demand and supply and offer a way to reduce social exclusion, by bringing human capi-tal back into the production cycle.

The third structural component of recovery can be found in the banking sector. The reforms introduced starting from 2015 have profoundly changed the finan-cial market: the reforms of both large and small cooper-ative banks (banche popolari and banche di credito co-operativo) have promoted mergers and acquisitions and have improved efficiency and competitiveness, while the reform of banking foundations helped sever the remain-ing ties between local politicians and financial power-houses. A number of specific critical issues have been solved that cast doubts over the whole sector (even though one could count them on the fingers of both hands and have some left over). Systemically this caused a watershed thanks to which loans are now flowing back to the real economy.

However, innovation in the financial sector does not end there, because the increase and diversification of business funding sources continued over the course of this Parliament, thanks to the implementation of the “Finance for Growth” programme, aimed at reducing the Italian economy’s dependence on bank lending, mainly focused on the short term. After the considerable perfor-mance of mini bonds, for example, a veritable boom was

registered following the introduction of PIRs (Piani Indi-viduali di Risparmio — individual savings plans ) that will help channel funds to firms in future years.

Other structural changes are less known, even insid-ers are not familiar with them, but are just as important. Among these one that I consider particularly important is the reform of the tax administration. For three years now we have been implementing a radical change in the way in which the tax authority interacts with taxpay-ers: we have increased the range of services to firms, to ensure that tax planning can be based on predictable rules so as to reduce the risk of litigation. The princi-ples of due process and simplification are the two cor-nerstones of the 2015 reform we have designed, and the implementation process is radically changing the behav-iour of the tax authority, with the aim of putting these principles into everyday practice. I also attach great importance to the reform of insolvency law, currently being implemented, which has changed provisions dat-ing back over 70 years and promoted restructuring and rescuing of ailing businesses.

Some of these structural changes underpinning Italy’s economic recovery have been recognised by internation-al analysts, others are still underestimated.

This Parliament, which is drawing to a close, has been characterised by the introduction of long overdue struc-tural changes, many of them at least two decades over-due. The impact of these reforms will grow stronger in future years; this is why I am convinced that the cruising speed the Italian economy has reached is set to increase in the short and medium term.

If in the future we continue along the path carved out during this Parliament, and I am confident we will, Italy, instead of just tinkering around the edges, can com-plete the structural overhaul of its economy, by address-ing other constraints on growth that have conditioned its development in the last few years.

First and foremost the lack of investment in human capital, with action on education, which requires an increase in the available resources and a wider range of technical and scientific education and training courses. This will benefit youth employment as well as the coun-try’s potential.

Government investment is another priority, which is picking up after the period of harsher austerity and which will increase as the reform of general government is being implemented.

Finally, mention should be made of fiscal consolida-tion: after eight years of continuous increases, the debt-to-GDP ratio was reversed in 2015. This ratio was stabi-lised also by pursuing the goal of achieving significant primary surpluses and a consistently declining deficit-to-GDP ratio. Following this narrow path, aimed at pur-suing both economic growth and fiscal responsibility, Italy will finally be able to reduce its debt burden, freeing up resources for sustained and sustainable development.

Pier Carlo PadoanMinister of Economy and Finance

Italy’s recovery: cyclical or structural?

002 JM_Foreword Italy 2018.indd 2 05/02/2018 09:27

actively promoting

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Crédit Agricole Corporate and Investment Bank includes social and environmental criteria in its fi nancing policies, proving

its will to act in favor of responsible growth.

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POLITICAL AND ECONOMIC OVERVIEW POLITICAL AND ECONOMIC OVERVIEW

THE ROBUST performance of the Italian economy over the last 12-18 months has come as a positive sur-prise to a number of analysts. As recently as April, the IMF was fore-casting growth in 2017 of just 0.8%. With the economic recovery across the eurozone gathering momentum, in July the IMF increased its fore-cast for 2017 to 1.3%, slightly below the 1.4% pencilled in by the Bank of Italy in the summer.

Bank economists are hopeful of slightly faster growth than these revised projections suggest. Paola Monperrus-Veroni, chief Europe-an economist at Crédit Agricole in Paris, is expecting Italy to grow at 1.6% in 2017 and 2018. UniCredit’s economic preview for 2018 forecasts growth of 1.6% in 2017 and 1.5% in 2018. BNP Paribas, meanwhile, anticipates growth rates of 1.5% in 2018 and 1.1% in 2019.

This growth trajectory may look modest in comparison to the 2.3% growth that UniCredit is projecting for the eurozone as a whole in 2018 and 2019. But by Italian standards, it represents an encouraging advance, given that the “root cause” of Italy’s

problems, in the words of a recent Robeco research note, is its “chronic lack of growth”.

Marco Valli, chief European econ-omist at UniCredit in Milan, says that one of the main drivers of the improved outlook for the Italian economy has been the acceleration in global economic growth. But he adds that an encouraging feature of Italy’s accelerated growth is that the economy has been firing on a num-ber of cylinders. “2017 was finally a year when we saw a broadly-based recovery, with consumption, exports and investment all contributing sol-idly to growth,” he says. “My expec-tation is that we will see a broadly similar picture in 2018.”

Sustainable recoveryOthers agree. As Moody’s comments in its most recent assessment, “importantly, the broad-based nature of the recovery provides some assurance that growth can be sustained over the near term; in contrast to the past two years the recovery is no longer driven solely by private consumption.”

Perhaps the most welcome news

— and the longest overdue — has been the strengthening of invest-ment, which fell sharply during and immediately after the finan-cial crisis. According to the Euro-pean Commission’s 2017 Coun-try Report on Italy, in 2007 Italian investment reached 21.6% of GDP, which was broadly in line with the Euro area average of 23.2%. “With the crisis,” notes the EC, investment fell to 16.6% of GDP in 2015, around three percentage points below the euro area average. In real terms, this means that total investment is around 30% lower than in 2007, at its lowest level since the mid-1990s.”

A notable recent pick-up in investment, estimated to have grown by 3% in 2017, has gone some way towards closing this gap. The most recent Bank of Italy/Il Sole 24 Ore report points to “a marked acceleration of investment expendi-ture in the second half of 2017, espe-cially in industry excluding con-struction and for the largest firms.”

More positive still, this uptick in investment is expected to gath-er momentum in 2018, according to the Bank of Italy survey. This

Italy’s growth trajectory, at around 1.5%, may look modest in comparison to the 2.3% growth that UniCredit is projecting for the eurozone as a whole in 2018 and 2019 but by Italian standards, it represents an encouraging advance, given that the root cause of so many of Italy’s problems is its chronic lack of growth. Philip Moore reports.

Fixing Italy’s growth problem

1. Economic situation and outlook

Evolution of Italy’s public debt-to-GDP ratio under di�erent debt sustainability analyses

Source: European Commission

110

115

120

125

130

135

140

145

14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

% o

f GD

P

PB = 1.3% of GDP; r*-g* = 1.2 pps. by 2028

PB = 2.4% of GDP by 2020; r*-g* = 1.2 pps. by 2028

PB = 4.0% of GDP by 2023; r*-g* = 1.2 pps. by 2028

Scenarios:

110

115

120

125

130

135

140

145

14 15 16 17 18 19 20 21

% o

f GD

P

p10 - p20 p20 - p40 p40 - p60

p60 - p80 p80 - p90 p50 (median)

Distribution percentile ranges:

Evolution of Italy’s public debt-to-GDP ratio under di�erent debt sustainability analysis


004-6 JM_Italy Political Economic Overview.indd 4 05/02/2018 09:26


POLITICAL AND ECONOMIC OVERVIEW POLITICAL AND ECONOMIC OVERVIEW

reports that the number of compa-nies in the manufacturing and ser-vices sectors planning to increase investment expenditure outstrips the share of those intending to cut back by 34.2 percentage points.

This rise has been driven in large part by a range of measures intro-duced by the government to boost investment. Specifically, the 2017 Budget Law introduces very gen-erous depreciation allowances on investment, including a so-called “hyper-depreciation” 250% amorti-sation rate for digital investments as part of Italy’s new Industry 4.0 strategy.

At Crédit Agricole, Monperrus-Veroni says that the pick-up in investment came slightly later than she originally expected, but that has not diminished the importance of its contribution to Italy’s economic revival. “The government’s measures for supporting invest-ment initially benefit-ed the transport equip-ment sector, because in the early phases of the cycle companies focus on investment in logistics,” she says.

“In 2017, however, there was a very strong improvement in invest-ment in machinery, equipment and innova-tion,” she adds. “This has important implications, because private con-sumption appears to have peaked after four years of growth and Italy needed another more sustainable source of growth.”

There are a number of other reasons for analysts to be more upbeat about the prospects for the Ital-ian economy. Uppermost among these is the much

improved financial profile of Ital-ian companies, which is support-ing a rise in business confidence. “In the corporate sector, prof-its and margins are rising,” says Monperrus-Veroni. “Bankrupt-cies are also now back to their pre-crisis level, which is a clear indication that the crisis is over.”

That may be. But the chal-lenges that remain are as famil-iar to students of the history of the Italian economy as they are formidable. Foremost among

these is public debt, which has sta-bilised but remains high. “Italy’s key credit weakness is the elevated public debt, which at 132% of GDP is among the highest of the sover-eigns we rate and which implies a high vulnerability to economic and financial shocks,” notes Moody’s.

Another longstanding vulnerabil-ity is unemployment in general, and youth unemployment in particu-lar, which at just over 35% in August 2017 remains stubbornly high. That is lower than in Greece and Spain, but is still well above the average for the euro area of 18.9%. Perhaps even more disturbing, the youth unem-ployment rate has been much slow-er to fall in recent years than it has in Spain.

A third weakness is the state of the Italian banking industry, where

asset quality, capital and profitabil-ity have all been under intense pres-sure. As the IMF comments in its latest report, non-performing loans (NPLs) in the Italian banking sys-tem have declined marginally, but at about 21% of GDP are still among the highest in the EU.

A fourth vulnerability for the Ital-ian economy is weak productivity and its poor infrastructure, with the European Commission commenting that “transport infrastructure quali-ty is below the EU average, with sig-nificant regional variation.”

Repairing the damageNotable progress is being made in all these traditional areas of weak-ness for the Italian economy. The government is expecting to achieve a balanced budget by 2020, with the debt to GDP ratio falling to 123.9%. According to the Bank of Italy: “Simulation exercises con-firm that a reduction in the debt-to-GDP ratio is possible in the medium term, based on realistic assump-tions about the future growth of the Italian economy and financial con-ditions, and provided that primary surpluses are adequate.”

Economists support this view. “Thanks to QE and the extension of its average life to about seven years, the cost of the government’s debt

has fallen,” says Valli. At current interest rates, a nominal growth rate of below 2% is enough to stabilise the debt to GDP ratio, which has started to decline.”

Monperrus-Veroni is also optimistic about the outlook for Italy’s pub-lic debt. “We have been forecasting a fall in the debt ratio for the last two years, which did not materialise because subdued inflation pre-vented the denomina-tor from rising,” she says. “However, we expect to see the ratio decline in 2018, which will send out a very strong message to investors and ratings agencies.”

The outlook for the labour market is also brightening. “There has been a drive towards reduced taxation of labour which is making

Employment and unemployment(seasonally adjusted quarterly data)

2008 2 009 2010 2011 2 012 2013 2014 2015 2016 1715

20

25

30

35

40

45

50

6

7

8

9

10

11

12

13

Total

15-24 years (2)

1 0, 400

1 0, 600

1 0, 800

1 1 , 000

1 1 , 200

1 1 , 400

1 1 , 600

22,500

23,000

23,500

24,000

24,500

25,000

25,500

Persons

(2 )

(1)

Source: Istat’s quarterly national accounts and labour force survey. (1) Thousands of persons, millions of hours. – (2) Right-hand scale.

Hours worked

Employment

Unemployment rate

Employment and unemployment (seasonally adjusted quarterly data)

Source: Istat’s quarterly national accounts and labour force survey, (1) Thousands of persons, millions of hours, (2) Right-hand scale

“Economic fundamentals will

prevail over political concerns“

Marco Valli, UniCredit



POLITICAL AND ECONOMIC OVERVIEW

it less expensive for companies to hire people,” says Valli. “Some of the tax incentives aimed at promoting permanent employment have now expired. But companies’ overall tax wedge has been reduced over recent years which has improved their competitiveness, and surveys of hir-ing intentions for 2018 are generally constructive.”

Positive momentum in the labour market is reflected in analysts’ fore-casts for employment, which the EC expects to increase by 0.9% in 2018 and 0.6% in 2019. This will help the unemployment rate gradually recede from 11.3% in 2017 to 10.5% in 2019, according to the EC’s fore-casts.

A continued pick-up in invest-ment and employment in Italy in 2018 is expected to mirror a strengthening in several econom-ic indicators across the eurozone. Luigi Speranza, head of European market economics at BNP Parib-as in London, recently revised his forecast for eurozone growth up to 2.4% in 2018, underpinned by mon-etary policy remaining loose for longer than previously expected, and global growth buttressing rising eurozone exports. His preview of the eurozone economy also points to a “promising” outlook for invest-ment and a further improvement in labour market conditions.

Banking on recoveryIn Italy, reform of the banking sec-tor is another source of support for accelerated economic recovery. The OECD comments in its most recent

analysis that “the government’s strategy to deal with weak banks is bearing fruit and NPLs have started to decline.” For the time being, this may not be feeding through into a palpable increase in credit to the corporate sector, says Monperrus-Veroni. “There has been a strong rebound in consumer and residen-tial housing lending. Growth in bank lending to businesses has been flat or slightly down, but we think this is a function of demand for credit rather than supply, because companies’ liquidity position and self-financing ratios are much stronger.”

More broadly, however, econo-mists say that improved sentiment in financial markets is provid-ing companies with a much wider

and more flexible range of funding options. “Prior to the crisis, Italian companies were highly dependent on bank credit,” says Valli. “Today, we are seeing more mid-sized com-panies accessing debt as well as equity financing, which is positive because it helps to strengthen bal-ance sheets and diversify funding sources in the corporate sector.”

Infrastructure and the other indi-cators on doing business remain an Achilles heel for the Italian econ-omy. But although it still ranks behind countries like Belarus, Rwanda and Moldova in the World Bank Doing Business rankings, Italy has been inching up the league table in recent years. In the 2018 report, it wins a special mention for mak-ing it easier to get electricity and pay taxes, and is 46th in the overall ranking, up 10 places since 2015.

While the potential of politics to upset the apple cart should never be underestimated in a country now under its 65th government since the end of the Second World War, economists appear to be sanguine about the likely economic impact of Italy’s general election in the first week of March. “The main chal-lenge for 2018 will be the election, although we have a reasonably con-structive view of the outlook for Ital-ian politics,” says Valli at UniCredit. “With the populists unlikely to win power, we don’t think that any polit-ical uncertainty in the run-up to and possibly after the election will be enough to derail the econom-ic recovery. We believe that in 2018 economic fundamentals in Italy will prevail over political concerns.” s

Italian public finance indicators


90

95

100

105

110

115

120

125

130

135

-6.0

-4.5

-3.0

-1.5

0.0

1.5

3.0

4.5

6.0

99 01 03 05 07 09 11 13 15 17f

% o

f GD

P

% o

f GD

P

Gross public debt (rhs) Budget balance (lhs)Primary balance (lhs) Interest expenditure (lhs)

forecast

Source: Istat, UniCredit Research

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

3Q10 3Q11 3Q12 3Q13 3Q14 3Q15 3Q16 3Q17

GDP (% qoq) GDP (% yoy, rs)

Good growth to continue in 2018

Italian public finance indicators

Good growth to continue in 2018


Source: Istat, UniCredit Research


UNICREDIT: SPONSORED STATEMENT


SPONSORED STATEMENT

STATISTICS SAY THAT Italy is the second largest manufacturer in Europe, second only to Germany, and among the largest in the world. This may be a surprise given how other developed countries have retrenched manufacturing over time. It shouldn’t be. Italian firms are based on true ingenuity, and strong entrepreneurial spirit. As a result, they are front-runners in many sectors, and today many clients all over the world still enjoy Italian products – either in the three “Fs” (fashion, food, and furniture) or in the less well-known sectors of machinery, the backbone of Italian exports, or pharmaceuticals. On many occasions, Italian industry proved to be resilient enough, not only to compete and innovate, but also to overcome various structural difficulties. For example, Italian companies sometimes struggled with scaling up. Nonetheless, they were able to develop industrial districts, a unique Italian ecosystem often used as a case study in the world’s leading business schools, and this environment has created a fertile ground for companies to prosper and compete with much larger players.

Yet, although the Italian industrial landscape has often been seen as the jewel in Italy’s economic crown and a hive of unique know-how, also Italian corporates have to confront the challenge of the upcoming fourth industrial revolution, so-called Industry 4.0, which is totally redesigning the production paradigms. On one hand, it is a terrific opportunity. It allows, for example, product differentiation, quality, and scale efficiencies as never before in the past, with significant potential upside in terms of profitability. On the other hand, firms need to be able to embrace new practices to remain competitive. The problem is that the investments needed to adopt Industry 4.0 are huge, and in many cases independent from the size of the company.

Is Industry 4.0 a phenomenon that will spell the end for many Italian companies? Not at all, since Italian firms have both fundamental strengths and the prerequisites for success. The fundamentals, as outlined before, are the Italian ingenuity that has created such a unique knowledge base, and long-lasting commercial relationships. Both of

these cannot be wiped out overnight. The prerequisites for success are both a fertile environment in terms of institutional support – the Italian government launched a thorough plan to spur capex, and in fact today Italy is the second best country in the world in terms of fiscal incentives for these kinds of investments – as well as in terms of cost of funding, thanks to historically low interest rates which will likely persist for the next few months.

What is missing in this picture? An important step: the ability to choose the right financial partner that can support growth and ensure sustainability for the business. Ideally, such a partner should have two key pillars.

The first pillar is the ability to offer access to a solid pan-European Corporate and Investment Banking product platform – a platform such as UniCredit’s, having been at the top of key Investment Banking League Tables in Europe for many years. Industry 4.0 often requires a company to rethink its business model, and the management therefore needs the support of a financial partner that can assist and advise in the redesign, as well as find the right funding mix to implement the new strategy. As previously mentioned, necessary investments are often huge, and scale matters. Therefore the right financial partner should be able to structure, and have the placing power, to syndicate large loans with other banks. If the plan requires M&A activity, the right financial partner in this case should have industry expertise and international reach. Last but not least, access to capital markets, both debt and equity, is often a step that should be taken to underpin ambitious growth strategies. Here, the right financial partner is the one able to connect international investors with issuers. Regarding the

latter point, Italy has notably been on the radar of several investors for the last few years. For example, UniCredit recently listed GIMA TT, a leading company in the design, manufacture and assembly of automatic open-architecture electronic machines for the packaging of both traditional tobacco products and new generation products. The IPO was one of the most successful in Europe in 2017, with an oversubscription of 8x.

The second pillar is the capability to offer access to international markets – Industry 4.0 is most effective when coupled with international operations. However, working abroad may be difficult, and the complexity can sometimes be overwhelming. This is why the financial partner should be able to provide clients with thorough market insights, dedicated products, and, above all, experienced people. At UniCredit, this is possible thanks to fully-fledged banks in 14 pan-European countries, and to branches and representative offices in 16 other strategic markets in the world. In addition, with 4,000 correspondent banking relationships in over 175 countries, UniCredit is ideally positioned to support clients’ international expansion. s

As Industry 4.0 radically alters the business world, Italian corporates are well placed to thrive thanks to a culture of ingenuity, a world-class knowledge base, long-lasting commercial relationships, and strong institutional support. Yet, for corporates to fully benefit from this revolution and enjoy international, sustainable growth, Alfredo Maria De Falco, UniCredit’s Head of Corporate and Investment Banking in Italy, explains that choosing the right financial partner is key

Riding the wave – Industry 4.0 has Italian corporates poised for a new era of growth

Alfredo Maria De Falco Head of Corporate and

Investment Banking in Italy

007 UniCredit statement Jan 2018.indd 7 05/02/2018 08:53


BANK OF ITALY GOVERNOR INTERVIEW BANK OF ITALY GOVERNOR INTERVIEW

: What will be the impact of the tapering and eventual withdrawal of quantitative easing on Italy’s access to capital markets? Is Italy ready for a return to more normal conditions?

The Italian economy is strengthening and growth is picking up at a similar pace to the rest of the euro area. The gradual removal of the monetary stimulus provided by the European Central Bank’s asset purchase programme would signal the materialisation of sizeable and self-sustainable improvements in inflation and economic activity. As such, this would be good news for both the euro area and Italy.

An increase in interest rates accompanying a strengthening of economic activity is fully sustainable and would not impair Italy’s access to capital markets. In terms of debt-to-GDP dynamics, Italy’s public debt has a long maturity and any rise in yields will be transmitted only slowly and gradually to the cost of debt refinancing. The high level of the debt ratio is nonetheless a source of vulnerability and the credibility of the commitment to reduce it remains crucial.

: Italy is to be congratulated on its economic recovery, especially over the last nine months. But how much of it should Italy take credit for — and how much is down to the broader upswing in Europe?

Economic developments in Italy are closely connected to those in Europe, due to similar economic structures, close trade ties and common factors underlying GDP growth. Over the past few years, the economic recovery has greatly

benefited, both in Italy and in the rest of the euro area, from favourable financial conditions and considerable monetary policy support. In Italy growth has also been spurred by government measures providing incentives to employment and capital accumulation. As a result, the ratio of machinery and equipment investment to GDP has returned to near pre-crisis levels; between 2015 and 2017 cumulative employment grew by 3%. According to our projections, economic activity will continue to expand in 2018 at a similar pace to that observed last year. The gradual unfolding of the effects of the various structural reforms enacted in recent years will keep sustaining Italy’s GDP growth over the medium term.

: One criticism of Italy is that it has traditionally grown more slowly than other European economies in the good times and shrunk further in the bad times. Have enough reforms been enacted to avoid repeating this

unwanted tradition?Since 2011 Italy has undertaken a vast programme of structural reforms, aimed at creating a growth-friendly environment. Legislators have approved, in various steps, measures to reduce red tape, improve the efficiency of the judicial system, prevent and fight corruption, foster competition in key service sectors, stimulate innovation, and achieve a more flexible and dynamic labour market.

The positive effects of these reforms are unfolding, but economic activity is still hampered by the rigidities and inefficiencies affecting the business environment and by weak productivity growth. The reform process must therefore continue. Its success depends on a shared commitment, far-sightedness and measures to mitigate the costs of the transition.

: Italy is also to be congratulated on the reforms put in place over the last six years. But is there a danger that the economic recovery will lessen the

Italy’s economy, like those of its European neighbours, is showing encouraging signs of consistently strong growth. But how much of it should Italy take credit for — and how much is down to the broader improvements in Europe? Has Italy made the most of improving economic conditions and central bank support to enact enough reforms to escape its unwanted tradition of growing more slowly than other economies in the good times and shrinking further in the bad times? Ignazio Visco, governor of the Bank of Italy, answered these questions and many more in an interview with GlobalCapital’s Toby Fildes.

Visco: Reforms must continue to sustain economic momentum

Ignazio Visco: “Italy’s economy is strengthening and growth is picking up at a similar pace to the rest of the euro area”

008-10 Italy Bank interview.indd 8 05/02/2018 09:25



appetite for further reforms?Reforms typically entail widespread benefits that take time to become visible, but their costs are often immediate and concentrated in specific segments of the population. Therefore, there is always the concrete risk that pressure mounts on the government to reduce the pace of reform or, worse still, to overturn previously implemented reforms. I do not believe, however, that these risks are higher in Italy than elsewhere. And I am convinced that the benefits from reforms are still palpable in Italy: an economy which has the potential to reduce the growth gap, as it is populated by firms that are on the cutting edge of technology and are competitive on a global scale.

: Should Italy be a special case regarding bank resolution regulation? Should it be exempt or should the regulations change, and if so, how?

No exception. As I have said elsewhere, it would have been preferable to have had a transition phase before the new resolution framework was introduced in the EU, and the bail-in should have been applied to newly issued instruments. Before the new rules became applicable, banks should have had time to build up adequate amounts of new bail-inable buffers.

One outstanding issue that warrants further reflection is how to manage crisis in small banks, for which no resolution procedure is envisaged under the new EU

resolution framework, given the absence of a ‘public interest’ justification for intervention. The new framework, coupled with the restrictive current interpretation of state aid rules, has disqualified instruments that were successfully used in the past to solve small institutions’ crises. Recourse to these instruments (such as interventions from deposit guarantee schemes in “purchase and assumption” transactions) should be given consideration in the forthcoming BRRD review.

: Should other bank regulations be changed or softened? If so, which?

The recent approval of the Basel III reforms is a milestone in the process of profound change in financial regulations spurred by the global financial crisis. The finalisation of the reform package dispels any residual regulatory uncertainty about the international banking sector. What we need now is to pause for a while, in order to let authorities and banks implement and apply the new rules.

At the same time, I see merit in devising ways of reducing the burden of reporting and disclosure requirements for smaller institutions, provided that basic and sound safeguards remain securely in place. Europe, where Basel rules are applied to all banks, has moved in this direction, and I welcome this development.

: How will the

ECB’s Targeted Longer Term Refinancing Operation funding be replaced by Italy’s banks, among its biggest beneficiaries? With the TLTRO repayments, MiFID II’s impact on retail investors, and potentially more expensive and volatile debt markets as a result of QE tapering, is there a danger that Italy’s banks will face a funding problem?

Recourse to Eurosystem refinancing by counterparties operating in Italy has been substantial. Following the last TLTRO2 in March 2017, it peaked at almost €260bn (10% of total liabilities) and declined slightly thereafter. Nevertheless, I do not envisage risks for the funding of Italian banks related to TLTRO2 repayments or to the end of QE.

First of all, retail funding has been increasing, driven by deposits. Combined with weak credit growth, this has brought the funding gap (the share of loans not covered by retail funding) to historical lows (4% in September 2017). The overall funding needs of Italian banks are also diminishing, as holdings of government securities are being reduced. Excess liquidity has been rising since mid-2016, including for small banks. Moreover, in the second half of 2017 Italian financial intermediaries have placed large amounts of uncovered securities on international markets and net issues have been positive for the first time since the beginning of 2015.

: Italy’s retail investors have been important players in the country’s capital markets. Are they being squeezed out by regulation and if so, where should they invest instead, and where should the country’s borrowers turn for investment?

In the past few years, Italian households have replaced their holdings of government securities and bank bonds with investments in asset management instruments (mutual funds, insurance policies and retirement products), increasing portfolio diversification. Disinvestments in bank bonds have been influenced not only by the changes in bank regulation implemented after the crisis, but also by a rise in tax rates (now at standard level, after a long period

Italy’s banks have been attracting more deposits and excess liquidity has been rising




of reduced taxation). More recently, the marked rise of investment fund subscriptions was favoured by the introduction of long term individual savings plans (PIR, Piani Individuali di Risparmio). In this way, the portfolios of Italian households increasingly resemble those of euro area households, even though holdings of asset management instruments remain limited by international standards.

: The ECB has put forward, then appeared to retreat from, plans to make banks increase their provisioning against non-performing loans. What is the best approach to this question?

I have said on several occasions that measures to favour the clean-up of banks’ balance sheets in the wake of the crisis are welcome. The so-called “calendar provisioning” is no exception, provided that it is adequately and appropriately calibrated. But supervisors should beware of approaches which would de facto impose blanket sales of NPLs on banks. In the current circumstances this would lead to a fall in the market price of NPLs. This type of policy would erode banks’ own funds at a time when raising capital can still be difficult, thereby putting the ongoing recovery at risk. In this field, any policy action needs to strike a delicate balance between the goal of speeding up the resolution of the NPL problem and that of preserving financial stability.

: What is the solution to Italy’s NPL problem? Is there a danger that it will keep coming back to bite the banking sector every time there is a downturn?

There is no silver bullet to solve the NPL problem, which is the legacy of the severe double-dip recession that hit Italy between 2008 and 2013. In any recession a build-up of NPLs is

unavoidable: in these circumstances firms shut down and workers lose their jobs, which is what leads to NPLs in the first place. Banks, supervisors and policymakers are working hard to reduce the stock of these assets in banks’ balance sheets. Progress is tangible: as a share of outstanding loans, new NPLs have regained the levels prevailing before the crisis; as for the stock, the NPL ratio has declined significantly since 2015, and will continue to do so, also thanks to large transactions that are currently being finalised. Work is also being done to make sure that any build-up of NPLs in the future is effectively limited by safe and sound practices. In some EU countries, including Italy, more needs to be done on the speed of recovery procedures. This may require legal reform but also actions to improve the efficiency of courts.

: Is more work needed to develop a unified strategy on dealing with unlikely-to-pay loans? Also, what are your thoughts on the development of a speedier foreclosure process in Italy along the lines of the EU’s NPL action plan?

Bankruptcy and foreclosure procedures, which in Italy take much longer than in other developed countries, are the main reason behind the “persistence” of NPLs in banks’ balance sheets. I have often mentioned that had recovery times in Italy been in line with the average observed in the other large European countries, the bad loan ratio would have been half of what we have instead observed. The reforms of the judicial procedures implemented in 2015 and 2016 have certainly gone in the right direction. But more work is needed, for instance in terms of the specialisation and organisational efficiency of the courts. There is no doubt that the EU action plan on this issue presents an opportunity.

Banks have their role to play. Our analyses have often found evidence

of poor management of NPLs, especially when it comes to prompt availability of detailed information on the state of the recovery procedures. A more pro-active stance by banks, then, is clearly needed, also on the unlikely-to-pay category. More efforts are needed to increase the cure rate (the percentage of NPLs that go back to performing). The reforms approved in 2015 contain important new rules on this front. A new kind of “restructuring agreement” was introduced, aimed at facilitating a more prompt agreement among creditors (the presence of multiple lenders, relatively widespread in Italy, can create perverse incentives among banks). Also, creditors of troubled firms have now the possibility to submit restructuring plans in competition with the one presented by the firm, reducing the possibility of opportunistic behaviour by debtors. However, reforms take time to kick in. This is a complex issue, which we closely monitor.

: Does the Bank of Italy regard climate change as a risk to the financial institutions it oversees? What steps, if any, have

“Supervisors should beware of approaches which would de facto impose blanket sales of NPLs on banks,” says Visco




you taken to address this risk or to make financial firms address it?

We definitely regard climate change as a risk. While we are not environmental watchdogs, we are aware that climate-related natural events, as well as a hasty transition to a low-carbon economy, have potentially far-reaching consequences for the economy. Households and firms are operating in a fragile environment, exposed to floods and landslides whose frequency and intensity is increasing because of climate change. The potential disruption caused by these events can also reduce the value of the collateral of bank loans and, in turn, hamper banks’ borrowing and lending activities.

Our approach to these issues is multifaceted. We contribute to “climate intelligence”, for instance, by investigating how environmental risks can affect the value of firms and spread to the banking sector. Moreover, we provide our view on these risks to inform the debate at the national and international levels. For example, together with the Ministry of Finance, we are currently leading a group established within the National Observatory on Sustainable Finance, to help the financial community manage more effectively the risks that come with climate change.

: Are Italian banks lending enough to support the corporate sector? Do they need further encouragement?

All in all, the availability of credit is no longer a constraint on economic activity in Italy. The rate of expansion of loans to non-financial corporations is still weak, in part due to the high self-financing capacity of firms, but it is positive in both the manufacturing and service industries. Moreover, banks have progressively eased lending standards, so that access to credit is currently quite favourable, especially for sound larger firms.

To a great extent, these improvements reflect the strengthening of the economic outlook and the effects of the unconventional measures implemented by the ECB. Looking forward, we expect growth in credit demand to gain pace as

the economic recovery gains ground. This is why it is essential that monetary policy continues to maintain an ample degree of accommodation.

: Are you concerned that not enough capital market finance is getting into the SME sector?

The access of Italian SMEs to capital markets has always been limited due to both demand and supply factors. On the demand side, family entrepreneurs are reluctant to allow their firms to become as transparent as listed companies and to share control with new shareholders. On the supply side, there are fewer investors specialised in less transparent issuers and riskier investment opportunities. We expect that the economic recovery, drawing on the effects of the many reforms introduced in recent years, will facilitate both bond and equity financing of firms, as well as the development of a crowdfunding market. In addition, individual savings plans are helping to channel capital from retail investors towards the non-financial corporate sector, which could further incentivise SMEs to issue market financing instruments.

: Why aren’t we seeing more mini-bonds?

At the current juncture, firms have ample internal resources and banks are granting new loans at low

interest rates, so credit is actually a very attractive alternative to market financing. However, the mini-bond market is still a relatively young segment of the capital market and, overall, there are signs of a positive trend in the number of issuing firms and in the amount of issued securities. The recent case of a basket of mini-bonds issued by a pool of SMEs and subscribed by institutional investors provides a successful example of these developments.

: How can Italy create a larger group of national champion-sized companies?

Recent work on “frontier firms” by the OECD showed that Italy’s champions are comparable to US champions in terms of efficiency but are much smaller on average. Historically Italian companies have always tended to be small, a characteristic that goes beyond sectoral specialisation. Many factors impede firms’ growth and the reallocation of inputs to the most efficient uses. To tackle this issue, among the reforms often mentioned in the policy debate, I believe that Italy should give priority to: changes in the industrial relations system to favour decentralised wage bargaining with a strong focus on firm-level productivity; the removal of tax and regulatory disincentives to firms’ entry and growth; and increasing the efficiency of the judicial system and the public administration. s

Visco: “the availability of credit is no longer a constraint on economic activity in Italy”



CASSA DEPOSITI E PRESTITI (CDP) CASSA DEPOSITI E PRESTITI (CDP)

FOUNDED IN 1850, and recently rebranded as a National Promotion-al Institution (NPI), Cassa Depositi e Prestiti (CDP) has a multi-dimensional mandate. CDP’s mission, as Moody’s explains, is to support economic development and investment in com-petitiveness by financing long-term development activities, “acting as a counter-cyclical force in the event of market failures”. It also complements the financial system where private institutions have “limited interest in supporting projects that are consid-ered critical to the Italian economy”.

Maurizio Gozzi, managing director of debt capital markets at Crédit Agri-cole in Milan, says: “CDP will remain an extremely important tool for any Italian government to promote growth both in industry, infrastructures and financial services.”

To play this role effectively, it is essential that CDP continues to retain its status as a quasi-government agency rated at the same level as the government by each of the leading ratings agencies. “We believe there is an almost certain likelihood that [CDP] would receive extraordinary support from the Italian government if needed, and we therefore equal-ize our long-term rating on CDP with our long-term rating on Italy,” noted Standard & Poor’s (S&P) at the end of October, when it upgraded CDP’s short term rating to BBB/A-2. This was not driven by any change in CDP’s fundamentals, but was in line with S&P’s upgrade of the sovereign a few days earlier.

Equally important, for Italy, is that CDP also retains its categorization by Eurostat as a market unit. This is because, as Scope Ratings explains in a recent analysis, “as long as its prod-ucts and services are offered at market conditions, CDP is not considered part of the government sector and its debt is not consolidated into Italian gov-ernment debt, leaving public debt sta-tistics unaffected.”

Given Italy’s commitment to reduc-

ing its debt to GDP ratio to well below its current level of over 130%, it is easy enough to see why the government is eager to ensure that CDP’s debt remains unconsolidat-ed and to maintain its operation-al autonomy. According to Scope, CDP’s governance structure protects it from excessive political interfer-ence. “CDP can only invest in pro-jects deemed economically and financially sustainable and therefore cannot bail out unviable business-es,” says Scope.

The 2016-2020 planCDP’s financial and credit profile means that it is well equipped to implement an ambitious 2016-2020 strategic plan that is central to its mis-sion of re-energising the Italian econ-omy by mobilising €265bn of resourc-es. Of this total, €160bn will come from CDP itself, with the remaining €105bn drawn from “national and foreign private and public resourc-es”. The most notable of these are the resources made available under the European Fund for Strategic Invest-ments (EFSI), the joint EIB/European Commission initiative to help over-come the current investment gap in the EU by mobilising private invest-ment in projects which are strategical-ly important for the EU. EFSI is a core component of the Investment Plan for Europe, also known as the Juncker Plan. This is critical for Italy, which has been the leading beneficiary of guarantees and equity made available by the EFSI, with CDP acting as the principal manager of funding under the Juncker programme.

The lion’s share of the €265bn total, accounting for €163bn (€117bn from CDP), is to be allocated to supporting “all phases of [the] life cycle of enter-prises” and strengthening support for exporters. This represents a 73% increase in the mobilisation of funds for the enterprise sector from CDP, which amounted to €67bn between 2011 and 2015.

Specifically, the 2016-2020 busi-ness plan sets out CDP’s objectives of promoting innovation and develop-ment in the smaller companies sector by becoming a leading venture capital operator. It also includes a commit-ment to support medium-sized com-panies by providing growth capital, and helping with the acceleration of the listing process and the diversifica-tion of their financing sources.

Also in support of the corporate sec-tor, under its 2016-2010 plan CDP is committed to “intervene in the capi-tal of companies of national impor-tance, safeguarding their econom-ic sustainability” through long-term equity investments. Internationally, meanwhile, CDP’s mandate is to “sig-nificantly increase export support through the creation of a single dedi-cated hub”.

Of the remaining €102bn that the 2016-2020 business plan aims to mobilise, €68bn (€24bn from CDP) will contribute to what CDP describes as a “change of pace” in infrastruc-ture development and environmental protection, via, for example, support for public private partnerships (PPP). A further €20bn (€15bn provided by CDP) is for local administration investment, with €15bn (€4bn from CDP) supporting the creation of value in “public real estate, social housing and tourism”.

Over the last 12 months, CDP has made notable progress in all the areas identified in its blueprint for 2016-2020. When it released its half-year-

If Italy is decisively to address the persistent challenges presented by its low growth, poor productivity, elevated debt, high unemployment and weak financial services industry, then CDP will need to play a pivotal role in mobilising over €250bn of resources. Philip Moore reports.

CDP’s €250bn mission to reinvigorate Italy

“CDP will remain an extremely

important tool for any Italian

government to promote growth“

Maurizio Gozzi, Crédit Agricole

012-13 JM_CDP Profile.indd 12 05/02/2018 09:24


CASSA DEPOSITI E PRESTITI (CDP) CASSA DEPOSITI E PRESTITI (CDP)

ly results in August, CDP announced that over its first 18 months, €43bn (more than 25% of the resources ear-marked for investment over the entire life of the plan) had already been mobilised.

Of the €13.1bn mobilised in the first half of 2017, €6.4bn was allocated to international expansion, with €4.8bn to enterprises, €1.8bn to government, public administration and infrastruc-ture, and the remaining €1bn to real estate.

This was achieved against the back-drop of sharply improved profitabil-ity, with group gross income reaching €1.5bn in the first six months of 2017, compared with “practically nil” in the same period in 2016.

Supporting SMEsWhile the resources mobilised in sup-port of the corporate sector in Italy have been quite modest in proportion to the target outlined in the business plan, CDP has implemented a series of important initiatives helping to pro-vide smaller and medium sized com-panies with access to funding.

One example is CDP’s continued participation alongside Germany’s KfW and the European Investment Fund (EIF) in the EIF-NPIs securiti-zation initiative (ENSI), designed to stimulate access to finance for SMEs through the capital markets. In 2017, CDP and KfW closed a new round of credit securitization for SMEs origi-nated by Alba Leasing. CDP reports that this was its fifth investment in the ENSI programme (and its fourth alongside KfW), which has brought the number of Italian SMEs supported by Alba to 2500.

A second important development in CDP’s support for smaller compa-

nies in 2017 was its acquisition in July of a 15% holding in Elite — the Italian Stock Exchange platform (within the London Stock Exchange Group) which supports capital raising for companies with high growth potential.

Established in 2012, Elite describes itself as “capital neutral” to any financing opportunity, providing access to private equity and venture capital funds as well as debt products. By early December, Elite reported that it had attracted over 700 compa-nies, of which 437 were Italian, with aggregate sales of more than €50bn. Its aim, according to CDP, is to build a network of more than 1,000 compa-nies by early 2019.

Another important initiative in 2017 was the signing of a guarantee agree-ment under the Investment Plan for Europe to support SMEs. The EFSI Thematic Investment Platform for Italian SMEs, the first in Europe to be promoted by the EIB together with an NPI, lays the foundations for the implementation of a series of guaran-tee and risk-sharing initiatives aim-ing to mobilise SME investment worth €6bn.

CDP states: “Using the Juncker Plan resources provided via the Europe-an Competitiveness of Enterprises and Small and Medium-sized Enter-prises (COSME) programme support-ing SMEs, CDP and the EIF will issue counter-guarantees to financial insti-tutions in order to facilitate Italian businesses’ access to credit and sup-port new investment.”

It adds that total allocated funds of €225m (€112.5m from COSME and an equal amount provided jointly by the Ministry of Economy and Finance and CDP) will have a notable multi-plier effect, supporting “a significant

amount of new investment.”CDP has also mobilised Juncker

Plan funding for much needed infra-structure investment in Italy. Last July, for example, it set out details of an investment of €113m under the European Investment Plan to reduce energy costs for Italian businesses by increasing the stability and security of the national power grid. Described by CDP as a “new milestone in promot-ing Italy’s infrastructure”, this project involves the construction by Terna, which is owned by CDP, of a new 190km electrical interconnection line between Italy and France, which is the longest of its kind in the world.

Diversified funding strategyAnother key component of CDP’s 2016-2020 business plan is the diver-sification of its funding. Historical-ly, CDP’s principal source of funding has been retail liquidity sourced via postal savings, which today account for about 75% of its total funding. As Scope Ratings notes: “Postal savings are a stable and inexpensive source of funding, providing CDP with a key competitive advantage in its markets.”

CDP made a successful return to the international capital market last June, placing a €1bn seven year bond issue led by Banca IMI, BNP Paribas, Deutsche Bank, Goldman Sachs and JP Morgan, which generated total demand of €1.8bn, with 50% of the bonds placed outside Italy.

A more recent landmark for CDP in the international capital market was its first social bond, in November. Led by Barclays, Citi, Crédit Agricole, HSBC, Société Générale and UniCred-it, this €500m five year issue broke new ground as the first ever social bond from any Italian borrower.

Proceeds of CDP’s social bond are earmarked to promote “sustaina-ble growth, ensuring socioeconomic advancement, access to financial ser-vices and support to employment”. Another notable innovation for the broader SRI market was that it was the first social bond from a European borrower to specify that the proceeds would also be used for SMEs (and micro-enterprises) located in deprived areas of Italy and in areas affected by natural disasters.

This clearly resonated with dedicat-ed SRI investors, who accounted for a notable share of the total final order book, which was in excess of €2.25bn. According to CDP, more than 70% of demand for the its social bond came from overseas buyers. s

CDP-owned Terna is helping to lay a “new milestone in Italy’s infrastructure”

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CDP: FABIO GALLIA INTERVIEW CDP: FABIO GALLIA INTERVIEW

: A number of econo-mists revised their forecasts for Italian growth upwards in 2017. Has the recent performance of the Italian economy been one of the surprise stories in the EU?

As far back as mid-2016, I was expect-ing a stronger year for the Italian economy in 2017 than most forecast-ers — not because I’m a guru, but because I was talking to entrepre-neurs on a daily basis, which gave me the strong feeling that things were moving in the right direction.

Three major factors have supported the recovery. We mustn’t forget that 12 months ago the government decid-ed to put €20bn into the banking sys-tem, which had an important impact on sentiment in Italy.

When it became clear 12 months ago that the financial system had been stabilised, this sent a strong con-firmation to corporates — especially SMEs — that banks were back to busi-ness and still in a position to lend, and to foreign investors that systemic risk was in retreat.

Second, exports have been doing better than anticipated. This is impor-tant because it is an indication of the solidity and sustainability of the rebound.

Third, companies have been invest-ing, which has not only supported GDP growth, it has also helped com-panies to become more competitive.

These three factors have led to an improvement in consumer confi-dence. The knowledge that banks are no longer in danger of failing has encouraged job creation. Although youth unemployment figures are still disappointing, young people now have more confidence that if they apply themselves to their studies, their prospects are improving.

So assuming that there are no major global disruptions, I am expect-ing another good year for the Italian economy in 2018.

: What role will CDP play in supporting the acceleration of the Italian economic revival?

CDP’s mission is to support growth and spur competitiveness in the Ital-ian economy, based on four key pil-lars. The first is infrastructure and public finance. The second is sup-porting exporters in international markets. The third is providing entre-preneurs with a full spectrum of equi-ty funds enabling them to strengthen their balance sheets and support their growth. And the fourth is accelerating the regeneration of urban real estate.

On the infrastructure and public finance side, we have reconfirmed our role as the leading lender and inves-tor in the Italian market. We have also focused on promoting projects in order to make them more bankable. We have also been helping the regions and municipalities to increase their financial flexibility by renegotiating their loans. There is still a lot of work to be done, but we are confident that in 2018 and beyond we can make a bigger contribution to infrastructure development.

Internationally, the strong growth we’ve seen recently has testified to the effectiveness of the reorganisation we implemented a couple of years ago by creating a single fulcrum for our activities on the export side. In the US this would be recognized as an Exim

bank because it blends the capacity of CDP as a lender with the exper-tise of Sace and Simest as providers of export guarantees, to create a more effective and efficient export credit agency.

On the investment side, two years ago we redefined our strategy and decided to create a number of equity platforms with a few key character-istics. First, we wanted to ensure we could help entrepreneurs throughout the life cycle of their companies. This means being able to provide support at the venture capital stage, as well as a range of funding and restructuring alternatives for SMEs and mid-caps.

The second characteristic of our effort in this area is to be comple-mentary to existing sources of private funding. We believe we can achieve this because as a long-term inves-tor we don’t compete with the private players. We can hold our investments for 10 years and longer if neces-sary, while the typical private equity fund has a much shorter time frame. This is not to say that we are a bet-ter source of investment than private equity. It just means we are different.

Another difference is that we don’t leverage our investment in compa-nies. We tend to invest almost exclu-sively through rights issues in order to provide capital for growth.

In support of this activity we have been raising funds from local and

Fabio Gallia, who became chief executive of Cassa Depositi e Prestiti (CDP) in 2015, is overseeing its ambitious 2016-2020 business plan. In this interview, he shares his views with GlobalCapital on the prospects for the Italian economy and the role CDP will play in supporting its accelerated recovery.

CDP happy to support Italy from the ground up

Fabio Gallia says Italy’s rebound is solid and sustainable

014-15 JM_CDP Interview.indd 14 05/02/2018 09:24


CDP: FABIO GALLIA INTERVIEW CDP: FABIO GALLIA INTERVIEW

international investors who share our long-term perspective. CDP Equity, the former Fondo Strategico Italiano, is a pure, strategic long-term entity with investments of just under €5bn. In addition, we have raised more than €2bn from other investors, and we plan to add to this total in 2018. So all in all, our target is to have well over €7bn invested in private companies.

: Is the focus purely on SMEs?

We have roughly €600m invest-ed in venture capital, both in very early stage technology transfer and in late stage investments, which are the areas in which there are the most market gaps in Italy. We have also strengthened our investment in funds of funds in the venture capital sector.

We have a separate platform focus-ing on SMEs with good long-term growth prospects. One of our priori-ties here is to strengthen SMEs in certain sectors by investing in so-called market leaders, some of which have revenues of as much as €100m.

CDP also has a 40% stake in the fondo d’investimento credit fund, and a third platform is the FSI mid-market growth equity fund which was launched in July 2017.

Our fourth platform, which is also brand new, is the QuattroR (Four Rs) Fund, targeted at restructuring, relaunching, recapitalising and reor-ganizing companies that have a via-ble industrial model but have faced financial difficulties. Unlike our other platforms, this tends to invest in majority stakes, which gives us the opportunity to inject fresh capi-tal, appoint new managers and work closely with the company to make it successful again.

One example is our investment in Fagioli, one of the four leading glob-al players specializing in the design and realization of haulage and lift-ing projects with advanced engineer-ing content. Our investment will pro-vide Fagioli with additional financial resources to support an ambitious growth plan of direct investments in equipment and add-on acquisitions.

On the real estate side, we have submitted smart housing propos-als to municipalities such as Rome, Naples, Bologna, Milan and Paler-mo. We also recently launched a new

fund designed to help entrepreneurs in the hotel sector who need capital to grow their business. The fund buys assets, rents them back to hotel own-ers and helps with refurbishing the buildings. This is significant because the number of rooms in Italy which are operated by hotel chains is below 10%, compared with around 50% in other large EU economies.

This fund has already raised and invested €100m. We have also raised a further €150m to accelerate the pro-cess of seperating property owner-ship with hotel management.

: How do you explain CDP’s return on equity, which is extremely high by the standards of European banks, let alone Europe-an financial institutions?

Although it is supervised by the Bank of Italy, it is important to empha-sise that CDP is not a bank. So com-parisons with traditional banks are inappropriate. Having said that, we are committed to strengthening our P&L, ensuring that our balance sheet remains robust and investing in com-panies that generate good dividend flows. We have also been working hard to improve our asset-liability management.

We play a key role on behalf of the country by being the custodian of some very important equity stakes in a number of large corporations. We are the leading investor in the Italian Stock Exchange, and we feel that we should live up to the responsibilities associated with being a good, long-term investor in terms of promoting best practices in the corporate sector.

: One of the components of CDP’s 2016-2020 business plan is the diversification of its fund-ing sources. Can you comment on your strategy in the capital market, and in particular on the successful social bond issued by CDP in 2017?

We have taken a strategic decision to diversify our sources of funding and to make more use of the capital mar-ket. At the same time, we recognise that we need to be attentive to sus-tainability, at both a social and envi-ronmental level.

Our social bond, which was the first to have been issued in Italy, is focused on providing finance to

SMEs, particularly those active in less developed regions of Italy, or companies based in areas that have been hit by natural catastrophes.

We were very pleased with the reception investors gave to our social bond. The book was almost four times oversubscribed by a very broad and diversified investor base which was of excellent quality.

This was not a one-off transac-tion. We intend to be a regular issu-er in this market over the coming years. Of course the volumes will depend on our financing needs, but we believe it is important for us to maintain a regular supply of tra-ditional senior bonds and to be an issuer of social bonds, because the highest governance standards are embedded in CDP’s nature.

: Why did CDP choose to rebrand?

The main reason for the rebrand-ing was that although each company within the CDP Group had its own separate brand, as a group we didn’t have our own identity.

One of the first decisions I took when I became CEO was to change the governance of the group. We are no longer a pure holding company, but an integrated entity, which for the first time has a five year plan for the group as a whole. This has meant that we have had to adjust some of the intangibles which are so impor-tant for the creation of a group spirit and a group culture.

Creating a single group has ena-bled us to refocus on our shared mis-sion and values which will define our managerial strategy going for-ward. s

Gallia: “We want to make more use of the capital market”

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ECONOMIC REFORM ECONOMIC REFORM

INTERNATIONAL INVESTORS were gloomy about the prospects for struc-tural reform in Italy not too long ago. In late 2016, Schroders commented, soon after the resignation of former prime minister Matteo Renzi, that he had been “Italy’s best hope of enact-ing badly-needed economic and structural reforms, and so his depar-ture is a major blow for Italy’s medi-um to long-term outlook.”

Schroders warned: “The change in leadership in Italy will mean a delay in the introduction of econom-ic and structural reforms. Without such reforms, Italy is likely to remain stuck in a low growth deflationary dynamic.”

It is easy enough to see why Renzi is immediately associated with reform in Italy. When he became Ita-ly’s youngest ever prime minister in early 2014, the leader of the centre-left Democratic Party was enthusias-tically greeted as a zealous reformer who would shake up Italy’s archa-ic political system and accelerate a much-needed programme of structur-al reforms.

In the event, he promised rather more than he was able to deliver, and resigned after 59% of voters in a refer-endum rejected his proposals on con-stitutional reform.

“Although the Renzi govern-ment failed to introduce institu-tional reform, it succeeded in push-ing through a number of economic reforms,” says Paola Monperrus-Veroni, chief European economist at Crédit Agricole in Paris.

The curtain raiserTrue enough. But Lorenzo Codogno, founder and chief economist at LC Macro Advisors in London, says that the first of the big recent structur-al reforms in Italy predated Renzi’s accession to power by over two years. This was the far-reaching pension reform the Monti government intro-duced in 2011, aiming to chip away at Italy’s mountainous pension costs by

ushering in key changes including an increase in the retirement age.

This reform, say economists, paved the way for the restructuring of the labour laws which many regard as the most significant of the initiatives from the Renzi government. The Jobs Act was enacted to tackle the peren-nial menace of unemployment by dismantling some of the well-inten-tioned but counterproductive regula-tions which discouraged businesses from hiring new workers.

The central pillars of the Jobs Act were measures to make it easier to fire employees and provide fiscal incen-tives for companies creating perma-nent job opportunities on less pro-tective terms. “The Renzi reforms have been successful in making the jobs market more flexible and linking employee protection to age and expe-rience,” says Monperrous-Veroni.

It was also under the Renzi govern-ment that essential reform of Italy’s precarious banking system was accel-erated. This was based principally on allowing for the securitization of non-performing loans (NPLs), promot-ing consolidation in the banking sec-tor, accelerating the process of credit recovery and supporting initiatives to strengthening banks’ capital ratios.

Initial indications suggest that bank reform is already generating positive results. According to a recent DBRS analysis, by the end of the third quar-ter of 2017, total gross and net NPE [non-performing exposure] ratios had improved to 15.7% and 8%, respective-ly, from 17.9% and 9.5% at December 2016. “Improvements in asset quality were supported by disposals, higher collections and lower NPE inflows as economic prospects improved,” DBRS notes.

Economists say capital increases and banking reforms are playing a critical role in addressing the chal-lenge of poor asset quality among Ital-ian lenders. “Everybody across the investment community now agrees that all the large systematic players

in the banking sector have been dealt with,” says Marco Valli, chief Europe-an economist at UniCredit.

“Credit recovery times have been shortened and are now more close-ly aligned with those elsewhere in Europe. Because this only applies to new loans it won’t help with the exist-ing stock of impaired assets, but it has positive implications for future NPL formation.”

More to doWhile economists and investors have warmly welcomed the reforms of recent years, it is widely agreed that much more needs to be done if Italy is to address the multiple challenges of low growth, feeble productivity, serial youth unemployment and a high pile of external debt.

The IMF has called for a number of measures to counter these corrosive influences on the Italian economy. These include wage bargaining, an improvement in product and service markets, an acceleration of the clean-up of bank balance sheets, and the enhancement of efficiencies in the public sector and civil justice system.

The IMF adds that although Italy has succeeded in containing spend-ing by freezing wages and cutting public investment, it has not yet been able to reverse pre-crisis spend-ing, which grew faster than national income. In response, the IMF recom-

Contrary to expectations, the fall of Matteo Renzi has not slowed down Italy’s reform drive. Admittedly, much of the recent progress started under his leadership and even before it, but the country’s continued commitment to economic reform under the Gentiloni administration has been warmly welcomed by economists and investors. The next big test will be a general election in March. By Philip Moore.

Italy’s five star political puzzle seeks March solution

Beppe Grillo’s anti-establishment movement is not set for power

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ECONOMIC REFORM ECONOMIC REFORM

mends a package of “high quality measures on the spending and rev-enue side” including more public investment, reducing pension spend-ing which is still the second highest in the euro area, and lower tax rates on labour.

Decisive implementation of all these measures, says the IMF, could raise Italian incomes by over 10%, cre-ate jobs, improve competitiveness, and “substantially” reduce public debt over the next decade.

Just as well, then, that structur-al reform in Italy did not come to an immediate halt following Renzi’s res-ignation. “Reforms in areas such as public administration, government spending and the justice system will all take time,” says Monperrus-Veroni. “However, the Gentiloni government is moving ahead with reforms silent-ly and decisively. This is building on Italy’s track record on reforms, which has already ticked a lot of the boxes presented in the OECD’s structural reform agenda.”

The OECD’s 2017 report on Italy’s progress on structural reforms is broadly positive. At the fiscal level, it acknowledges some success in broadening the tax base and reduc-ing tax evasion, as well as reducing the debt ratio and implementing a balanced budget rule for sub-nation-al governments. On financial issues, meanwhile, the OECD welcomes the measures that have been taken on NPLs and the creation of bad banks. The report also recognises progress in increased efficiencies in product markets, and in boosting innovation through measures such as R&D tax incentives and other schemes to pro-

mote start-ups and SMEs. On labour market reforms, the

OECD acknowledges the role of the Jobs Act in promoting permanent contracts. It also welcomes initia-tives such as the National Agency for Active Labour Market Policies (ANPAL), the support of incentives for employing so-called NEETs (young people not in education, employment or training) and the implementation of a universal unemployment insur-ance system (NASPI). The OECD also reports on measures taken to increase female employment.

Another area identified in the OECD’s report is education. The Buona Scuola reform programme approved in 2015 has started to address some of the shortcomings in the Italian education system by recruiting more teachers and promot-ing digital and language skills.

While Italy has made progress in implementing structural reforms and bolstering efficiencies, there have been setbacks in areas such as priva-tisation, which has failed to generate the revenues that Renzi had target-ed to help reduce the national debt. The privatisation of the national rail-way operator and the offloading of the 65% of the post office still in state ownership have both met with stiff political opposition. More recently, the planned sale of stakes in the air traffic controller, ENAV, and the ener-gy company, Eni, have stalled.

Real estate ambitionsHow much of a role privatisation will play in improving Italy’s debt to GDP ratio is open to question. “There is not much left to be privatised, although the government still has huge real es-tate assets that need to be sold,” says Monperrus-Veroni. “Since 2012, the government has planned to sell real estate assets worth about 1% of GDP per year. This has now been scaled back to 0.5% annually, which is still a very ambitious target.”

Economists say that the biggest immediate political threat to the structural reform process, and to Ital-ian capital markets, would be a vic-tory in the 2018 election for the anti-establishment Five Star Movement (M5S), described by Monperrus-Vero-ni as Italy’s black swan. UniCredit cautions in a recent report that a Five Star government would be perceived as “the worst-case scenario by finan-cial markets, due to the risk of an unwinding of previous reforms and, potentially, the beginning of a debate

to reform the EU treaties.”Given that it is ahead in the opinion

polls, it would be premature entire-ly to rule out a victory for M5S in March. But economists say that even though M5S may be able to count on up to 30% of votes, according to recent polls, an M5S-led government remains the unlikeliest outcome of the election. This is because a coali-tion between M5S and either of the two other most popular parties has been more or less ruled out.

As Monperrus-Veroni explains, under Italy’s new “Rosatellum” elec-toral law, an individual party would need to poll 40% of the vote to qual-ify for a so-called “majority premi-um” of a further 50 seats, creating a clear governing mandate. In spite of the growing appeal of the anti-estab-lishment movement, polls suggest this is well beyond the reach of M5S which was co-founded by the come-dian, Giuseppe Piero Grillo (popularly known as Beppe) in 2009. This will be reassuring to investors.

As BNP Paribas noted in an Octo-ber update on Italian politics: “In the eyes of the market, the likelihood that [the Rosatellum law] might erode Five Star’s influence and reduce its chanc-es of winning the next general elec-tion is probably positive news.”

M5S has toned down its anti-Euro-pean rhetoric, and its new leader, Luigi di Maio, has said that the party does not support an Italian exit from the EU. But it is still committed to a referendum on membership of the euro if reforms to the single currency do not transpire.

Thankfully for financial markets and the future of the single currency, economists believe the most like-ly outcome of the election will be a hung parliament. This would prob-ably pave the way for the formation of a grand coalition government bring-ing together former president Silvio Berlusconi’s centre-right and Renzi’s centre-left parties.

Although that may look like an step backwards for Italian politics, Codog-no says that a grand coalition along these lines might be the best chance Italy has to pursue structural reforms. “It would not be pleasant for democ-racy, as it would leave only the anti-establishment or extreme parties in opposition,” he explains. “However, this scenario would not be adverse for the economy as the government would be free to implement unpopu-lar reforms that no party would indi-vidually do.” s

A hung parliment could herald a coalition of Berlusconi’s and Renzi’s parties

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CAPITAL MARKETS AND ECONOMIC GROWTH CAPITAL MARKETS AND ECONOMIC GROWTH

THE PAST YEAR has seen two major equity transactions that have grabbed the headlines for both their size and significance. In February 2017 investors took up the bulk of a €13.7bn record capital raising by UniCredit, Italy’s largest bank. The first day of its offering saw commit-ments to take up 99.8% of the rights issue that was launched to repair a restructuring-related shortfall in its capital buffer.

Eight months later, Italian tyre maker Pirelli floated on the Milan stock market in an IPO that valued the veteran Italian industrial com-pany at €6.5bn, and raised about €2.6bn from a sale of 35% of its shares. Although the shares fell 2% on their opening day it was on track to post a gain of 17.9% on its launch price by the end of January.

Thanks to its flotation, Pirelli became the 30th company to join the Italian stock exchange in 2017. Lorenzo Langella, head of ECM Italy and co-head of corporate finance Italy at BNP Paribas, says Pirelli and UniCredit were “landmark transac-tions” that were smoothly completed with a positive aftermarket perfor-mance.

Carsten Hesse, European econo-mist at German bank Berenberg, describes it as an “IPO boom”, saying

2017 was the best year for IPOs in more than a decade.

“The successful Pirelli IPO, the capital raising exercise by UniCredit, as well as more than 30 other IPOs [in 2017] clearly show the advantages of having access to the capital mar-kets,” he says. “The capital raised from shareholders can be used for faster growth of the company or to improve its capital structure.”

While total equity volumes in Italy have jumped by 185% to €23.7bn as of the end of November compared with a year earlier, IPO volumes have soared by 237%, according to figures from UniCredit.

Analysts say the equity market has benefited from an improved macro-economic situation in Europe, great-er stability in the financial sector as banks repaired their balance sheets, and the realisation by investors that the political outlook had become more stable after the Brexit vote in the UK and the election of Donald Trump in the US.

“The upturn in the market comes from a combination of improved macro conditions, greater politi-cal stability, and increased inves-tor appetite for public offerings,” says Stefania Godoli, head of equi-ty capital markets at UniCredit in Milan. “There’s no doubt the market

is much healthier than it was three years ago.”

While Pirelli was a hugely impor-tant IPO, many of the companies that had come to market in 2017 had tended to raise €200m-€500m. “The Pirelli deal is a testament to the strength of the market — raising €2.6bn gives you an idea of inves-tors’ appetite,” Godoli says. “Howev-er, Pirelli’s listing doesn’t represent a standard Italian IPO — mid-size companies still make up the bulk of the IPO market in Italy.”

These mid-market IPOs includ-ed gambling company Gamenet which priced a €72m IPO in Decem-ber, Gima TT, the tobacco packaging machinery division of IMA which floated for €423m, consumer elec-tronics retailer Unieuro’s €220m IPO, and bad loan specialist doBank which came to market with a €704m valuation.

Langella says the improving macro environment, coupled with the abundant liquidity available in the marketplace, is prompting many listed companies to reconsider stra-tegic options and accelerate growth plans, especially for non-organic growth.

He says M&A is becoming the “name of the game” for many good, listed companies, citing the $3bn acquisition by Prysmian of its US rival General Cable in December 2017. “The equity markets are cur-rently able to serve any equity need,” he says.

“On the other hand, given the strong performance in the equity markets — and correlated implied multiples levels — many private companies are taking off the shelf IPO plans that were previously put on hold.”

Entrepreneurs seek IPOsMilan’s stock exchange is also pro-moting itself as a hub for high-end consumer goods after recent list-ings by fitness equipment company

Ask people to name the centres for capital markets in Europe and most will probably pick London, Frankfurt and perhaps Paris. But Milan will not be on many people’s shortlist, at least not outside Italy. But that may be about to change as a series of major transactions on the city’s stock exchange has shone a spotlight on a growing trend that could point to a boost to the eurozone economy’s growth outlook. By Phil Thornton

Italy’s capital markets: an engine of growth?

The €2.6bn Pirelli listing demonstrated investors’ appetite for public offerings

018-19 DJ_Economic growth.indd 18 05/02/2018 09:12


CAPITAL MARKETS AND ECONOMIC GROWTH CAPITAL MARKETS AND ECONOMIC GROWTH

Technogym, as well as fashion brands Brunel-lo Cucinelli and Salvatore Ferragamo.

Many successful mid-market companies in Italy coming to market are fam-ily-owned firms where the founding entrepreneur or subsequent generations of the family can no longer pass control of the busi-ness down. Italy’s cor-porate sector is strong-ly founded on the idea of entrepreneurs who are exceptional and have built their companies over 30 years.

However, there has been a trend of companies looking for managers outside the family who can take the business to market to access capital for growth. “This is a phenomenon we have seen in Italy for the past 10 years or so, but the difference now is the receptivity of the market, and stronger entrepreneur interest in crystallising their value and creating a more diverse shareholder base,” Godoli says.

Another stimulus for family-led small and mid-sized firms to go down the IPO path to raise new capi-tal is that lending has been squeezed during a banking crisis.

The success of companies com-ing to market in 2017 has laid the groundwork for another positive run of IPOs in the coming year, ana-lysts believe. Godoli says that 2018 is set to start off on the “right foot” in terms of companies’ desire to go to market.

Hesse adds that stronger growth in consumer spending would also encourage another slew of compa-nies to come to the market in 2018. There has been a great deal of spec-ulation about IPOs by a number of companies in the fashion and food sectors. According to local reports these could include Valentino Fash-ion Group, handbag maker Furla, and Eataly, a restaurant chain.

He also highlights the implemen-tation of the piani individuali di risparmio (PIR) programme, retail vehicles that offer significant tax advantages for investment in SMEs and which attracted €7.5bn in assets in the first three-quarters of 2017 and underpinned SME investments.

Langella describes the PIR ini-tiative as the “icing on the cake” for listed SMEs that were already

benefiting from abundant liquid-ity, relatively high valuations, good after-market performance and posi-tive investor sentiment towards new offerings.

Away from IPOs, rights issues in the 11 months to November 2017 were up by 201%, mainly thanks to UniCredit. The bank’s rights issue is a sign that Italy’s troubled bank-ing sector is able to use the equity markets to carry out the refinancing needed to plug the holes in their bal-ance sheets. “Several of Italy’s large banks have raised a lot of capital,” says Jack Allen, European econo-mist at independent research house Capital Economics. “Certainly, that is very important for strengthening Italy’s banking sector and its econo-my more generally.”

ECM ‘invaluable’ boost to economyOne trend particularly among high valuation IPOs is the greater role of national and international institu-tional investors taking stakes in cor-porates away from banks that often hold a web of cross-shareholdings and which have been criticised for limiting the scope for risk taking. For instance, Pirelli’s IPO marked the end of a shareholder pact at Mediobanca, the Milanese invest-ment bank, which has been one of Italy’s most significant power bro-kers.

Hesse says the control of compa-nies by national and internation-al institutional investors tends to improve corporate governance. “It forces the companies to stay focused on day-to-day business and to devel-op a coherent long-term growth strategy, and constantly improve profitability — which improves their survival chances in a globally

competitive market.”However, he adds that

while cross-shareholdings are in general best avoid-ed, in order to improve cor-porate governance, there are times when they are a positive factor, such as when a cross-shareholding could be a first step to a full merger that could raise significant synergies and make a company more suc-cessful.

Langella says that while the unwinding of cross-

shareholdings is the clear trend, it is too early to say if it is wholly positive.

“The reality is that time will tell if unwinding of cross-shareholdings would mean acceleration in the growth trajectories of the companies involved and in the value creation process for all stakeholders,” he says.

The billion euro question is the extent to which an uptick in the equity and bond markets will feed through to the economy.

Hesse says he sees signs for opti-mism: “Bond and equity markets are very important for the development of the corporate sector.”

Overall the market cap to GDP ratio is still quite small in Italy, about 40%, but it is rising. Hesse says a strong capital market as well as a slowly improving banking sec-tor will “improve business sentiment and therefore improve GDP growth”.

Godoli says a country with a strong capital market has a way of funding and growing companies, and attracting talent and M&A. The more active the market is, the more companies come to market, then companies become less local and more European and more competi-tive and more able to attract talent, she says.

“Being listed means you are able to get the best people to work for you. These people create the best companies, leading these companies to become competitive at an inter-national level. In other words, you attract money, you attract talent, and you build a strong future.”

Langella says the equity mar-kets have the potential to provide top class Italian companies with the financing needed to accelerate growth plans. “And that is invalua-ble when it comes to contribution to the overall economic recovery of the country,” he says. s

Valentino Fashion Group may hit the IPO catwalk

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THE RETAIL INVESTOR BASE THE RETAIL INVESTOR BASE

ITALIAN CAPITAL markets have long been underpinned by healthy support from retail accounts.

Just as mom and pop investors have been an important feature of the equity markets in countries like the US, households in Italy have shown a strong preference towards investing in bonds — bolstered by favourable tax treatments.

“This familiarity with bonds dates back to a time of high interest on Ital-ian government bonds and continued in recent years, following the large volume of retail bonds issued by the Italian financial system,” explains Nicola Francia, head of private inves-tors products Italy at UniCredit in Milan.

But there has been a shake-up in the way that retail accounts have been investing their money in Italy.

In particular, investment in bank bonds has been drying up over the last few years.

Consob, Italy’s securities market regulator, estimates that the amount of bank debt in Italian retail portfoli-os shrank by about 28% between 2015 and 2016, for example, accelerating a shift into other forms of investment.

Bank debt securities had become a very popular source of income for many Italians following the global financial crisis, but recent problems in the Italian banking system have eroded people’s confidence in the asset class.

The failure of Banca Marche, Banca Popolare dell’Etruria, CariChieti and CariFerrara in 2015 was perhaps the most important episode to demon-strate how easy it could be to lose money when investing in certain parts of a bank’s capital structure.

More than 15,000 subordinated bondholders suffered losses as part of a €3.6bn rescue of the four banks, and one investor, a pensioner, committed suicide following the collapse of the banks.

These ordinary Italians found themselves caught up in a new world

of European banking regulation, in which the Bank Recovery and Reso-lution Directive (BRRD) and the min-imum requirement for own funds and eligible liabilities (MREL) had spelt out how bail-ins should start replacing bail-outs — or in other words, how investors should bear the brunt of bank failures in the place of taxpayers.

“The impact of European legisla-tion on bail-ins, together with the banking crisis affecting some Ital-ian banks, may have had a nega-tive impact on retail appetite for banks by increasing the percep-tion of the riskiness of the sector,” says Maurizio Gozzi, managing director in debt capital markets Italy at Crédit Agricole in Milan.

But the banks themselves have also been losing their appetites for placing unsecured bonds with retail investors.

Issuers are being careful to make sure that liabilities can comply with MREL, which may require that senior bonds can be bailed-in nearly as easily by resolu-tion authorities as subordinated debt instruments.

Though the Single Resolution Board — Europe’s centralised reso-lution authority — has said explic-itly that it will not exclude retail exposures from a bank’s MREL cal-culation, the supervisor has also expressed doubts about whether or not these holdings would constitute “an impediment to resolvability”.

Indeed, much of the work that has been done on reforming bank creditor hierarchies in Europe in recent years has had the specific aim of making resolutions easier.

In 2018, for example, Italy will join other EU countries in issuing non-preferred senior bonds — a new asset class that has been designed with a bank’s failure in mind.

Because of the way in which Italian legislators have decided to implement the provisions of the Bank Recovery

and Resolution Directive into Italian law, these non-preferred senior debt instruments will have high minimum denominations that will exclude retail investors from the market.

“There is a strong view that these transactions should only be placed with institutional accounts,” says Denis Beltramini, private banks and distributors sales at BNP Paribas in London. “This is not the case with preferred senior bonds, which inves-tors might reconsider buying when

interest rates are more compelling. “But we have seen that banks have

already begun replacing much of this funding in the wholesale market.”

All changeIn the meantime, the Italian mar-ket for retail investments has been adapting to the new operating envi-ronment.

“It’s been quite a dramatic shift out of bonds,” observes Beltramini. “Most of the retail money has moved into asset management products, like funds, and some of it has also gone into current accounts.

“Italians are quite risk-averse in general. They are not willing to invest in the equity markets and they have become less willing to invest in bonds, given that yields are so low. Many have preferred to keep their money in current accounts, even if they are not being paid anything.”

Another alternative to bank bonds that has been gaining traction in

Italy’s retail bond market is going through a profound shake-up in which alternative investments are set to replace bank bonds among the securities of choice for Italian households. Tyler Davies reports.

Italian retail: out with the old, in with the new

“In the current low-yield bond environment,

investment certificates offer investors a defined

return, in the form of redemption value or a

periodical coupon, while allowing them to choose

their own risk profile”

Nicola Francia, UniCredit

020-21 JM_Retail investor base.indd 20 05/02/2018 09:12


THE RETAIL INVESTOR BASE THE RETAIL INVESTOR BASE

recent years is a form of structured note or derivative known as an “investment certificate”.

The term investment certificate covers a broad range of securities that allow retail accounts to add expo-sure to any market by reference to an underlying asset — including com-modities, currencies, indices, interest rates and shares.

The certificates are traded on the securitized derivatives market of the Italian stock exchange (SeDeX), as well as the EuroTLX market, and tend to be issued by banks.

“They represent a hybrid invest-ment — combining the protection of bonds with the yield of the equity market,” says UniCredit’s Nicola Fran-cia. “The most popular certificates in the last few years have been those with full or partial capital protection, while more recently there has been a growing interest towards conditional-ly protected certificates.”

Sales of investment certificates have boomed in the last few years, according to UniCredit.

The Italian bank expects issuers to have placed €8.5bn of the securities by the end of 2017, with total turnover on the SeDeX and EuroTLX passing the €13bn mark. The market was half as large in the previous year.

“In the current low-yield bond environment, investment certificates offer investors a defined return, in the form of redemption value or a peri-odical coupon, while allowing them to choose their own risk profile,” says Francia.

Old wine in new bottles?But issuers of all types financial instruments — including bonds, investment certificates and asset management products — will likely find it more difficult to place their

securities in the hands of retail inves-tors with the arrival of the second Markets in Financial Instruments Directive (MiFID II) which came into effect on January 3.

One key part of the new regula-tions is the rules covering product governance, which aim to ensure that firms are acting in the best inter-ests of their clients when selling new financial instruments.

The product governance framework stipulates that distributors should identify and assess the circumstances and needs of the clients they intend to focus on when designing a product, as well as when placing the securities in the market.

As MiFID II comes into effect at the start of 2018, so too do the Pack-aged Retail and Insurance-based Investment Products (PRIIPS) regula-tions, which require manufacturers — including issuers and underwrit-ers — to disclose information about investments within short and con-sumer-friendly Key Information Doc-uments (KIDs).

A combination of the two sets of rules is likely to pile pressure on the retail bond market in Europe, raising the cost of issuance.

Responses to a public consulta-tion on the Capital Markets Union in June 2017 suggested that “PRIIPs and MiFID II product governance regimes will reduce the availability” of bonds to retail investors and even “consti-tute a barrier to selling products” to these types of buyers.

But the new regulations will not kill off the retail market in Italy, accord-ing to Emiliano La Sala, counsel at Allen & Overy in Milan.

Consob has played a key role in pre-paring the market for these sorts of changes.

“Consob has introduced a number

of guidelines in recent years, aimed at filling the knowledge gap between issuers/intermediaries and retail investors as well as preventing con-flicts of interest in securities markets and strengthening the position of retail investors under MIFID I,” says La Sala.

“The overall aim is for intermediar-ies to always act in the best interest of their clients.”

In some cases, says La Sala, the guidelines have anticipated the impact of the incoming European legal framework of MiFID II and PRI-IPS.

For example, Consob made a series of recommendations in late 2014 aimed at issuers and financial inter-mediaries engaged in selling “com-plex financial products”.

Echoing a number of MiFID II pro-visions, the Italian regulator suggest-ed that intermediaries place certain restrictions on the sale of financial instruments deemed too complex for retail investors, like perpetual bonds, convertible securities and over-the-counter derivatives.

Consob’s guidelines are not com-pulsory, but they can exercise a strong influence on market practice.

“In light of this, the introduction of the new rules, even though it must not be underestimated, might not be as disruptive in Italy,” says La Sala. “Intermediaries already comply with some of the new provisions when looking to place securities with retail clients.”

There is no doubting, however, that MiFID II will have a big impact the shape and size of retail bond markets — even in Italy.

Once the rules have been intro-duced, everyone will have access to far more detailed disclosures around the sales of financial instruments.

“We will have to see how the cli-ents react to this,” says Beltramini. “They may well decide that the costs for some products are too high and switch into other products.”

Italian savers are largely adopt-ing a “wait and see strategy” for now, according to Beltramini, as interest rates hover around historic lows and recent bank bond losses remain fresh in the memory.

Deloitte, the accounting and con-sultancy firm, estimated in May that one-third of Italian investors’ money was parked in deposits and cash.

Putting this money to work will be crucial for establishing new invest-ment traditions for Italian savers. s

0

10

20

30

40

50

60

By 2018 2019 2020 2021 2022 2023 2027 Beyond 2027 Maturity

Source: Bank of Italy (Sep 2017)

Italian bank bonds by holder and maturity

Households Banks in the issuer's group Other Italian banks Other investors Volume (€bn)

Italian bank bonds by holder and maturity

Source: Bank of Italy (Sep 2017)

020-21 JM_Retail investor base.indd 21 05/02/2018 09:12


GOVERNMENT BONDS GOVERNMENT BONDS

LIKE MANY countries recovering from the eurozone sovereign debt crisis, Italy is enjoying a resurgence in investor appetite. A return to the dollar market in 2018 — for the first time since September 2010 — should confirm the sovereign’s impressive recent progress, says Maria Canna-ta, director-general, public debt at the Italian Ministry of Economy and Finance in Rome.

“We have concluded the legal framework on our [credit support annex] agreements for cross-curren-cy swaps with our counterparties,” says Cannata, who had been working on those agreements for some time. “We want to rebuild our dollar curve as we have only two bonds outstand-ing, one redeeming in 2023 and the other in 2033. After that we can look at other currencies. The sec-ond we would consider could be yen, although that would not be for 2018 but the following year.

“Our dollar deal in 2018 will let us reach other investors. We have had some modest inflows from Latin America and the Middle East that had been completely absent until a couple of years ago. This buying action has been in euros but will be greater in dollars.”

Those potential names will add to a list that has grown since last Sep-tember, with Cannata pointing to “some noticeable new inflow from Asian investors, in particular from Japan but also Korea and other areas in the Far East”.

She adds: “We have continued to see a large presence of the usual UK, US, European and Nordic investors. What is fairly new is the inclusion of Spanish investors and banks. There’s quite a lot of interest now in cross-investing between Spain and Italy.

“First of all there is a regional link, with Spanish banks wanting fewer Bonos and more BTPs. This has also

helped institutional investors like insurance companies or asset man-agers to increase their knowledge of our market, so we are also seeing investment from those sectors. This is because we have similar levels of yields and ratings as Spain so we are a natural alternative of national investment.”

Those additional investors were welcome in 2017, a year when Italy faced a near record level of distribu-tions, including some lumpy peri-ods of big bonds redeeming, such as in November. But 2018 will be smoother.

“We sold a €7.3bn BTP Italia in late November that left us with a strong cash position,” says Cannata. “We didn’t allow a larger placement because we didn’t want to finish the year too abundant in cash. That’s also because 2018 will be less heavy in redemptions than 2017. We also in 2017 reduced the volume of T-bills outstanding, so those redemptions will be lower in 2018 too.

“Apart from finding funds for the intervention in the Italian banking sector, there will be a reduction in net borrowing in 2018. That means 2018 is not a concern in terms of the borrowing requirement.”

Bringing the ratio downThe desire to avoid holding too much cash at year end comes from an effort by Italy to reduce its debt to GDP ratio — at about 130%, one of the highest in the world.

“We are committed to reducing our debt to GDP ratio, so we didn’t want to grow our issuance,” says Cannata. “Instead, we have held buyback and exchange transactions and we are waiting for January for any large, new issuance.”

The increasing interest in Ital-ian sovereign debt has been helped in no small part by the country’s

improved economic outlook, even though it still trails some of its peers in Europe.

“Over the course of 2017 there were some positive surprises in terms of growth for Italy, which goes along with the picture we have seen for the eurozone in general,” says Luca Cazzulani, deputy-head of fixed income strategy research at UniCredit in Milan. “We expect the growth environment to remain strong in 2018.”

In September, the Italian Treasury raised its GDP growth estimate for 2017 to 1.5%, up from 1.1% in April, and also increased its 2018 projec-tion to 1.5%, up from 1.0%.

Work to be doneOn top of the GDP figures, inves-tors have keenly watched the Italian government’s reform agenda — and seem pleased with the results so far.

“Italy has reformed employment law in the past couple of years,” says Antonio Cavarero, co-head of fixed income at Generali Investments in Milan.

“You could argue whether the gov-ernment could have done more or reformed in a better way, but things have been improved here and there. Still, there are several outstanding reforms: making the justice mech-anism quicker and more efficient; improving energy and transporta-

Italy may be holding the eurozone’s only major election in 2018 but the vote is causing little concern for bond investors, with a backdrop of solid growth and a new electoral law likely to keep fringe parties from wining outright power. While the improving economic outlook is generally good news, it does raise potential political challenges of its own — although the sovereign is confident enough about 2018 that it is planning to tap the dollar market for the first time in eight years, writes Craig McGlashan.

The Italian sovereign: growth, diversification and dollar return

“There will be a reduction in net

borrowing in 2018. That means

2018 is not a concern in terms of the borrowing

requirement”

Maria Cannata, Italian Ministry of

Economy

022-23 JM_ Government bonds.indd 22 05/02/2018 09:11


GOVERNMENT BONDS GOVERNMENT BONDS

tion; taxes; public administration — there are plenty of angles.”

Some in the Italian market are concerned that the improving eco-nomic outlook could take some of the pressure off politicians to finish that remaining work.

“There was some fairly good pro-gress on reforms in 2017,” says Uni-Credit’s Cazzulani. “Reforms are always an important factor: the more, the better. But one needs to take into account that, given the robust growth environment, the pressure to reform is reduced.”

Much of the reform work could of course be undertaken by a new government, with Italy’s parlia-ment required to hold a general elec-tion by no later than May 20 this year, although reports suggest the vote could happen as soon as early March.

Polling in late January 2018 sug-gested that the centre-right coali-tion, led by Forza Italia, was ahead on 37%-39%, with the ruling centre-left grouping — with the Democratic Party its main member — behind on 28%-29%. The Five Star Movement, an anti-establishment party formed just a few years ago, was performing best when looking at single parties, on 26%-27%, but is unlikely to gain power on these figures, given that it has no coalition partners.

“The risk from the election is that we have a very long transition before a government is formed,” says Italy’s Cannata. “But this government has performed very well in terms of its implementations over the past year, so the risk may not be so great as this government can continue nor-mally while a new executive forms.”

Investors also believe the risk of a populist party such as the Five Star Movement gaining power has been diminished, thanks in part to an electoral law enacted in October that means those parties that form pre-election coalitions — something Five Star lacks — have a higher chance of victory.

“The elections scheduled for the spring will no doubt be a focus for investors,” says Andrea Iannelli, investment director at Fidelity Inter-national in London. “But while the support for populist parties in Italy remains elevated, the recent change to the electoral law should pre-vent them from gaining substantial

power in parliament, even if they receive a large number of votes.

“The market expects some sort of coalition of centrist parties that will diminish the impact the pop-ulist members may have. This reduced political risk has contribut-ed towards a more positive tone for Italian assets and risks — bearing in mind the meaningful impact the European Central Bank has had on Italian government bonds and else-where.”

Cash cutThat “meaningful” impact from the ECB’s buying programme is likely to change in form in 2018, with its annual purchases halving in January to €30bn and running until at least September.

But, as with the election, investors are confident that Italy will be able to ride out the change in demand.

“Overall there will be less sup-port on aggregate from the ECB in 2018, but the net impact will be less substantial than the headline num-ber because of the reinvestment of redemptions,” says Iannelli. “In 2018, net issuance for Italy is likely to be positive, even when account-ing for ECB reinvestments. This con-trasts with 2017, when we had nega-tive net issuance, thanks to the ECB purchases.

“Spreads should remain in check — particularly if the current envi-ronment of strong economics and minimal political risk persists.”

But the mix of a strong expecta-tion of economic improvement in Italy and the eurozone, the reduc-tion in ECB support and the general

election could create some inter-esting dynamics for Italy’s curve in 2018, says UniCredit’s Cazzulani.

“The behaviour of the BTP curve will be a mix of the credit spread and the performance of the German curve,” he says. “The risk-free curve, the Bund spread, might steepen a bit in the first part of the year then, as we approach the end of 2018 and ECB rate hikes come into focus, we will start to see a bit of bear flattening.”

Rate hikes will start to appear on investors’ radars near the end of the year if the economic improve-ment holds and the ECB is ready to end quantitative easing and turn its focus to tightening.

BTP yields are likely to move in line with the German curve at the two to three year part of the curve, says Cazzulani, as the spread is “already fairly tight”.

“But the long end of the BTP/Bund spread in particular has room to adjust,” he adds. “Looking at the 10 year, the picture is a little bit complicated because there are two opposing forces in the first quarter. One is the propensity to enter carry trades, which should help compress spreads. On the other hand, as it’s highly likely the Italian general elec-tion will be late in the first quarter or very early in the second, the poten-tial volatility could create headwinds for spread tightening, particularly those at already tight levels.

“I would expect spreads to recover in the second and third quarter, then afterwards we will have the issue of how to deal with the post-QE envi-ronment.” s

100bp

120bp

140bp

160bp

180bp

200bp

220bp

240bp

260bp

Jan 2 Feb 1 Mar 3 Apr 2 May 2 Jun 1 Jul 1 Jul 31 Aug 30 Sep 29 Oct 29 Nov 28

10y BTP/Bund 10y Bono/Bund

Italy holds �rm vs. Germany and peers over 2017

Source: IHS Markit

Italy holds firm versus Germany and peers over 2017

Source: IHS Markit

022-23 JM_ Government bonds.indd 23 05/02/2018 09:11

24 Italy in the Capital Markets

Tesoro Roundtable

: What’s the picture for ultra-long issu-ance in 2018? Will the scaling back of quantitative easing affect the environment?

Maria Cannata, Tesoro: Apparently, the demand for ultra-long remains quite good, even now. We don’t expect, at least in the first part of 2018, any particular change to that. The sentiment of investors is good. The appetite for long end paper is still there.

However, specifically for very long maturities, like our 50 year, we have noticed some interest in the mar-ket recently. We would likely tap the existing bond. We want to ensure the line is of sufficient size to ensure liquidity, although, as Davide can confirm, liquidity is already very good for the bond.

Davide Iacovoni, Tesoro: Compared with some other peers that have issued in similar maturities recently, we are pretty happy with the liquidity and the feedback

we’ve received from investors. The performance has also been extremely positive compared with our peers in Europe that have issued in that part of the curve.

Antonio Foti, BNP Paribas: Yes, the 50 year transac-tion was a great success, but I agree with Maria — that area of the curve needs more liquidity before accessing longer maturities.

Pietro Bianculli, UniCredit: 2016 was certainly the year of ultra-long. We had Italy, Spain, Belgium and France all hit the 50-year-plus area. In 2017, there was a slow-down, although we did get the 100 year Austria trade.

I think there are two causes of this demand: firstly, the appetite for yield pushed investors to look at longer maturities and secondly, the demand for convexity. This in particular was the main driver for the 100 year out of Austria. The demand is still there. We are expecting there

Participants were:Pietro Bianculli, co-head of investment grade and CEEMEA bond syndicate, UniCredit

Maria Cannata, director general, public debt, treasury department, Italian Ministry of Economy & Finance

Antonio Foti, head of FIG DCM and SSA — Italy, BNP Paribas

Davide Iacovoni, deputy director general, public debt, treasury department, Italian Ministry of Economy and Finance

Gabriele Sacerdote, managing director, head of global markets Italy, Crédit Agricole CIB

Lewis McLellan, moderator, GlobalCapital

Tesoro ready to reap the bene�ts of Italy’s improving economy

Italy has weathered, with remarkable resilience, a turbulent year in European politics. While it still faces its own turmoils — an approaching parliamentary election in particular — its recovering economy and process of economic and political reforms have given investors the con�dence to put money to work in Italian assets. The next 12 months will see the ECB reducing its quantitative easing programme and a host of new regulatory challenges, but the Italian treasury is con�dent that it, and the banks with which it works, will be able to adapt to the new challenges and opportunities 2018 holds. GlobalCapital hosted a roundtable in mid-December to discuss how the year ahead is shaping

up for Italy’s Tesoro and its primary dealers.

024-28 JM_Italy Roundtable.indd 24 05/02/2018 09:10

Tesoro Roundtable

Italy in the Capital Markets 25

to be an opportunity in 2018 to tap the market again. For Italy, the question is whether or not to re-open

the existing line — it is really quite below par at present — or to print a new line. The demand is there for a suc-cessful transaction either way.

Gabriele Sacerdote, Crédit Agricole: Since the ECB will continue to expand its balance sheet, there is con-sensus in the market that rates will not be increased for a long while (at least until said expansion comes to an end). We therefore expect the monetary policy backdrop to support demand for ultra-long maturities and a 50 year BTP tap would be well received.

Cannata, Tesoro: Let me add that we are not consider-ing any ultra-long maturity beyond 50 years because demand beyond there is related to the shape of the curve and is quite opportunistic. Before extending the BTP, we want to be comfortable regarding the capability of assuring the liquidity of our current bonds, and the persistence of demand for an ultra-long maturity in the market.

Foti, BNP Paribas: We, and investors, would like to see a tap of the present 50 year. We can imagine a new benchmark in a couple of years but, before thinking about longer maturities, there must be enough liquidity for the present benchmark.

Sacerdote, Crédit Agricole: A tap is the best choice.

: The ECB has extended the purchase programme to September at least. How will that affect the market in 2018?

Sacerdote, Crédit Agricole: Investors will keep on searching for yield in a low inflation/monetary easing context. But I do not expect the purchase programme extension to incentivise investors to look away from Italy. On the contrary, said extension will consolidate investors’ demand counterbalancing a potential higher degree of market volatility as we get closer to the gen-eral elections.

Foti, BNP Paribas: The dovish tone from the ECB and Mr Draghi will help the European government bond market for sure. The prolonged QE at €30bn a month (plus reinvestment) will support mainly peripheral bonds and we expect some good interest from investors on the long end of the curve. The curve is quite steep, and investors still look for good pick-up.

Cannata, Tesoro: The focus has been particularly on the net purchases, but there are important redemptions in the ECB’s portfolio in 2018, which will be added to the ECB’s net €30bn of purchases. Their presence remains very important. This year, we have significantly fewer redemptions than in 2017. The buy-backs and bond exchange transactions we executed in the last year have further reduced this amount. So, our net borrower requirement for 2018 is lower than for 2017, which should mean less issuance this year.

: What are your issuance plans for the year ahead?

Iacovoni, Tesoro: As we always do at this time of year, we have been running our simulation internally, and

having a lot of meetings with the primary dealers and other investors to assess our strategy. The feedback has been that our commitment to the longer part of the curve is appreciated. We need to be present in the 10-year-plus area in order to standardise our curve as much as possible, to stabilise or increase the average life of our debt.

As Maria said, we have fewer redemptions, so it will be more difficult to increase the average life. That’s why we’ll need to make a particular effort to be present in the longer part of the curve.

For the rest of our strategy, we will maintain a regular presence in other maturities. We have been reducing treasury bills continuously up to 2017, a year when we probably reached the bottom. In 2018 we will likely issue something in line with what we did in 2017 to keep the stock the same size.

If the market allows, we hope to issue a bit more on our inflation-linked programme. In 2017 we issued a new 10 year inflation-linked bond, so we’ll see if there’s space to look at the short end of the curve for the new bonds as well as on the longer part of the curve. It’s a niche part of the market, so we have to assess the demand even more carefully than we do for vanilla bonds.

Cannata, Tesoro: Davide is particularly referring to the European inflation linkers while, for BTP Italia, we have no redemptions in 2018. We want to serve the domestic and retail base, so we’ll be doing at least one, perhaps two inflation linkers if there’s opportunity in the BTP Italia sector.

Bianculli, UniCredit: From a banking point of view, the transparency of the Italian treasury is always appreciated by investors. It adds value to its activities.

The team also had the capacity to select when the right opportunity is available and explore new maturi-ties. The new 20 and 50 year deals were opportunistic, because that’s what the market was demanding. With those done, the Treasury can be a bit more regular in standard maturities.

We see the plan as consistent with the market’s expec-tation.

The topic of BTP Italia is interesting. Italian banks, in 2017, stopped issuing their own bonds, which has reduced the amount of assets available to retail inves-tors. Banks are offering insurance and asset management products but, whereas before Italian retail clients bought banking bonds, now BTP Italia is the main reference.

Maria Cannata Italian Ministry of Economy & Finance


Tesoro Roundtable


The fact that the last deal, with such a low coupon, had almost €4bn of retail demand is a clear indication that this is the retail benchmark and the Tesoro can rely on a dedicated distribution channel.

: How has the change in electoral law impacted the political outlook and market appetite?

Cannata, Tesoro: It’s less the change of electoral law that has led to the market being more relaxed. It’s more the awareness of the fact that the upcoming election should occur at the natural end of the legislature. Some type of transition period is expected, but that’s become normal throughout Europe, with the Netherlands, Germany and Spain. The market is prepared to live with this kind of uncertainty. The only probable consequence is that we will remain very regular and a little boring closer to the election in terms of issuance. February remains a traditionally favourable month in terms of demand to try to exploit this moment.

Foti, BNP Paribas: The perception from Italian investors is that the Five Star Movement isn’t market friendly, but at this stage, polls don’t indicate any chance that it will form a government, which is thanks to the change in electoral law. Currently, the centre right coalition is leading the polls and it’s very unlikely that the Five Star Movement will be able to overtake the coalition even if it is the most voted-for party.

Sacerdote, Crédit Agricole: The new electoral law is not the only factor that contributed to improving the market sentiment (as reflected in the recent positive evo-lution of the spread). We need to take into account also the important signals coming from the Italian economy (in terms of growth, investment outlook and employ-ment dynamics) and the recent upgrade by Standard & Poor’s. This being said, investors will keep on moni-toring the government’s commitment to focus on the reforms needed to pay down public debt, taking advan-tage of the current low rates environment.

: What has the perception been of Italy’s recovery story?

Cannata, Tesoro: The investors, after a long period when the promises seemed to deserve modest and less visible outcomes, have really appreciated the new vitality of the Italian economy. The upgrade from S&P, together with the ECB’s policy announcement have helped to support demand for our assets. This vitality has also been present in the secondary market, which is quite unusual towards the end of the year. The volume traded on electronic platforms grew a lot in November, which is a month in which we traditionally notice a meaningful decline. There is quite strong evidence that it’s a positive time in the market.

Iacovoni, Tesoro: There is debate about how much of this recovery is structural and how much is cyclical, relating to the fact that the rest of Europe is also recov-ering. We don’t know how much in Italy is cyclical or structural but, the feeling is that, looking at the compo-nents of the recovery where we are seeing important signs of resumption in domestic consumption and investment, the recovery is structurally supported and related to the reforms that have been enacted over the past few years.

Bianculli, UniCredit: Aside from the growth, the reforms have really created the right element of investor trust. The banking sector was the source of the biggest problems and, from the beginning of 2017, this problem has been solved.

You can observe this in the performance of Italian bonds across asset classes. We’ve rarely seen second and third tier banks approaching the market before, but they have a chance now — it’s a clear sign of a turn in the situation.

Sacerdote, Crédit Agricole: Reforms have clearly been instrumental in consolidating the recovery of economic growth. Focus on the labour market, the education sys-tem and on public administration (to reduce the bureau-cracy workload) should be maintained in order to stop the brain drain and ultimately promote demography — demography being a key supporting factor for growth.

Foti, BNP Paribas: Investors are looking with favour on the improving economic data. It’s helping to con-solidate perception of the improving Italian banking system. What’s been done up to this point for the banks is considered a great help by domestic accounts, and as a result, the perception of the economy has improved a lot.

: We’ve touched on the S&P upgrade. Are you expecting any ratings changes in 2018?

Cannata, Tesoro: Of course, it’s difficult to say, but I don’t expect anything before the election. Afterwards, we’ll see. Perhaps the removal of the negative outlook from Moody’s. I’m surprised it’s still in place. The nega-tive outlook was put in place in December 2016, but none of the fears that prompted it have been realised.

They expected a weakness of the Gentiloni govern-ment, but it didn’t occur. They expected the implemen-tation of reforms to stop, but, on the contrary, several steps for completing the package of reforms were achieved. They expected low growth, but in the end, it was more than double their forecast. I would expect a stabilisation of their outlook. I think it would be in line with what the market expects. For the rest, I believe that will depend on the development of the situation after the election. I’m confident the performance of the real economy will continue to be strong.

: It’s been a while since Italy printed in a currency other than euros. Are you planning to return to dollars?

Pietro Bianculli UniCredit


Tesoro Roundtable


Cannata, Tesoro: Yes, probably in 2018 Davide will launch the second wave of issuance in the dollar mar-ket. We have completed the process of regulation for assigning a CSA scheme for collateralising exchange rate exposures. The minister is soon to sign, so that in 2018 we will be ready. It will also depend on the eco-nomics and the relative conditions available between the dollar and the euro market, but the intention is to access the dollar market.

Foti, BNP Paribas: We need to see the cross-currency basis swap at an appropriate level, but it really opens up a much deeper market than euros. That’s what we’ve seen with corporates and financials. There is a lot of demand from Asia and the US that it would be use-ful for the Italian treasury to tap into.

: With conditions in euros so good, I sup-pose it isn’t necessarily a given that dollars will be economically worthwhile?

Cannata, Tesoro: Yes, we always have to make sure the levels make sense.

Iacovoni, Tesoro: We need to assess the impact of mon-etary policy in the US and Europe. This is a factor we still need to understand. The rate hike cycle, which the US Federal Reserve is engaged in, while the ECB is still in an expansionary phase, although at a slower pace, may affect how the exchange rate evolves and impact the basis swap rate. This will impact our decision pro-cess and the economics of new issuance.

Cannata, Tesoro: Nevertheless, there is now a channel of the market, and a potential base of investors that we have not tapped into since the sovereign debt crisis in Europe.

Bianculli, UniCredit: The opportunity to diversify is always a positive direction for a treasury. Exploring dif-ferent currencies and distribution channels, like with BTP Italia when it started, is always positive. It adds flexibility.

: In 2016, there was discussion around turning Italy from a nation of savers into a nation of investors. How has this developed?

Sacerdote, Crédit Agricole: The Italian per capita wealth remains high compared to the rest of Europe,

while household debt remains low. Given that situa-tion, the investment appetite has increased in the low rates environment.

This dynamic is reflected not only by the success story of the BTP Italia but also by interest raised by the so called ‘PIRs’ (Piani Individuali di Risparmio) initiative.

The PIRs are investment schemes introduced a year ago to incentivise retail investments in SMEs. The origi-nal target was to raise €10bn and the latest statistics show that said target is now within reach.

: How is the primary dealer model working?

Cannata, Tesoro: It’s working well, but progress is always possible. We have the same 18 dealers that we have had since the beginning of 2016. Two left at the end of 2015 — one because it was leaving the business at a European level, and the other decided that it didn’t have the appropriate strength for distributing Italian gov-ernment bonds. It’s an activity that needs strong com-mitment and solidity in assuring continuity of presence.

It’s a common question for every sovereign — to keep the attractiveness of this kind of business and the reputa-tional value of remaining a primary dealer. It’s not easy, but we have a resilient group.

Iacovoni, Tesoro: It’s an increasingly challenging activ-ity because there’s so much new regulation. MiFID II, for example, has a lot of impact in terms of secondary market trading. We are sure that all the players will adapt to the new environment, but we expect some adaptation period in the new year, that will likely strain primary dealers’ activities.

: With the syndicated market so healthy, are private placements still useful?

Cannata, Tesoro: The private placement process is based on reverse enquiries. In 2017 we had none. There’s so much choice in the market with liquid bonds. I think the need for liquidity is even more relevant now than in the past. I don’t know if the change in the regulation has influenced the lack of appetite for private placements. In any case, it’s a part of our programme, designed to satisfy demand.

We’re not interested in using complex structures. Over the last year, the supply in the public market was enough to satisfy demand.

Foti, BNP Paribas: We have seen, during the past year, fewer enquiries for private placements. With the inau-gural 50 year BTP and the new BTP 30 year syndicated transaction, investors have been keen to tap public transactions rather than enter long-dated private place-ments. In past years, there were no syndications in that territory, so private placements were a good means of serving that demand. Today it’s definitely more appeal-ing for investors to buy liquid transactions.

Bianculli, UniCredit: This is the feeling that we’ve had as well. In the past, private placements were primarily in the ultra-long part of the curve and often on inflation-linked bonds, but now that’s open to the public markets, investors prefer the more liquid options, even if it’s buy-and-hold investors.

: It’s been mentioned that liquidity was

Davide Iacovoni Italian Ministry of Economy and Finance


Tesoro Roundtable


very good in the last year. What underpinned this?

Cannata, Tesoro: It’s difficult to say the cause, but the year was made up of two parts. Up until the French elec-tion, liquidity suffered but it improved after that. Iacovoni, Tesoro: I think that despite the turbulence, what underpinned liquidity in 2017 was the efforts of market makers, even those beyond the primary dealer pool. There’s also the fact that there’s been a growing electrification of trades, bringing new impetus to the liquidity of the market.

We can’t compare the liquidity right now with the liquidity that we had before 2008. Nonetheless, we have to put things in comparative terms. The general feeling is that the Italian market is still able to provide a very good standard of liquidity on almost all products.

Cannata, Tesoro: It’s important that we have a strong cash market, but also a strong repo market. It’s not so common now in Europe. The Italian repo market is by far the largest one in Europe.

Foti, BNP Paribas: BTPs and Italian bonds remain very liquid, although we had a couple of events that affected liquidity. The market was, as Maria men-tioned, a bit nervous before the first round of the French election but, overall, liquid-ity remained a strength of the Italian market. Primary dealers continue to sup-port Italian bonds in the secondary market, which is appreciated by domestic and foreign investors.

We’re not concerned about changes in the future. I think that liquidity will remain good in BTPs and Italian govvies, which is important for investors to be involved in the market. Without liquidity, international investors cannot participate in BTPs.

I wanted to highlight the Tesoro’s efforts in primary auctions. Now that there’s no over-bidding in primary auctions, international investors can participate in them without fear of surprise in pricing.

Sacerdote, Crédit Agricole: The regulations coming into force in 2018 (MiFID II and IFRS 9) should not be detrimental for market liquidity. And the recent good news on Basel IV also represents a supporting factor: the new rules will enter into force in 2022 with a grandfa-thering period of five years and the risk weighting on government bonds has not been introduced.

The European Banking Authority calculated that the additional capital requirements for banks will be sig-nificantly lower (€40bn) than what originally estimated by the market (€800bn-€900bn). This being said, the overall cost of the regulatory framework will be increas-ingly punitive for market participants, and this might be reflected in terms of higher returns needed to justify an active presence in financial markets.

Bianculli, UniCredit: For sure, the regulation is the one that pushes some specialists to step out of the business. It comes back to the topic of liquidity. Predictability and

liquidity are the two best aspects of the Italian treasury. We expect something of a grace period at the beginning of 2018 for the MiFID II impact, not because people don’t understand the requirements, but simply because it takes time to set up.

Cannata, Tesoro: Yes, it’s technologically a demanding process, adapting the models to the new requirements.

: We have a French sovereign green bond and social bond from Cassa Depositi e Prestiti. Are there thoughts of an Italian sovereign green bond?

Cannata, Tesoro: We have not concluded our reflections on that. Honestly, the preliminary evidence indicates that Italy is not likely to approach the market soon. Most kinds of eligible expenditure take place at a local level. This has slowed our ideal path to enter the market. We have to assess if it is appropriate for the sovereign because, in this market, the most important part is ensur-ing proper implementation, monitoring and reporting of the usage of the revenues of this type of issuance. If it’s disbursed at a local level, it’s not easy to report at a sov-ereign level. However, the analysis is not yet concluded.

Sacerdote, Crédit Agricole: When we talk about green bonds, the key point to be considered is the opportu-nity to diversify the investor base. The total SRI assets under management in Europe is estimated to be €12tr, of which the pure fixed income share is close to €8tr. The resultant gap between supply and potential demand should definitely be kept into account in a market con-test which is expected to become more volatile.

: How do you feel the reaction of the Italian press to the developments in the Italian economy has been?

Cannata, Tesoro: Generally speaking, the press have preferred to emphasise problems, rather than positive results, but it’s not a specific Italian problem. When I speak to my colleagues in other countries and complain about such a stance in the press, they tell me that it’s clear that I don’t read their newspapers.

Nevertheless, the progress in the performance of the economy is all positive and more neutral newspapers have started to give some evidence of this.

Still, we must not forget that we are now in an elec-toral campaign and that the tone of the debate is increas-ing noticeably and that this is reflected in the press. s

Gabriele Sacerdote Crédit Agricole CIB

Antonio Foti BNP Paribas



THE BANKING SECTOR

IN APRIL 2016, the architects behind the private bank rescue fund known as Atlante came together to discuss some serious business.

The worry was that a number of Italian banks would fail to raise equi-ty from private investors and would then themselves fail, bringing about severe losses for investors and trigger-ing a systemic crisis in Italy.

Atlante’s creators were desperate-ly trying to think of a way to avoid a catastrophe and plug the sector with some sorely needed capital, without breaching Europe’s tough new rules on state aid.

But fast-forward less than two years and those heightened concerns are already starting to feel like distant memories.

Italy’s banking system witnessed a remarkable improvement in fortunes

following the controversial and dra-matic rescue of Banca Monte dei Pas-chi di Siena at the end of 2016.

The recapitalisation was able to tap into a near €4bn injection of taxpayer money and was criticised for break-ing the spirit of Europe’s new bank rescue regime. But the decisive action cleared up a major source of uncer-tainty that had been hanging like a dark cloud above Italian banks for the best part of a year.

In June, public funds were also called upon to smooth the liquidation processes for Banca Popolare di Vice-nza and Veneto Banca, whose futures had weighed heavily in the minds

of those involved with the original Atlante fund.

“These solutions were a turning point, not only for the Italian banks but for Italy in general,” says Antonio Foti, head of FIG DCM Italy at BNP Paribas in London. “It proved that the country could find a solution to its financial difficulties that wouldn’t disrupt the entire market and, impor-tantly, would minimise losses for retail bondholders.”

Lorenzo Codogno, head of LC Macro Advisors and former director-general at the Italian treasury, says: “There will likely be some additional problems with small lenders, but the systemic risk for Italian banks is basi-cally gone.”

The country’s largest and safest banks have also put considerable effort into cleaning up their acts.

UniCredit made important pro-gress with its turnaround plan in 2017, raising €13bn of equity in 2017 and putting itself on track to offload €17.7bn of bad loans. And Intesa Sanpaolo’s efforts to reduce its stock of non-performing loans have been similarly commendable.

It should not come as a surprise, then, that the nation’s lenders have been taking advantage of the newly positive backdrop by flooding back into the capital markets.

Italian banks managed to place about €35bn of new bonds in euros and dollars in 2017, according to Dealogic, more than doubling their efforts from a year earlier.

Rare issuers were included among the names of returning borrowers. Banca IFIS and Banca Sella both managed to raise tier two capital in the autumn, for example, while Banca Sistema tapped the market for senior debt.

“There was turnaround in sen-timent towards Italy in 2017,” says Maurizio Gozzi, managing director in debt capital markets Italy at Crédit Agricole in Milan. “Investors started to buy second and third tier banks,

which had previously been shut out of the capital markets.

“The Italian banking sector has largely been recapitalised. Investors have realised this and they have start-ed to position overweight on finan-cials versus corporates.”

Home or away?But Italian banks are hardly out of the woods yet.

Over the next four years, the coun-try’s lenders will have to raise very large quantities of senior funding as they look to comply with Europe’s capital standard, the minimum requirement for own funds and eligi-ble liabilities (MREL).

Italian financial institutions will join many other EU countries in issu-ing these riskier, non-preferred senior instruments, which recognise explic-itly that resolution authorities have the power to bail them in should they need to.

At the same time, the banks will no longer be able to take on cheap four year loans from the European Central Bank as part of the targeted longer-term refinancing operations (TLTROs).

This will represent a big shift in the funding profiles of some Italian banks, which have previously leaned on the TLTROs and the retail market as reliable sources of funding.

“Eventually I think the banks will get the funding that they need, but the problem is at what price they will get it,” says Codogno.

“If the price is too high then it could undermine their long-term profitability. This is a very challeng-ing issue in my opinion.”

In its most recent macroprudential bulletin, the European Central Bank said that foreign investment would be key in keeping MREL costs down.

The ECB expressed concern about “home bias”, commenting that a large proportion of Italian bank bonds were held by other financial institu-tions, with most of those firms also

A remarkable year of recovery has put Italian banks in a far stronger position to raise huge quantities of bail-inable senior bonds and clean up their balance sheets. By Tyler Davies.

Italian renaissance allows banks to return to the fold

“We saw a lot of foreign demand for

Italian bonds in 2017, in particular from the UK. I expect that will

continue when the banks start issuing

non-preferred senior“

Antonio Foti, BNP Paribas

029-30 JM_Banking sector.indd 29 05/02/2018 09:06


THE BANKING SECTOR

residing in Italy.But Foti is confident that issu-

ers will be able to attract the invest-ment they need from international accounts without too much trouble.

“We saw a lot of foreign demand for Italian bonds in 2017, in particular from the UK. I expect that will contin-ue when the banks start issuing non-preferred senior.

“2017 proved that there is a lot of interest in Italian paper — we have seen a number of inaugural, sub-benchmark and even unrated trans-actions perform very well in the pri-mary and secondary market.”

Italian issuers are likely to test the water for non-preferred senior bonds as soon as they can in 2018, given that they will be sidelined for full-year earnings blackouts in parts of the first quarter and may have to contend with volatility around the upcoming general election.

Fortunately, the Single Resolu-tion Board has signalled that banks will have up to four years to comply with MREL, with transition periods accounting for each bank’s specific financial situation.

Financial institutions may also be able to include an amount of old-style senior debt equivalent to up to 3.5% of their risk-weighted assets as part of their bail-in capital.

“Net interest margins are still suf-fering because of the rates environ-ment, and banks are going to have to start replacing what is maturing in the retail market by financing in the wholesale market,” says Gozzi. “With such a pressure on margins, issu-ers will likely go for cheaper funding sources of MREL. That doesn’t mean we won’t see supply of non-preferred senior in 2018, of course. But banks will be considering their options in the preferred senior asset class.”

Making a molehill out of a mountainAn even bigger challenge for Italian banks may be tending to the asset side of the balance sheet.

NPLs are one of the hottest top-ics in European finance, and Italy is home to a large proportion of the region’s bad debt.

Despite great progress in offload-ing NPLs in 2017, it is hardly likely to be an easy ride chipping away about €150bn of bad loans in the coming years.

“NPLs will be one of the main top-ics for Italian banks going forwards,” says Foti. “It remains to be seen how

different issuers will approach sell-ing their bad loans, but I think it is clear that we will see further use of the government guarantee scheme on NPL securitizations in 2018. It takes time, but gradually the problem will be fixed.”

Regulators also have the issue in their sights.

Market participants expect that a recently dismissed ECB proposal to make banks provide full coverage for the unsecured portion of new non-performing loans within two years could eventually come back to bite the Italian lenders, for example.

And sandwiched between a series of positive updates from UniCred-it at its latest capital market day, a warning appeared that the European Banking Authority’s guidelines con-cerning common standards for credit risk modelling might heap further pressure on the sector.

UniCredit said it would apply the guidelines ahead of time, shaving a hardly insignificant 80bp of capital from its common equity tier one ratio in 2018.

Given that the guidelines sug-gest that banks should be more con-servative when calculating the risk parameters of their loss-given default models, they could be particular-ly harmful for banks with high NPL ratios.

“You need to look case-by-case,” says Codogno. “Some banks can afford to keep their NPL positions and work on them internally. Other banks have no choice but to sell the positions. It is up to the regulator to look at each individual bank.”

Piecing the puzzle togetherBut over the past two years, Italy has put itself in a much stronger position to revitalise its financial system.

“The big elephant in the room for the country has always been the banking sector but bank balance sheets have improved, particularly after the ECB took over the moni-toring of the European banks,” says Andrea Iannelli, investment director at Fidelity International in London. “Lending towards the real economy has also improved and the cost of bor-rowing has fallen accordingly.”

Market participants are asking themselves how far the recovery can go in Italy, and how quickly it can take place.

To some extent, the country is still playing catch-up.

Foti notes that some senior unse-cured bonds from national champi-ons have started trading through Ital-ian government bonds.

But Italian government bonds are also still yielding some 30bp more than Spanish Bonos, despite political risks around Catalonia in Spain.

“What really puzzles me,” Gozzi says, “is that some Spanish banks are trading much, much tighter than their Italian counterparts. This is an opportunity for investors. The spread between the jurisdictions is too wide.”

And Italy’s lenders will be relying on the national economy strength-ening further in the coming years to underpin investors’ growing expecta-tions around profitability and asset quality.

“There has been a huge return of confidence in Italy,” says Codogno. “But there remains some doubt about the long term viability of the banks — their equity valuations are still low compared with other institutions.

“You could look at this in two ways. On the one hand there is still potential, which is good. But on the other hand, the situation is not fully improved in Italy yet.” s

-1.2

-1.0

-0.8

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

01/03/10

01/08/10

01/01/1

1

01/06/11

01/11/1

1

01/04/12

01/09/12

01/02/13

01/07/13

01/12/13

01/05/14

01/10/14

01/03/15

01/08/15

01/01/1

6

01/06/16

01/11/1

6

01/04/17

01/09/17

Rea

l GD

P g

row

th r

ate

(%)

New

bad

loan

rat

e (%

)

Source: Bank of Italy, Central Credit Register, Istat

New bad loan rate and GDP growth in Italy

New bad loan rate Real GDP growth rate

New bad loan rate and GDP growth in Italy

Source: Bank of Italy, Central Credit Register and Istat

029-30 JM_Banking sector.indd 30 05/02/2018 09:06


Banks Roundtable

: In the last year or so, banking authori-ties have stepped in to deal with Banca Monte dei Paschi di Siena, Veneto Banca and Banca Popolare di Vicenza, which had all been concerns for market participants looking at Italy. Do you think that this changed the outlook for Italian banks at the start of 2018?

Maurizio Gozzi, Crédit Agricole: The precautionary capitalization of Monte dei Paschi di Siena and Intesa Sanpaolo’s intervention into the two Venetian banks represented a turning point for the Italian banking system. The market was also boosted by the recapi-talisation of UniCredit and its subsequent disposal of a large stake of non-performing loans. This chain of events made investors more relaxed vis-à-vis the Italian jurisdiction, and we are seeing the effects very clearly in a crowded pipeline of Italian financial insti-tutions launching quite successful transactions since the fourth quarter of 2017.

Antonio Foti, BNP Paribas: Sorting out the problems with the Venetian banks and Monte dei Paschi proved to the international market that Italy was solid. You only have to consider the issuance we saw out of the country last year. Not only did we see AT1s from Inte-sa Sanpaolo and UniCredit with massive interest from international accounts, but we also saw very interest-ing transactions from newcomers.

Banca IFIS sold €400m of tier two capital and there was a senior deal from Banca Farmafactoring, which was unrated. If you think also that we had tier twos from Banca Popolare dell’Alto Adige and Banca Sella in the second half, and Banco Desio sold a covered bond trade, which was an inaugural trade that got €1.7bn demand.

There were new issuers approaching the market with great success, attracting strong demand from both domestic and international accounts. It is clear that foreign investors became much more comfortable with Italian risk in 2017.

Participants in the roundtable were:Filippo Alloatti, senior credit analyst, Hermes Investment Management

Filippo Casagrande, head of multi-manager solutions, Assicurazioni Generali

Antonio Foti, head of FIG DCM Italy, BNP Paribas

Maurizio Gozzi, head of FI DCM Italy, Crédit Agricole

Carlo Masini, head of group treasury, Mediobanca

Roberto Rati, head of financial institutions group Italy and Southern Europe, UniCredit

Tyler Davies, moderator, GlobalCapital

Italian banks face up to MREL and SRI after year of progress

Italian �nancial institutions had an exceptional year in 2017. Banks that had been �irting with collapse were either recapitalised or allowed to fail, with very little disruption spilling over into the broader market. All this helped to make Italy an attractive destination once again for international investment, clearing some of the clouds hanging over the �nancial system and allowing �rms to increase the volumes of debt they placed into the public capital markets.

But that does not mean that the coming years will be without challenges for Italian �nancial institutions. Banks will have to make their �rst steps towards meeting the minimum requirement for own funds and eligible liabilities (MREL) with senior debt, and they will have to prepare themselves for the point when they can no longer rely on the European Central Bank for cheap funding.

In this roundtable, held in Milan in January, prominent market participants came together to discuss these issues and more with GlobalCapital.

031-39 JM_italian Banks roundtable.indd 31 05/02/2018 09:02

Banks Roundtable


: Filippo, as an investor, does that match your view of the market in 2018?

Filippo Alloatti, Hermes Investment Management: Everyone was expecting some type of solution for Monte dei Paschi and then it finally happened. In my opinion it took far too long, but there were many rea-sons for the delay — including various demands from Brussels and meddling from the Single Supervisory Mechanism. Of course, now that the country has dealt with Veneto, Vicenza and Monte dei Paschi then the focus has shifted on to the smaller banks. Even if you exclude some of the extraordinary operations that need to be completed in the sector — like the €26bn Monte dei Paschi securitization and several small GACS secu-ritizations — still there is a lot of work that remains to be done.

Roberto Rati, UniCredit: The outlook is certainly get-ting brighter. The systemic risks of the past have been addressed and the Italian banking system is now well equipped to manage any further troubles that might arise for smaller banks. That is an important point. At the same time, asset quality is continuously improving, helped by the positive macroeconomic environment and GDP growth. In the short term, however, banks must contend with further pressure on net interest margins — mainly due to the higher cost of regulation related funding.

Carlo Masini, Mediobanca: Yes, the macro environ-ment is very benign and the regulatory capital frame-work is now better defined as well. There is of course a profitability issue, which we need to deal with, but I am pretty positive going forward and I think that 2018 will be another good year for issuance — at least until the interest rate hikes from the US Federal Reserve start to weigh on the market.

: Now that the non-preferred senior law has been passed in Italy, banks will have to start thinking about issuing for MREL. How big a chal-lenge is this going to be for Italian banks?

Gozzi, Crédit Agricole: Italy came late with non-preferred senior debt because for a while there was no relevant law in place. UniCredit has now launched a very successful transaction, attracting more than €4bn of demand. And on top of this, the bank also secured a very attractive cost of funding. If you look at the ratios vis-à-vis the senior preferred class and tier two for the bank’s global peers, you realise that UniCredit’s pricing outcome was very compelling. That further underlines the appetite for Italian assets — especially for good quality Italian assets, which is the case for UniCredit.

So the inaugural non-preferred senior issue out of Italy has been a big success, and I hope it will pave the way for more issuers to come. Clearly UniCredit is the most obvious candidate to have opened the market in Italy as, being a G-SIB they have to comply with TLAC. But we do expect that D-SIBs will come with deals later on. They will be leveraging on the success achieved by UniCredit.

Foti, BNP Paribas: The non-preferred senior instru-

ment is already established with plenty of trades issued by European banks — and even the Italians now after UniCredit’s deal this January. The instrument is well known and you can already compare it closely with other regions, which is good for Italy.

We saw UniCredit attract a massive book of more than €4.1bn for its €1.5bn deal, which was printed at 70bp over mid-swaps. Clearly the market was expect-ing UniCredit to open this new wave of issuance, as the only G-SIB in Italy and the only bank subject to TLAC. But all the other Italian banks will also be issu-ing for MREL reasons. We expect that other issuers will come to the market this year, but we don’t think that they will have the same rush as UniCredit.

Rati, UniCredit: MREL means banks will have to man-age their capital structures increasingly cost-efficiently — likely leading to an increase in the use of senior non-preferred bonds. In terms of impact on the net interest margin, new instruments such as these could create a favourable environment — with more efficient pricing than subordinated debt. Senior non-preferred bonds introduce an additional protection buffer for investors, while simultaneously helping to de-risk the rest of the senior debt class. Considering the assign-ment of MREL requirements, senior non-preferred bonds also look to be the right kind of instrument for tier two banks’ funding purposes.

UniCredit recently opened the non-preferred market in Italy with its inaugural deal, and, as Maurizio says, we now expect the domestic SIFIs to come out with their own issuances, with other financial institutions following suit. Italian banks would be well advised to issue this kind of instrument in order to improve their compliance with Europe’s various regulatory targets. The system may have reached the market late, but the instruments are now available and there is a clear need for them.

Gozzi, Crédit Agricole: What I have also heard is that there are some banks that are looking at filling their MREL requirements with subordinated instruments only, which is a virtuous attitude that I expect to be rewarded by investors.

And then you also have other banks that are making calculations on how to fill MREL with senior preferred bonds. Because senior preferred is eligible to fill MREL

Roberto Rati UniCredit


Banks Roundtable


requirements up to a certain extent. In this respect it is worth noting that Italian non-systemic banks will probably be helped by the corporate depositor prefer-ence that kicks in in January 2019. These changes will widen banks’ eligible space for senior preferred to fill the MREL requirement.

I would also say that the market should get even more mature when issuers get the firm MREL require-ments that they need from the SRB. I think that these figures will come very soon — I expect them to be announced in the first quarter. As soon as the banks get those requirements, investors will know what issu-ers need to do in the market. This is already known for the G-SIBs, because they have to fill their TLAC bucket by 2019.

: Carlo, what is your approach to the market this year?

Masini, Mediobanca: We are looking at senior non-preferred with great interest. We think that it’s going to be a useful instrument to gauge the right capital structure, MREL requirements and relative cost of funding and I am looking forward to participating in this new market.

What we see from UniCredit is that the premium between senior preferred and senior non-preferred is between 20bp and 30bp. So it is definitely cheaper than a tier two transaction, for instance. Also we will be looking closely at how the spread between senior non-preferred and senior preferred evolves.

We do think that we start from a very healthy MREL position. However, MREL requirements are different depending on the type of institution: the subordination requirement is a key concept. Although Mediobanca does not have the subordination requirement, senior non-preferred might still be a very useful instrument to use.

Investors will set the agenda on the convergence of pricing of senior preferred bonds between different capital structures. For instance, Mediobanca normally compares itself with Intesa Sanpaolo and UniCredit, and they will most likely have different capital struc-tures, so we will see whether or not investors will push us towards a G-SIB-like capital structure or if they are comfortable with MREL buckets made up of senior unsecured funds.

: Let’s ask the investors. How do you look at Italian banks as they start reshaping their liability structures for MREL?

Filippo Casagrande, Assicurazioni Generali: I believe that rather than the ability, the key ques-tion mark is the indeed the cost. This is a regulatory requirement and hence it has to be fulfilled by the banks. The successful placement of the Monte dei Pas-chi lower tier two in early January shows that there is an interest for Italian banks, however the yield that investors demand is high and clearly a large volume of issuance commands even a higher premium as inves-tors know that there will be a ceaseless stream of sup-ply that is driven by a regulatory requirement.

The best way for Italian banks to go about comply-ing with the capital regulation in a short space of

time is to be transparent — i.e. clearly communicating their plans and following them through. In terms of market strategy, the large Italian banks have sufficient size and adequate ratings to tap different currencies to broaden the spectrum of buyers, to which the Intesa deal in US dollar in early January testified.

The key risk from MREL is that in order to achieve compliance with the rules at an acceptable cost, banks will be less inclined to lend money to the economy to reduce risk-weighted assets. This is a macro risk for the economy rather than a risk for the banks per se.

On the other hand, it is clear that private wealth managers and the asset management industry remain very interested in getting involved in buying any prod-ucts that yield something, and so of course there will be plenty of demand for riskier investments.

Alloatti, Hermes: It’s good that the law has finally come in and Italy has put its banks in the situation to be able to issue these non-preferred senior instru-ments. We were expecting UniCredit to open the mar-ket as the only G-SIB in Italy, and I think it has done that relatively well. The other banks will now follow.

Monte dei Paschi has signalled some potential inter-est in exploring this avenue, for example, probably not this year but maybe next year — depending on how things evolve over time. We’ve heard from Carlo that Mediobanca is potentially looking at the instrument too, and we also know that banks like UBI Banca or BPER (Emilia-Romagna) could tap into the market in the near or medium term future.

In terms of pricing, I guess that’s the big question. We need to be clear that even though this instrument carries a senior label, it is a subordinated bond and it is loss-absorbing capital. So should we price these instruments closer to ordinary senior bonds or closer to subordinated tier twos?

There are a couple of schools of thought in the market. There are those that think that there is less value as non-preferred senior spreads gets closer to the preferred senior stack — and maybe then a straight-forward tier two becomes more interesting. But, on the other hand, if you are investing in a well-managed institution with a decent capital buffer and a clear path to reducing NPLs — like UniCredit or Intesa in Italy and perhaps like Crédit Agricole or BNP Paribas in France — then of course it should not be worrying

Filippo Casagrande Assicurazioni Generali


Banks Roundtable


that senior non-preferred starts to trades closer to the senior.

It will be a real test for the market when the second tier, especially the lower rated banks, come to issue senior non-preferred. I don’t expect that there will be massive issuance out of the second tier, but it will be interesting to see how these deals price versus the Uni-Credit deal and other recent issues.

Foti, BNP Paribas: The majority of the second tier banks do not have not any senior deals outstanding, so it is going to be very challenging to price these new trades. There are covered bonds out there, as well as tier two, but you will not be able to look at the price of a preferred senior deal first and work up to get the price for a non-preferred trade.

Clearly one of these banks is going to have to make the first step in the market. When they come they will certainly need to pay a premium compared with UniCredit, which paid about 22bp over the preferred senior curve. It was a great transaction. UniCredit is very solid in terms of capital and investors can feel comfortable to invest in this new asset class. Not many other Italian banks can count on this backstop of AT1, as tier two would be the first line of defence after equity.

Gozzi, Crédit Agricole: This is a very interesting topic. Many investors are now playing the game on a relative value basis. They are valuing bank capital structures from the bottom up, but they are also assessing the spreads versus Spain. There are some striking points to be made here. In government bonds, for example, 10 year BTPs are paying 50bp more than Bonos and we do think that this is exceeding the fair value between the two countries.

When you look at financial institutions, this gap can-not but be reflected. Looking at fundamentals, I expect that there will be some compression between Spain and Italy from a government bond and a financial insti-tution perspective. That’s my view.

: Antonio, would you agree that Spain and Italy are too far apart in terms of valuations?

Foti, BNP Paribas: Yes I would. There is increasing interest in Italy because if you are an investor in north-ern Europe, the returns you can get from issuers there are extremely low. If you want to get a better margin you need to look at southern Europe. And when you can see that Spain is trading 50bp tighter than Italy on the 10 year Govies, then it is clear which country looks more attractive.

I really hope Italy can move tighter to Spain, 50bp is a big difference. The countries shouldn’t trade flat to one another, but they should trade much closer in line. That should also have an impact on other types of funding instruments, such as those from the banks. If the BTP tightens then we would expect that bank fund-ing costs will also be driven down too.

: There has already been a lot of discus-sion about the general election in Italy this March. Do you think that market participants should be worried about the upcoming vote?

Masini, Mediobanca: Well the market doesn’t seem very concerned yet and I think pretty rightly so in that the new electoral system that Italy has given itself is one whereby the natural outcomes are coalitions — and coalitions rarely have extreme positions. So, unless something very strange happens, I think that there’s not going to be a lot of disruption to the market. Of course, there’s going to be a little volatility but I don’t expect a big issue.

Casagrande, Generali: We saw the outcome of the vote in Catalonia and there has been little fallout in the market from that. At a different point in time you might have expected that this would cause a repricing with the large domestic banks suffering. But we have seen very little change in the market following the vote in Catalonia. From an investor perspective, it is important to note that the European framework is still in place.

The other element that is important to note is that, whatever the outcome of the elections, nothing will derail the positive trends we are starting to see in terms of M&A and consolidation in the Italian ban-king system. That is more of a management issue than anything related to regulation or politics. So I can’t see anything disruptive resulting from the election.

Alloatti, Hermes: Yes, I think so far the market has been very sanguine on the sound bites coming out of Italy and to some extent it’s quite remarkable because — as you would expect in an electoral campaign — all the parties are going out and promising everything and more to the electorate and also, of course, trying to get votes from the opposing parties. But the market has been relatively ebullient. It has been really discount-ing all those promises on pension reform and on the labour market, and so on.

I guess that what the market is focused on at the moment is that it seems quite likely that the result will be either a clear majority via a centre right coalition, or there will be some sort of grand coalition. And, as people have said, there will likely be a limited impact in any event. Almost every single party now agrees that it does not make a lot of sense to call a referen-dum on EU membership — which, by the way, is also not enforceable in Italy. So, there is a limited amount of damage that the parties can do.

Carlo Masini Mediobanca


Banks Roundtable


No matter what there will be a government in a clear position to govern and they may try and have a bigger say in Brussels. It could well be that in the second half there is a closer link between Germany and France and then it could be good for Italy to remind itself that it was one of the founding partners of the European proj-ect. I think that’s what they should be thinking of in the mid-to long-term.

Gozzi, Crédit Agricole: I would add, if I may, that with Great Britain leaving next year, Italy is going to get an even bigger role within the European Union.

Alloatti, Hermes: Yes, it could be an opportunity and hopefully this opportunity will be seized by the gov-ernment in power.

: Would you expect there to be volatility in the market closer to the election date?

Foti, BNP Paribas: At the moment the market is amaz-ing. We haven’t seen anything in terms of repricing and volatility ahead of the vote in March. It feels like the election won’t ever happen. In a way that is good because it shows that investors feel confident, but later I expect that volatility will arise. My personal view is that issuers should wait until after the election before approaching the market. We have already seen Ital-ian bond deals — covered bonds from UBI and Banco BPM, the Monte dei Paschi tier two, UniCredit in non-preferred senior and Intesa Sanpaolo in dollars. But now most banks are in their blackout periods. They will come out in February after reporting earnings, but we will then be in the middle of the election cam-paign, so I don’t expect many issuers to tap the market.

Rati, UniCredit: Economic data on Italy has been encouraging for some time and is looking increasingly positive. Of course, we often find that elections can create a little short-term volatility — but this could actually be considered an opportunity for investors.

In terms of delivering on banks’ funding plans, sev-eral issuers have already accounted for a pause in issu-ance around the election — hence the spate of issuance in early January. They will likely restart accessing the primary market after the vote.

: Roberto said that volatility could potentially be an opportunity for investors later this quarter. So how are the investors approaching the election date?

Casagrande, Generali: Well, I would come at it in this way. As investors we are living in a world where volatility simply doesn’t exist anymore, frankly speak-ing. We’ve already seen the example of the vote in Catalonia and we’ve seen the example of the French elections. But we are also living in a very good time for growth worldwide, which should benefit Italy. So, what I’m saying is that I don’t think the election will change the macro environment for Italy. As far as we see, we will maintain our investment guidelines no matter what the outcome of the election. Volatility is welcome, but I don’t think, again, that it should derail the economy or any bank funding plans.

Alloatti, Hermes: Yes, I would agree. Like Generali, we are a long-term investor. There should be opportu-nities in the short term, because there could be bouts of volatility around March 4 or rather March 5 — when the announcement comes out — but the impor-tant thing is to see how that volatility plays out over a long period of time. We had volatility in the UK with Brexit in the summer of 2016 and we have volatility around Catalonia, but those volatilities were relatively short-lived. If you think of the Catalonia vote last year, there was some weakness in some specific Spanish institutions — like CaixaBank and Banco de Sabadell — but then those weaknesses were forgotten about in a matter of a couple of weeks. So, it was actually a good entry point for investors. CaixaBank is a very good franchise in Spain, for example, and it didn’t make a lot of sense that the bank’s bonds should drop by about two points on the result of the vote, just because it was headquartered in Barcelona.

As for the French election in 2017 and the spread differential between the OAT, the French sovereign and the bonds — I think it went up to 55bp or even 60bp, which is quite a lot because historically it’s been more around 20bp-25bp. But then, of course, that also disap-peared in a space of about in three or four weeks and we were back to the long-term average. I guess that’s something worth watching ahead of the Italian election as well, because there could be an opportunity to get assets with a very decent yield, yes.

Masini, Mediobanca: The other thing to note is the lack of volatility with government bonds. We certainly won’t see a 2011 scenario, when spreads ballooned. The situation is now very different in that domestic investors are predominant and the ECB holds a large proportion of the stock of BTPs. So, the situation is very different in terms of both technical and also with the macro backdrop: there is healthy growth in the US, emerging markets and in Europe as well. So, this is a much healthier starting point.

Alloatti, Hermes: I would add to that by saying that investors now realise that even Italy can grow — per-haps 1.5% of GDP growth, even 1.6% or, God forbid, 1.7%. That’s quite an achievement for an economy like Italy because, remember, in 2016 very few people

Filippo Alloatti Hermes Investment Management


Banks Roundtable


expected Italian GDP to grow by more than 1%.So it was actually a surprise to see that the OECD,

the IMF, the European Commission and even the government predicted lower GDP growth for 2017. It doesn’t really happen very often that the government is, so to speak, bearish on the growth. I think probably investors are assessing this now.

Casagrande, Generali: Yes, macro-wise things do look very good. If we find out that Italy’s GDP grew by 1.5%-1.7% in 2017 we will be delighted. It’s a bit unexpected and there would be huge implications for a country in which the pile of government debt is so high. We cannot underestimate that.

But in the banking system I think it is also impor-tant that the banks are inclined to lend money to the economy and this is one macro risk that is potentially worrying. I think the regulator has to help some of the banks in becoming bigger — outside of UniCredit and Intesa Sanpaolo. These businesses need to beco-me more efficient and they need to bring their cost of capital down. The cost of capital, especially for the second tier banks, is too high versus their profitability. This needs to be addressed.

Alloatti, Hermes: Yes, I agree that the cost of capital is too high for the banks, even in a European context. If you compare it with banks in other jurisdictions, it seems to almost be fictional — especially if you com-pare the cost of capital with some UK banks.

: Italian banks have taken a lot of cheap funding from the European Central Bank as part of its targeted longer term refinancing operations (TLTROs). But now financial institutions will no lon-ger have access to this programme. Will it be dif-ficult for Italian banks to replace this ECB money with market-based funding?

Foti, BNP Paribas: The main challenge from refinanc-ing TLTROs will be the hit to the banks’ profit and loss (P&L) statements. Even if there are competitive spreads, with covered bonds at such tight levels, the banks still need to shift from basically zero-cost fund-ing to issuing to the market. We can expect a moderate rise in interest rates, from which banks should ben-efit. This will be a kind of counterbalance in terms of the P&L — an increase in the cost of funding will be coupled with a benefit to income from having rates at a higher level.

But there is clearly a lot of demand for Ital-ian paper, not only from domestic investors but also international investors. That is crucial. If you think about banks like Banco di Desio coming to the cov-ered bond market for the first time last year without even doing an international roadshow, the main invest-ment came from Germany and Austria. We are talking about the smallest issuer

among covered bond funders. And they attracted €1.7bn of demand. The real challenge will be how much you do in terms of the mix of senior preferred, senior non-preferred and covered bonds.

Gozzi, Crédit Agricole: You have to consider regula-tion again here, and the net stable funding ratio (NSFR) in particular. Because TLTROs are eligible for net stable funding requirements up to one year before they mature. Meaning that June 2020 TLTROs will be fully eligible up until June 2019.

For me, the bulk of the refinancing will start in 2019. Italian banks have a lot of matching assets and liabilities. Some of them bought BTPs with matching maturities with the TLTRO money they brought in and so no need to refinance this at all. Assuming that one-third of €240bn of TLTROs are matched business then the need to come to market is clearly lower. I don’t think the TLTRO refinancing is this year’s worry.

Rati, UniCredit: Maurizio is right, but this is still something that banks need to keep an eye on because it’s simply not that far away. The Italian banking system has a €240bn stock of TLTRO loans, of which €140bn will mature in June 2020. That is something banks have to start thinking about and addressing.

Of course, they could potentially reduce their liquid-ity buffer (effectively another cost today’s banks must bear). This would then contribute to the growing pres-sure on net interest income, but they can look to the capital markets to recalibrate their funding — and, of course, to support them with their regulatory require-ments. We will see secured funding for MREL, but I am also expecting the ABS market to return to normal-ity, instead of being flooded by bonds placed with the ECB. Banks need collateral in order to replace TLTROs, so I expect treasury teams will be more reactive here. You cannot replace TLTROs with another single solu-tion — that’s the key point.

: Do the other participants also expect that the ABS market could be boosted by the con-clusion of the ECB’s TLTRO programme?

Foti, BNP Paribas: We have been expecting the ABS market to regain momentum for a while, but the ECB purchase programme was not really enough to re-energise the market. At the moment there is a very big difference between the covered bonds and RMBS in terms of the number of participants in the market. The number of investors is still too limited in RMBS ver-sus covered bonds. But clearly with the withdrawal of TLTRO funding, the banks need to look at using their collateral to fund themselves at the cheapest rate. They could not only use the unsecured market because it would be too expensive.

Masini, Mediobanca: TLTRO II cannot be substituted with one source of funding. You need to spread the requirements around different sources of funding. We were wise enough to take on the loans from the ECB in order to have the maturities spread as much as we could, so we’ll have smooth enough maturities look-ing ahead. How shall we refinance it? Well, TLTRO requires collateral. So, instead of posting collateral to

Antonio Foti BNP Paribas


Banks Roundtable


the ECB, we will sell it to the market, like the ABS market. But all funding sources must be deployed as much as possible.

: As well as asset cases then, do you expect that Italian banks will start making greater use of foreign currency markets. I note that Uni-Credit and Intesa Sanpaolo have both resumed issuing in dollars in recent months.

Rati, UniCredit: Italian banks are diversifying in terms of asset classes and funding sources, rather than cur-rencies. To implement, say, a dollar-denominated funding plan, you need to put a proper programme into place — and that can be costly. It also requires roadshows and investor education. Ultimately, all of this groundwork can prove too complex considering the funding needs of most Italian banks. Instead, they might consider opportunistic, one-off deals, but, in my opinion, the best way to stay in a market is to be a reg-ular issuer, creating a regular dialogue with investors. Consequently, a significant increase in use of the dollar market seems unlikely.

Masini, Mediobanca: I think the bottom line is you can’t afford to have, as Roberto was saying, another programme, another market, another set of investors, another regulator. That all costs time and money unless you have currency-specific loans on the asset side, which would mean that you have a regular need of funding in that specific currency.

Mediobanca does not have a huge balance sheet in dollars and it doesn’t justify a whole programme in dollars. However we do issue opportunistically in non-euro currencies — in dollars and sterling for example — domestically.

Alloatti, Hermes: There is a distinction between a 144A programme and Reg S. With Reg S, the so-called Asian market can offer banks quite competitive pricing. If you do a 144A programme, you need to update the prospectus on a yearly basis and really need to issue — otherwise it’s not competitive considering the cost. But in the Reg S market, we have seen Italians, Spanish, French and even UK banks issue in dollars because the cross-currency swap between sterling and dollars and between euros and dollars was quite tempting.

Those banks had the possibility to issue a 10 year bullet at a cost where they would have been able to issue a 10 year non-call five in euros. But I agree on the regulatory and also the monetary costs of a 144A programme.

: As well as transitioning away from using the ECB as a major source of funding, Italian banks will also have to reduce their reliance on retail investors. What is the future of this market in Italy?

Rati, UniCredit: Retail investors have already started moving away from bank bonds. Data from the Bank of Italy shows that the total stock of bank bonds was €345bn in September 2016 — a figure that fell to €299bn one year later. Of that original €345bn, 50% was owned by retail investors, but this market share

dropped to just 40% (of a smaller total) one year later. This trend started years ago and is still going. What’s more, regulation — in the form of MiFID II — could potentially see it accelerate further.

If we look at the issue from a historical perspective, Italy was, by some way, the first country in Europe to have a market — in either equity or bonds — for direct investments from individuals. But now retail investor behaviours have changed in line with more mature European countries and people are increasingly relying on professional asset managers. This is the right way to move. Let’s leave it to the professionals to invest in the single stocks.

Casagrande, Generali: Again the key question is for the second tier banks in terms of their lower ratings, their high yield ratings. We know that the importance of retail bonds has dropped in Italy, as you mentioned. But retail business is still there, even if it is decreasing. That will be tested during this year and next. I expect that it will be manageable, but we will see if there will be any impact from the withdrawal of retail funding.

The other point to mention is that part of this story obviously has to do with the fact that some retail investors have lost money because they invested in capital products sold by small banks. I would say that the asset and wealth management industries have felt the importance of this trend. Wealth management is an industry that has grown a lot in Italy and is increasing in importance.

Foti, BNP Paribas: A lot of retail funding has already gone. We have not seen massive activity in the retail market in the past two years, since the bail-in rules were introduced. And we did see a big shift from retail funding to asset managers. It is worth noting that senior non-preferred cannot be placed to retail by law, because of the €250,000 minimum denomina-tion. Even for the senior preferred it is less and less common, because the investors tend to want shorter maturities and the use of retail for the three year tenor is less interesting for issuers.

Gozzi, Crédit Agricole: Crédit Agricole Group is run-ning some large retail operations in Italy, so we have direct access to this issue. Asset management is defi-nitely benefiting from the withdrawal of retail invest-

Maurizio Gozzi Crédit Agricole


Banks Roundtable


ment in bank bonds on top of the successful launch of the PIRs — piani individuali di risparmio.

As for the retail bonds themselves, my view is that the decline is not a matter of bail-in, it’s a matter of yield. The media is reporting a lot on investors being scared by risk of the bail-in. But our view is that the change in retail behaviour has more to do with the yields on offer, because you may have to lock in your money for five years, getting less than 1%, and so peo-ple are more inclined to leave their savings in current accounts or in deposits.

In the MiFID 2 environment, retail bonds are also getting more expensive because it’s almost compulsory to list them. But on the other hand, deposits are expen-sive too because you have to contribute the deposit guarantee fund. So, what I believe is that, if yields go up, we are going to see investment in retail bonds once again — though with much less volume than in the past. If that is not the case, then the money will go in asset management and be parked into deposits and timed deposits.

: What are your thoughts, Carlo, from a funding perspective?

Masini, Mediobanca: There are three issues. The first two have to do with regulation. It’s true that the SRB has been saying that retail bonds are MREL eligible — there is no legal basis for them not to be so. But at the same time the SRB has stated that there are definitely concerns around them being an impediment to resolu-tion. That’s a fact. The regulatory environment is also difficult because of MiFID 2 requirements, which are an obstacle to selling retail bonds, really. And the third issue is what Maurizio is saying.

It is the low rates environment. In order to give investors a positive interest rate you need to go very long term — six, seven, eight year bonds and people don’t tend to lock in these kind of maturities with less than a 1% yield. So, the sum of these three issues mean that retail bonds are suffering.

Still, they were a very important asset class not so long ago. So while retail bonds are suffering times of fatigue, they will still exist as an asset class, at least for the quality names.

Alloatti, Hermes: Italy was a little bit of an exception in the past because it offered favourable tax treatment versus the tax treatment on government bonds, and also versus certificates of deposit (CD). But with all the recent regulation — I’m thinking about the BRRD — those types of instruments, i.e. senior bonds sold to retail, will be termed out in favour of the new TLAC or MREL eligible instruments. The SRB appears to be fine with retail bonds and they have said that they are not exempted from bail-in. But of course I think this asset class — senior non-preferred — will be reserved for institutional accounts.

Rati, UniCredit: Following the recent SRB declaration that “bail-in-able” instruments will count as MREL, there is now another type of instrument that can be eligible if you structure it with some form of capital protection. These are called investment certificates, and their returns are linked to the underlying perfor-

mance of an equity index, a commodity, or any other instrument.

These products can be offered to retail investors and that’s exactly what banks have been doing. While investment certificates are not suitable for everybody, they fit the MiFID profile that some retail investors will be looking for. There is, of course, a massive trend towards asset management products, but this is simply a way for retail investors to maintain direct investment in the market — as is usual in every country. It is an alternative to the retail bond market.

: Non-performing loans remain a mas-sive focus for the Italian market, but the situation appears to have improved over the course of 2017. Can we start to talk more positively about asset quality in Italy?

Foti, BNP Paribas: The country is addressing the situ-ation with non-performing loans. Intesa Sanpaolo, UniCredit and Banco BPM have already offloaded bad debt and NPLs are on the agenda for all CEOs in Italy — they are a strong focus in business plans. We know that many issuers are working to structure the GACs government guarantee scheme for NPL securitizations and it will be interesting to see how this new market will develop in 2018.

Masini, Mediobanca: Yes, we can be more positive around NPLs. We can see that the market is working now, though it has taken a long time for it to start. There is a market for NPLs in several ways, including via direct, whole loan purchases and via securitisation with the GACS government guarantee scheme.

Alloatti, Hermes: A lot has been done on the asset quality, as we all said last year and the year before. But a lot remains to be done.

Profitability is low because of a number of structural constraints, including very high cost to income ratios and oversized banking networks. These networks are not at all efficient in most cases — in fact for at least 75% of the system. And then of course there is the fact that we also have the current structural yield curve weighing on income — especially low yield in the short-term part of the curve, which is very important for the Italian banks. These factors constrain profitabil-ity. So banks could have some difficulties in meeting loan loss provisions, which I believe will remain very elevated in the next few years.

: Regulators have been circling around this issue for some time now too. Do you think that new regulations, such as the ECB’s guidance on provisioning for NPLs, will have a big impact this year?

Alloatti, Hermes: Generally speaking, there is some sort of grand bargain on the horizon with the regula-tory authorities, which in my opinion will help to advance the region toward the completion of the Pan-European scheme for the deposition guarantee funds — as planned by the European Commission.

There is clear demand, especially from the Nor-dic countries, to do more on the asset quality side


Banks Roundtable


throughout Europe. I think some sort of deal will be done to this end, probably starting in the second half of this year.

: Would you agree with these points Filippo?

Casagrande, Generali: I would add that there are more and more asset managers specialising in non-per-forming loans at the European level and the Italian level now. The Italian government is also starting to help with bankruptcy procedures. And loan provi-sioning standards are also much more clear, where they used to be difficult to determine in the past. Everything is going in the right direction to reduce the volume of the NPL stock in Italy. This is something that is progressing.

From an investment perspective, though, the barriers to NPL sales remain — the gap between the bid and ask, and the lengthy recovery process. I believe that the recent regulatory actions taken by the Italian gov-ernment go in the right direction and we are indeed seeing signs of growing volumes of NPL sales.

Measures that improve the existing legislation via incremental steps are the way to go, as they bring fruits earlier and are more feasible. The key is to main-tain the focus on this topic, which for the past nine months has been a bit dormant.

Rati, UniCredit: The key point is to find a way to reduce the bid/offer spread on NPLs. First of all, sellers need to be more disciplined. They should have proper databases for their loans and they should put investors in a position to properly evaluate portfolios or single tickets. If investors have enough information to evalu-ate an asset, they have enough information to price it in a proper way.

The second point is that sellers should be able to create tranches of risk to appeal to investors with a range of risk appetites. Some investors prioritise yield and are willing to take on riskier equity portions of NPL securitizations, while other investors want to take on less risk. GACs is an important instrument in this respect — creating what is considered a Level 1 asset that banks could use for counterbalance capacity.

Last, but not least, it is important that we improve the overall regulatory environment — particularly with a view to reducing the collection time for bad debt in the Italian market. As a bank, you want to externalise the role of collection to specialist agents, because your key business is to lend money in an appropriate way — not to enforce its collection in the case of a default.

Gozzi, Crédit Agricole: Whatever the government, we have to make sure that the repossession time is shrunk. That’s a key point.

: Whatever government comes in after the election in March?

Casagrande, Generali: That’s a very good point. Talking about the election, whoever forms the next government will have to continue to improve the exi-sting legislation on bankruptcy procedures to make incremental steps toward improving collection time

on NPLs. They have to maintain a focus on that. If the next government does not have the right approach then that could be an issue, yes.

: Green finance has been sweeping the capital markets in the past few years, but Italy has been a little behind the curve. Will Italian banks get in on the act this year?

Gozzi, Crédit Agricole: Up until now Italian financial institutions have been quite shy but Intesa Sanpaolo pioneered the green bond market last year. That’s obviously because there were other, more pressing focuses, like net interest income, NPLs and so on. But this is something that is developing and the govern-ment has said that it is also looking at the area of green finance.

Rati, UniCredit: Green bonds are certainly another interesting funding option for Italian banks. Diversify-ing across asset classes is always a sensible approach, and the trend of investing in social and green bonds is gathering pace — it is no longer a niche area of invest-ment by any stretch of the imagination.

Casagrande, Generali: I tend to agree. These are pockets of investors that you might not otherwise reach. If you’re talking about diversification of fun-ding, green bonds are definitely a source of interest. The other thing is it is very much in demand from the communication side. These are issues and topics that, summed up, make it an interesting market.

Alloatti, Hermes: Green bonds are also very good for transparency. There are some international benchmarks that mean that when financial institutions issue this type of product, they must to adhere to a common framework for reporting. And then also of course you can check this out and see whether or not it is an effec-tive use of proceeds. Whether or not they using it just to refinance mortgages, or whether they are trying to improve energy efficiency of water consumption and so on.

Gozzi, Crédit Agricole: I would add that there is a lot of senior debt that needs to be issued in the coming years and, as we’ve discussed, green bonds can offer a clear way to diversify the sources of that funding. But there is also a specific asset class that could be particu-larly interesting for financial institutions — residential and commercial mortgages.

The European Commission is sponsoring an initiative to promote green mortgages, which may have some regulatory benefits for issuers, investors and incentive for borrowers and which would be eligible as collateral for green covered bonds, for example. This could be a strategic move to support the energy efficient renova-tion of a well-seasoned European real estate stock.

Masini, Mediobanca: From an institution perspective, green and social bonds are very interesting both from the sustainability and economic viewpoint. There are very sizeable pockets of investors to address and actual very successful trades have been taken to the market. So green finance will take off in Italy as well. s



CORPORATE BONDS CORPORATE BONDS

EUROPEAN COMPANIES in the bond markets enjoyed a vintage year in 2017. The European Central Bank’s quantitative easing programme helped drive spreads lower and kept volatility at bay. Almost all issuers benefited, either directly or indirect-ly, but none more than Italian com-panies.

Established borrowers issued at tighter spreads and in longer dura-tions. Issuers not seen for several years returned to the market. And first time issuers offered investors extra options for investing in Italy. In fact, 2017 was arguably the year when Italy’s companies finally shook off the taint of the country’s finan-cial woes.

“Italy has been through a difficult time since the beginning of the crisis in 2008 and then the political crisis after the demise of Berlusconi’s gov-ernment in 2011,” says Gianmarco Viglizzo, managing director in debt capital markets at Crédit Agricole in Milan. “The market has never really been shut for Italian corporates but there has been a time when periph-ery was a buzzword and Italy raised eyebrows. That has practically gone away now.”

Indeed, Viglizzo goes as far as to say that Italy no longer seems to be a

major factor driving investors’ credit decisions. “It all boils down to each issuer’s individual credit story rath-er than being Italian, currently,” he says.

Giulio Baratta, head of invest-ment grade finance and investment grade bonds at BNP Paribas, puts it slightly differently. “Investors do observe Italian macro fundamentals and credit fundamentals for corpo-rates,” he says. But he adds: “Both have been positive clearly in 2017. Italian large corporates all get ratings better than the state, so they position well compared to the rest of Europe. So far in 2018 we have experienced an extremely constructive market for Italian corporates.”

But what of the rest of 2018? One potential stumbling block is the gen-eral election, scheduled for early March. This is one of the top politi-cal risk events on European financial markets’ radar screens in 2018.

Polling has consistently shown the populist, eurosceptic Five Star Move-ment as the most supported party. However, its founder and president, Beppe Grillo, has refused to be asso-ciated with any of Italy’s older estab-lished political parties.

This could allow a centre right coalition, headed by former prime

minister Silvio Berlusconi’s liberal conservative Forza Italia party and the more right wing regionalist Lega Nord party, to form a government. Financial markets would be likely to see that as a favourable result.

Indeed, there is a consensus among bankers that only if there is a clear victory for one of the populist par-ties will there be anything more than minor volatility around the time of the election.

Taps are tighteningMeanwhile, market participants are beginning to consider how European Central Bank president Mario Draghi may finally turn off the taps of his bond buying programme.

“We do not see the end of QE changing anything in 2018, but it will have an impact when it happens,” says Carolina Marazzini, head of debt origination Italy at UniCredit. “Not in terms of size [of issuance], but mainly in terms of cost.”

Federica Sartori, director in debt capital markets corporates at BNP Paribas, expects quantitative eas-ing to last until the end of the year and that the corporate element of it, the Corporate Sector Purchase Pro-gramme, will remain a big part of it.

“This will allow credit spreads to remain at tight levels,” she says. “We believe there is more rate risk than credit spread risk and we would expect issuers to frontload their fund-ing plan by the summer.”

Baratta thinks there might be a small amount of volatility at the end of CSPP, but does not expect it to be “market-changing”.

However, there is a potential speed bump on the horizon. ECB president Draghi, who was Bank of Italy gover-nor before taking his current job, will hand over to a successor in October 2019.

“At some point the market will have to consider the succession plan beyond Draghi. He has been very

Italy’s biggest corporate bond issuers such as Enel and ENI have been agile players right through the crisis years. Spreads were turned upside down and companies traded inside the sovereign. Many still do, but Italy’s corporate bond market has changed greatly. The group of issuers has swelled and they have gone far beyond merely securing market access, to considering how to optimise their funding with a range of instruments, from liability management to green bonds. Nigel Owen reports.

Italia SpA casts off the taint of the crisis years

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Source: IHS Markit

040-41 JM_Corporate bonds.indd 40 05/02/2018 09:01


CORPORATE BONDS CORPORATE BONDS

supportive of unification and market stability in the periphery of Europe. We have to see if there will be a link between his successor and the periphery. It has not yet been a topic for market participants, but is likely to be discussed in 2019.”

Not the only show in townBond market participants everywhere are nervous about what will happen when the vast and unprecedented wave of central bank stimulus since 2009 ebbs. But it would be wrong to think QE was solely responsible for the present debt markets’ very sup-portive conditions for Italian issuers.

“QE definitely helped, but the pic-ture was looking good before CSPP came along,” Viglizzo points out.

Spreads have been tightening for issuers of all credit qualities quite consistently for the last six years.

“Definitively the ECB has been the largest ‘new’ investor, but we have also seen new investors coming from outside Europe, mainly from the east,” says Marazzini.

“The clear evidence is that the dif-ference from before is that where demand from investors was focused on Italian corporates with large inter-national business, nowadays also cor-porates with pure domestic activities are frequently included in the inves-tors’ buy lists.”

As spreads tightened and investors found it more difficult to hit their return targets, existing issuers were not able to provide such returns, so conditions were created that allowed new issuers, many of them specula-tive grade, to issue bonds.

The importance of diversification One of the pillars of stable access to markets is diversifying the sources of money a company uses to finance itself, increasing the number of inves-tors it can reach. For Italian firms that can mean exploring beyond the euro bond market, on which they are heavily reliant.

“Enel had huge success going back to the Yankee market last year,” says Viglizzo. “Euro investors have acknowledged Italy is making pro-gress, but also now US investors too. Asian investors remain a bit more elusive, but Asia has never been a big investor in Italian bonds — from BTPs down.”

Access to different markets and currencies has more than just a diver-sification benefit, argues Baratta: “It

means issuers can enjoy access to a wider spectrum of financing instru-ments, so they can be more oppor-tunistic and tap markets when it looks convenient to do so, in terms of tenors and pricing.”

One class of instrument that gives access to different pools of money — and can help to reduce overall financing costs — is green and socially themed bonds. Italian issuers became noticeably busy in this market in 2017.

Enel, the electricity and gas com-pany, kicked the year off for green issuance when it launched its first green bond in January. It was fol-lowed by four other issuers. “I sense a growing interest,” says Viglizzo. “A number of issuers were quite scep-tical at the beginning when Hera sold the first one in 2014, but in 2017 alone we had four new issuers. That has raised the level of attention and lots of issuers are asking about green bonds today. And at a political level, the level of attention has increased as well. Italian politicians talk much more about sustainable growth and investment.”

Strange reversalThe Italian government itself has been considering a green bond, although the complexity of how funds and budgets are organised at national and regional level could prove a challenge.

Such a deal would be of particu-lar interest because of the unusual relationship in Italy between govern-ment and corporate bond yields. Sev-eral Italian companies actually trade more tightly than BTPs.

Part of that is due to their own merits. “Italian corporate balance sheets are very sound right now,” says Marazzini. “Most of the refinancing they have done has been with longer tenors and at a lower cost, improv-ing financial efficiency, coupled with increased business profitability. Bal-ance sheets are now ready to use cur-rent favourable conditions for oppor-tunities of external growth.”

As Baratta puts it: “The balance sheets of large corporates have been regularly deleveraging, and they have taken advantage of open markets for financing and also asset-liabili-ty management exercises involving longer dated issuance.”

But the peculiar reversal in the nor-mal hierarchy of debt costs mainly came about because the country’s ratings slipped following the finan-

cial crisis. In 2006, before the crisis, Italy was rated Aa2/A+/AA-. In 2011 it was put on negative watch, which brought about a series of cuts, and by 2016 it had fallen to Baa2/BBB-/BBB+.

Fitch’s April 2017 cut to BBB was the low water mark, as in October 2017 Standard & Poor’s raised its rating on Italy for the first time for nearly 30 years, putting all the rat-ing agencies on the same mid-triple-B level. This has prompted many to believe that BTPs will now tighten, and that Italian government debt, whether green or not, is a bargain.

“Some investors have started to question corporates trading so far below BTPs,” says Viglizzo. “Italy suf-fered multiple downgrades and has been slower to recover than Spain, Ireland and other periphery coun-tries. So BTPs have underperformed. Meanwhile, Italian corporates have performed in line with the market and maybe outperformed some of their international peers. But as BTPs recover compared to Bunds and other sovereigns then I would expect the gap will narrow again.”

The decade since the financial crisis has proved that Italy’s large compa-nies can ride out very tough markets.

The political and monetary poli-cy risks of 2018 look like a picnic by comparison. If events turn out badly, the chances are that Italian firms will still be able to finance themselves successfully in a variety of ways.

And if, as expected, the election on March 4 goes the way the finan-cial markets hope, Italian govern-ment bonds are likely to continue their improving trading performance. Sooner or later that will take their yields back inside those of the coun-try’s top companies.

But observers expect to see more successful borrowing by Italian com-panies in the international bond mar-kets in the coming years, irrespective of how fast the sovereign’s standing recovers, or what the ECB does with monetary policy. s

“Italian corporate balance sheets are very sound

right now“

Carolina Marazzini, UniCredit

040-41 JM_Corporate bonds.indd 41 05/02/2018 09:01


Companies Roundtable

: What was the reason behind the raft of new Italian corporate issuers coming to the bond market in 2017?

Giulio Baratta, BNP Paribas: 2017 was a great year for volume and per-formance, characterised by the access Italian corpo-rates had to different mar-kets, different currencies and different tenors within them. The increase in issu-ance on the year before was substantial — up more than 50% compared to 2016.

The reasons behind this increase were market conditions overall and the ability of Italian corporates to anticipate funding needs where possible. The liability management activity was clear evidence of Italian corporates trying to lock in favourable funding levels.

Obviously QE has played a part, but general credit spread performance has helped borrowers from periph-eral countries with good ratings. Previously, Italian corporates paid for volatility, but they enjoyed good access in size and maturity in 2017. They had access to long term maturities as much as any other European corporates.

Carolina Marazzini, UniCredit: Cost is the main reason. The ECB, in lowering the yields of investment grade bonds, has created the conditions for new issuers (main-ly sub-investment grade) to come to the market to fill the pockets of demand with a minimum return required

that was not possible to achieve with existing invest-ment grade issuers.

Gianmarco Viglizzo, Crédit Agricole: There were various reasons. A number of corporate restructuring related transactions — Italgas spinning off from Snam, Saipem from Eni. There was a little M&A financing, like Esselunga. And then we saw companies like Leonardo, formerly Finmeccanica, and Ferrovie dello Stato come back to the market.

We saw green bonds being quite active in Italy in 2017 after Enel’s transaction in January which we led. We saw a bunch of smaller companies who issued pri-vate placements for the first time, such as Erg. Everyone benefitted from the low cost of money — that is quite evident.

Quite a few issuers took advantage of very strong market conditions to extend duration, to diversify sources of funding and to prefund some redemptions. Liability management exercises have been widely used to optimise redemptions, which also helped to optimise balance sheets. Most Italian corporates today feature smooth maturity profiles as a result.

Fabrizio Viola, Generali: In general, the European cor-porate market performed very well in 2017, driven by high beta credits and sub debt, but ECB corporate pur-chases have helped corporate bonds, as has the restora-tion of the banking systems.

With regard to Italy in particular, the new legisla-tion for PIR products — piano individuale di rispar-mio, or individual savings plans in English — which are totally tax free for investors, has created a natural demand for Italy-based companies and Italy-based debt and equity. Many Italian issuers have taken the benefits of this to issue for the first time or to re-issue, and many have done so also with the opportu-nity to fund themselves at very low interest rates —

Participants in the roundtable were:Stefano Pierini, head of finance, Ferrovie dello Stato Italiane

Gianluigi Basile, formerly treasurer, Telecom Italia Finance

Valerio Bellamoli, corporate head of finance, Saipem

Gianmarco Viglizzo, managing director, debt capital markets, Crédit Agricole

Carolina Marazzini, head of debt origination Italy, UniCredit

Giulio Baratta, head of IG finance and IG bonds, BNP Paribas

Fabrizio Viola, third party structure at Generali Investments Europe

Nigel Owen, moderator, GlobalCapital

Where next for Italian corporate bond issuers after a stellar 2017?What is the outlook for 2018 for Italy’s corporate borrowers, after a year in which old and new names came to the bond markets with great success? Some of Italy’s most important treasury teams met GlobalCapital to discuss the prospects for the year ahead. Funding teams and investment bankers shared their views on the state of the local and international economies, how they are �nding access to capital markets and what the future holds as the ECB tapers its corporate sector purchase programme and investors adjust to a new era of normalisation.

Giulio Baratta BNP Paribas

042-47 JM_Italy Companies Roundtable.indd 42 05/02/2018 10:34



well below the norm.Gianluigi Basile, TIF: In my view, the liquidity in the market has given us more of a window to issue. Of course, all the market performed well in 2017 and it didn’t just help Telecom Italia and Italian corporates but all European corporates as demand grew.

I expect the demand for investment grade bonds will remain stable in 2018. We have a split rating, but the outlook is good for us too. The performance Telecom Italia had in 2017 was super good.

Valerio Bellamoli, Saipem: In 2017 QE and the search for yield were certainly very important factors, if not the most important factors. When you add the expecta-tions of low inflation and a general improvement in economic conditions, this all led to an improvement in perception of the risk of issuers.

Because of this, in 2017 we anticipated some of the financing we would oth-erwise have done in 2018 and I would imagine other companies did similar for the same reason.

The marker of the success, from our point of view, was the tenor that it was possible to achieve and the spreads we could price at. We are relatively new to the market, with our debut in September 2016. We issued in 2017 in April and at the end of October. We achieved better terms each time, while observing a tightening of spreads over each previous issuance. The recovery of the price of oil also helped, as our investors tend to associate higher oil prices with lower credit risk.

Stefano Pierini, Ferrovie dello Stato: The new compa-nies that were born last year like Italgas also helped. The market has been looking to businesses that have a blend of monopolistic content — Terna, for example, and some of the other utilities. When markets understand a busi-ness and how the business is critical to its clients, it is well received.

During 2016, our CEO was working on the brand new business plan which was presented in August 2016. So in 2017 we explained how our new business was shaping and evolving. This is why we got a very good reception from the market. Our first green bond is the only green bond where the funding of rolling stock was addressed. Otherwise train companies have always used them for infrastructure.

: Does it feel like investors, international and domestic, are more comfortable with your credit than they ever have been?

Bellamoli, Saipem: Our impression is that investors have become increasingly comfortable with our credit. This is also confirmed by the level of new issue premi-ums we have been paying. We provided alternatives to typical Italian issuers, but we only have a very small por-tion of our revenues generated in Italy. We are a global company and selling a lot into dollar markets. But a sig-nificant amount of our costs are Italian so we are Italian!

Pierini, Ferrovie dello Stato: We are a sweet blend of

being 51% owned by the government and we are an essential business. We own the infrastructure and we run the greatest rail fleet, so we are perceived as an essential company and we have seen order books three times oversubscribed in June and more than two times for the last transaction.

Foreign investors want to know how you are running the business. The UK is looking to Italy with a need to understand the business. But, if I look at France or the Netherlands — one wonderful discovery of recent transactions — when we explain how green we are we got a wonderful reaction. Some 10% of our green bonds went into the Netherlands.

Basile, TIF: I don’t think Italy is an issue for international investors. Conditions have improved, GDP and economic data are good and will continue to increase in the future. When you look at the spread Italian companies offer ver-sus other similar companies, the premium is quite good for investors and they had good performance from Italian corporates in 2017.

Marazzini, UniCredit: Investors were worried about Europe and the euro. They were so worried by the fact that any possibility of going back to local currency would have penalized Italy massively because of the large government debt. Since it became clear to everybody that the euro is here to stay, the perceived credit risk of Italian corporates has diminished substantially.

Viglizzo, Crédit Agricole: I would say that rather than new investors we are back to seeing all of the old ones again. On average the UK is buying a little less, but France and Germany are buying a bit more. Overall, investors are comfortable with Italian credits.

Viola, Generali: There are many comments out there saying how the systemic risk has been significantly reduced in the European landscape. We should also add that in Italy the banking system is experiencing a quite successful balance sheet reparation, with many non-per-forming loan clean-ups.

There are also many blocks of NPL sales in the pipe-line, and this should provide more buffers for bond investors.

This will help banks offer opportunities for Italian corporates, particularly SMEs, to borrow at historically low yields.

: Are you worried that this recent support for Italian corporate bonds may not continue once CSPP ends in September and will this affect the tim-

ing of your deals in 2018?

Viglizzo, Crédit Agricole: The ECB has gone to great lengths to say tapering would be gradual, so I expect no shocks. I would say there is strong support for Italian names currently, irrespective of CSPP.

We have certainly seen a lot of prefunding, so how much more is their left to do? But we are also seeing the first green shoots of recovery on the domestic

Valerio Bellamoli Saipem

Gianmarco Viglizzo Crédit Agricole




macro front which should bring new investment and fuel bond issuance.

2017 was the strongest year of the last three. I don’t know if 2018 will be as strong in terms of volume, but conditions remain excellent, and I expect a contribution from M&A activity, which seems set to pick up.

Pierini, Ferrovie dello Stato: 2018 should not be a year when we expect to have a lot of funding to do. But anyway, we are not worried about the ECB. I think we must see QE as an experience that is limited in time. If it were to go on and on then something must be tragi-cally wrong.

Basile, TIF: The ECB announcement it will end QE in 2018, maybe 2019, of course will have an impact on bonds and markets and bonds have performed better over the life of QE. But when the ECB decides to stop QE it will be because the economy is performing well. So I think it will have an impact from a rates point of view, but, in terms of demand, the reaction will be balanced.

I don’t think rates will increase quickly as inflation is still low. Maybe the ECB will end QE because there are no more bonds to buy! And they could implement QE again if they needed to ease conditions at a later date.

Bellamoli, Saipem: It appears that QE will be very gradually unwound. We don’t expect dramatic changes in 2018.

The economic growth that seems to be sustainable globally will help offset any effects of unwinding so we don’t expect much overall effect.

Viola, Generali: I agree that the ECB withdrawal for QE will be quite smooth and slow — minimising the market impact of this. It will be government bonds first, then corporate bonds, but the effect will be mostly in the sec-ond half of 2018 and possibly more in 2019.

The market, particularly on the corporate bond side, is well prepared. There is still a natural demand for credit and this will counteract the effect of the withdrawal of QE going forward.

Baratta, BNP Paribas: With regard to timing I see no reason to wait. Everyone expects CSPP to come to an end in 2018. Rates expectations are for an increase in the US and that can influence the rates dynamic in Europe. We expect Italian corporates to keep accessing market before the summer break.

The market has opened strongly in January. The tone is strong, unchanged from last year, and funding levels are still very attractive.

Marazzini, UniCredit: I agree. We believe corporates will try to anticipate the future tapering by taking advantage of the current favourable conditions as much as possible.

Corporates with diversi-fied operations will continue to issue below government levels after the end of QE. It will be more difficult for purely domestic corporates and will also depend on where their international peers will trade.

: How have Italian corporate balance sheets been improved over the last number of years?

Bellamoli, Saipem: The perception is that balance sheets have improved for many important Italian companies because they have been doing well and reinvesting rather than distributing dividends.

In our case we completed a capital increase for €3.25bn in 2016. Many companies managed to extend the average life of their debt by increasing the proportion of capital markets issuance and reducing their reliance on bank finance. That has allowed them to extend maturities as much as possible.

Pierini, Ferrovie dello Stato: Italian corporates have put in a wonderful amount of internal work to improve their financial statements. As Valerio mentioned, there has also been a significant convergence towards funding many activities in the capital markets. These help to make these corporates stronger from a financial perspective. Security has grown and S&P notching up the rating of the republic has also helped. We expect a further tightening of spreads.

Baratta, BNP Paribas: I agree with that comment on ratings. Deleveraging has been testified by the ratings uplifts we have seen. Several sub-investment grade issuers have been upgraded to investment grade — Telecom Italia and Leonardo, for example. Lots of issuance has been combined with liability management exercises and capital structures are now more balanced.

Thanks to the issuance of Italian corporates over the last year or so, capital structures have become more solid, balanced and flexible. Italian corporates have accessed the capital markets a lot in recent months, and not just in euros. There has been an increase in dollar supply from Italian corporates as well. Managing investor diversifica-tion beyond a heavy reliance on the euro bond market will be seen by investors as another strength of Italian issuers.

Viola, Generali: Italian corporate balance sheets are now largely in line with their sector averages across Europe. This has created the opportunity for these companies to fund themselves at lower overall interest rates and allow them the possibility to prefund maturities coming due well ahead of time. This has provided buffers of cash and this safety is allowing them to counteract some negative cyclical effects.

There are no signs that any of the non-financial sectors are in difficulty and all are in line with their European peers with regard to revenue growth and profitability.

Marazzini, UniCredit: Italian SMEs have also improved their balance sheets in recent years and investors are recognising that. The number of SMEs that fall into this category is increasing, resulting in more firms that are eligible for alternative forms of financing.

: Does the political situation in Italy worry you with regard to international investor involvement in your borrowing?

Bellamoli, Saipem: The election is likely to increase the volatility in sovereign spreads and for corporate bonds as we approach the date. However, this might be relatively temporary because, unless we get a surprise result and one of the parties emerges as a clear winner and is able to dictate its own conditions, we will probably have no

Carolina Marazzini UniCredit




clear winners and no dramatic changes in the economic policy of the government.

Pierini, Ferrovie dello Stato: We have to deal with this every two or three years! Those corporates who are stronger and perceived as long term companions of financial markets were in the market in 2002 and 2010, etc, but what might happen to some of the newer issuers may depend on the result.

Viola, Generali: The market is not expecting an adverse result in terms of a new government being anti the EU or the euro. The most likely scenario seems to be a continu-ation of the current situation with no party receiving a majority in either the sen-ate or parliament. This will leave financial markets very benign and there will be no sell-off of Italian bonds.

When we start looking at the exit polls we will start to see some volatility in markets for sure, but I don’t expect it to last long. Beyond the election, the most likely impact is on BTPs. With a positive out-come I think it is almost cer-tain that the spread between BTPs and Italian corporate bonds will narrow as gov-ernment bonds start to perform again.

Basile, TIF: From a political point of view we had a stable year last year. Of course the election is this year but I don’t think it will be an event for the market. It is likely that everything will remain stable with no one party winning and the reaction of markets is likely to be minimal.

Italy overall performed well in the last year. Invest-ment is increasing. Employment is still an issue for the Italian economy and of course there are lots of things to do still, but economic conditions are improving and I think we have a good path to better conditions with a stable government. The momentum is good and it is a good time to push that all European economies are trying to get better.

Also the government has helped Italian corporates attract funding. It depends on the company but some have benefitted from laws that have been implemented to accelerate investment.

Viglizzo, Crédit Agricole: We have had a raft of elections across Europe, and exceptional political events globally, and none of them have managed to derail the market. Of course the election is important, but there is a consensus that the sort of scenarios that could cause market disruption are unlikely — wanting to leave EU and the euro, etc. The most likely scenario is a coalition.

The most important political safety net is provided by the ECB. There will be some volatility around the elec-tion, but the market won’t really be closed. Maybe a few basis points of widening, but I don’t see the market being disrupted.

Where a future government could help is with SMEs. Different tools can be put in place by the government, such as tax credits and the treatment of non-performing loans, and we have to reduce the complexity of doing

business. Currently there is too bureaucratic a frame-work to allow this dynamic for smaller companies. A future government could take a decision to support mid-caps. Tax benefits for mergers and acquisitions and consolidation to achieve sizeable dimension, for example.

Baratta, BNP Paribas: It is still early, but from speaking to investors, people are not worried about the outcome at moment. Once the election is over, positive macro trending will play a big role in continuing the positive momentum we have been seeing. From an international perspective, what investors want to see is the Italian state balance sheet under control and that a bit of growth is there. They are asking for generic economic and political stability.

Marazzini, UniCredit: The election will increase volatility only if there will be a clear victory of one of the populist parties. In other cases, including a tie, the markets will be barely touched.

When the result is settled, the new government needs to continue with the specific measures it has been promoting to opening the capital markets to more companies. For instance, there have been initiatives to promote bond issuances by taking out tax and legal obstacles for unlisted firms that want to access the market.

: While on the subject of politics, what effect might Brexit have on your business and your plans for growth?

Pierini, Ferrovie dello Stato: We entered the UK market in February 2017 — we now own C2C [an English train operating company that operates the Essex Thameside railway franchise]. Some asked why. It is undeniable that the UK is an interesting market. There may be fewer commuters after Brexit but I think the UK has experienced so many things in its history, and I think there might be further opportunities to come.

Peers of ours like Deutsche Bahn are looking to the UK market, and competition is not coming from private companies because the UK market is so capital intensive. You need to have a good financial profile.

On a separate note I think Brexit has made the remaining EU countries a little bit closer.

Basile, TIF: I don’t think we would see an impact, even in the worst case scenario. We have some positions in sterling but they are fully hedged as per our policy to hedge all FX exposures. I don’t believe there will be an impact on Telecom Italia’s business.

Bellamoli, Saipem: We don’t think that Brexit will affect us significantly either.

Viglizzo, Crédit Agricole: Brexit is not high on the agenda of any of the corporates we talk to. One corporate has expressed doubt about how long sterling investors will continue to be active but nobody is worried about it from a business perspective.

Viola, Generali: We also don’t see it being applicable in Italy at all.

: How have you seen the dynamics of the loan market versus the bond market develop in recent times?

Fabrizio Viola, Generali Investments Europe




Baratta, BNP Paribas: The spread compression in bond markets has served to increase bond issuance, while com-panies have looked to extend revolving credit facilities to lock in existing funding levels.

In 2016 I think the bond market was impacted by the TLTRO loan facility, but in 2017 the tightening saw loan financing decrease and things evened out.

Viglizzo, Crédit Agricole: Bank loans will possibly become less attractive now TLTRO has ended.

Bellamoli, Saipem: As I mentioned earlier, tenor is what brought about the increase in capital market funding in 2017.

For large corporates like us that are investment grade or are cross-over credits, the terms that we can achieve in the bank market are very good but the maturities are shorter than what we can achieve from capital markets, with the possible exception of export finance.

In our case, we are keeping a significant proportion of our funding, around €500m, through export finance facilities which provide longer tenors. These are typically 8.5 years amortising with a weighted average life of around five years.

Basile, TIF: In short term maturities there is no arbitrage between loans and bonds because we can have liquidity in both. But Telecom Italia has a big portion of debt — around €25bn net debt — that we have to refinance. So, of course, we will use all the markets we have to hand to optimise our debt profile.

Pierini, Ferrovie dello Stato: Loans are not really an option in our business, given the duration we aim to achieve. They are maybe complementary for purchase financing but it is clear if you look at the numbers: in 2013 we had zero bonds; now, more than 40% of our debt is in bonds.

Marazzini, UniCredit: UniCredit is committed to being a key player not only in traditional lending, which remains our core business, but also by responding to the changing market place by matching the financial resources of the capital mar-kets with the financial needs of our clients.

Clients can choose to issue bonds instead of tak-ing out loans so they have enhanced visibility, others may prefer IPOs given current positive market condi-tions, while some are able to grow through M&A. Most transactions take some time before concluding, but Uni-Credit is committed to partnering and supporting clients over this regardless of the changing market conditions.

Viola, Generali: The PIR provided an opportunity for companies to issue in the bond market but the restora-tion of the balance sheets of Italian banks will free up space for the loan market to continue to offer cheap funding, despite the end of TLTRO.

But I think there will be opportunities in both the loan and bond markets for borrowers to fund cheaply and to support the restoration of the recovery of the Italian cor-porate market.

: Has your banking group evolved at all in recent years? What is your domestic/international mix?

Basile, TIF: We are one of the big Italian companies so we have worked with all the premier international banks.

But in the last few years all the Italian banks had an incentive to lend money to big Italian corporates, and so we saw an increase of this type of loan. But I haven’t seen much change beyond that.

Bellamoli, Saipem: In our case it is a little special. Saipem was part of the Eni group until the end of 2015 so our direct relationship with the banking market is very recent.

We started a direct relationship with the bank mar-ket when we syndicated a €4.7bn bank facility at the end of 2015 with large participation from European banks. This has now been entirely repaid in full, except for the €1.5bn revolving credit facility.

We aim to utilise the banks in future more for trade finance facilities such as bid bonds, advance payment bonds and performance bonds, and less for funding.

Pierini, Ferrovie dello Stato: We too have been grow-ing. In 2003 we had almost no banks and now we have a large amount of banks. I agree with Valerio — you have to look at the banks for the services they can pro-vide.

It does not mean some of those we had originally are no longer with us, but if you want funding you have to have the right banks to allow you to achieve your plans.

Viglizzo, Crédit Agricole: At the margin we have seen some Asian banks becoming more active and more vocal in getting mandates linked to their lending activity. We also see that happening with Italian regional banks.

American banks are slowly but surely getting back the market share they had lost after the crisis.

Baratta, BNP Paribas: It is fair to say large international banks by and large remained in Italian corporates’ banking groups. The trend has been selective in terms of maybe the more international banks weighting more on large versus small or medium, in line with the historical behaviour of larger international players. But this has created opportunities for local lenders.

In the last quarter of 2017 there were a few refinancings from big borrowers looking to extend revolving credit facilities. There were no big banks missing from those. Maybe some international banks reduced their appetite at the margins due to some name-specific challenges, but nothing that affected the end result for the borrowers.

Clearly the domestic players have tried to increase as much as possible their inclusion in loans to Italian corporates. The borrowers would not have perceived dif-ficulties from international players — more the need to allocate a lot to local players.

This has created pricing tensions leading to spread reduction, and on DCM transactions becoming more crowded.

: So what are your funding plans and objectives for 2018?

Pierini, Ferrovie dello Stato: In 2017 we raised €1.6bn and this won’t be the case in 2018! We are making

Gianluigi Basile Formerly Telecom Italia Finance




calculations now and we might have a benchmark close to the summer but it depends. We have a good generation of cashflows, but we are now entering into a reshaping of our freight business. This means we will be buying locomotives so that might be part of our plans for 2018. In the coming months we will make a clear assessment of that.

Basile, TIF: We are also waiting. We usually issue in January but we didn’t come to the market as we are waiting for new plan from our CEO. He will be launch-ing his new plan in February. We issued more than €1bn in October, so it was enough for now and we are waiting for the new plan to assess our funding for the future.

Bellamoli, Saipem: We also don’t plan to issue as much in 2018 as in 2017 because we anticipated last year what we would have done this year and took advantage of the very good conditions.

We will remain opportunistic for not particularly big amounts because we have literally no debt maturing in 2018. Even for 2019 and 2020 the amount of debt maturing is very manageable.

One objective remains to extend the average life. So that may result in some new capital markets exercises if we have the opportunity to issue longer maturities, but we have little debt maturing so have no need to access capital markets for refinancing purposes.

Viola, Generali: As mentioned here, many corporates have prefunded in 2017, but there is a natural demand for newcomers who could come to the market.

Pirelli, an unrated issuer, was massively oversubscribed in January, and the bond was priced well inside initial spread guidance.

Last year there was almost €60bn of total issuance from Italian corporates and around €55bn of that was in clips of more than €300m of net issuance, so benchmark size. It was a lot, but we expect something similar in 2018. We are planning for €50bn-€60bn of gross issu-ance again this year.

We could see more green bond issuance too in 2018. This is a largely undiscovered area for Italian investors and that could be increased going forward. SRI and ESG dynamics are always very popular in other jurisdictions across Europe, and Italian investors could become inter-ested in these types of investments too. Particularly pen-sion funds and endowments, who are obliged to provide something different to their investor base.

: With strong conditions and a reduced need for funding, what might keep you awake at night worrying in the year ahead?

Bellamoli, Saipem: The overall picture is very positive. I hope it remains as it is today. Right now we have only positive expectations. The global economy is doing well. The price of oil is doing well. The price of shares is gen-erally doing well, but another risk might come from a sudden reversal.

But there are widespread forecasts of economic growth with low inflation, so the best of all worlds.

If there are risks they are maybe of a geopolitical nature, but the economy seems to be very resilient to them and therefore in general we are very positive about the year ahead.

Basile, TIF: Political change in Italy and the rest of the

world is still the biggest issue for us in the next year, but hopefully it is still a relatively small risk. The end of QE will be an issue but again it is unlikely to be a big issue.

We had a good year in 2017. We performed super well. We are implementing a lot of changes as a busi-ness — technology, demand for data is increasing — so we have a lot of challenges to face, but I think it will be a good opportunity to implement new technology. At some stage we will have to finance life on 5G, but that is for the future.

We have to wait for the new plan to understand what we will do this year and in future, and to understand if Standard & Poor’s and Moody’s will upgrade us to invest-ment grade, but I hope so obviously.

Even if they don’t, I am sure we will still have a great year.

Viola, Generali: Inflation is the name of the game this year. Inflation spikes or uncontrolled inflation could derail the base picture because rates will adjust accord-ingly — possibly quite sharply — and this will provide negative total returns for bond investors, forcing some redemptions and losses.

Supply and demand dynamics will be the key. If they stay under control thanks to the efforts of central banks to control inflation and allow smooth growth, then I think we could see a copy and paste of 2017. If inflation is not controlled then the market could suffer.

We have a natural bias for the short to medium area of the curve and believe there are relatively good returns to be had in that part of the curve.

Pierini, Ferrovie dello Stato: We have no specific issues because of the frame-work we built for the ratings agencies.

Lots of banks will give us committed lines and that makes everyday business a little bit less scary!

What is important in 2018 is that the markets should look at Italy as a reliable place to invest. You have to attract international inves-tors for eight to 10 years, so they need to perceive Italian corporates as reliable.

Corporates are closely analysed by investors, so we need to keep explaining the growth and future plans of the company. We have a continuous and ongoing con-versation with investors via our investor relations depart-ment.

Viglizzo, Crédit Agricole: Nothing related to the market keeps me awake for 2018. Save for the black swan type of event, I think in 2018 investors will have a perception of central bank support still being there. The political election does not keep me awake at night.

I hope the recovery in the economy will not be derailed by either macro or political forces, but I don’t have any real worries about either.

Baratta, BNP Paribas: Things are quite positive because of the macro environment and the trust and appetite of investors. European credit markets will continue to be supported by CSPP for several months. s

Stefano Pierini Ferrovie dello Stato



FINANCE FOR SMEs FINANCE FOR SMEs

SMALL AND MEDIUM sized companies make up 99.9% of the businesses in Italy and employ 79.6% of the workforce — way above the European average of 66.9%. These businesses drive the Italian economy, and for years have dictated whether the country is booming or in decline.

Medium sized Italian companies are world leaders in several areas. “The US has Silicon Valley, we have Food Valley!” exclaims Alessandro Marchesini, senior banker at Crédit Agricole in Milan. The area northwest of Bologna has been famous for producing prosciutto, parmesan cheese and tortellini pasta for centuries. However, it is the businesses that have grown up around these traditional industries that highlight how the SME sector in Italy can flourish.

Alongside Food Valley, Packaging Valley has grown. “Ima is a world leader in specialist packaging,” says Marchesini. “But there are lots of other smaller companies contributing to Ima’s success and creating their own. And Italy is not just about food. It is a high tech country, with companies like

Leonardo [formerly Finmeccanica].”However, the picture has not

always been so bright. The credit crisis killed off a lot of small companies, and although Italy was not alone in this respect, the effect was felt especially deeply, because of the very high share of SMEs in the economy.

Finding funding solutions for these companies, therefore, is even more critical than in other countries.

Banks on the caseItalians often blame the banks for shutting down lending to SMEs after the crisis, and being very slow to re-open the taps. Accurate data are hard to come by, but the weakness of Italy’s banking system, which has become apparent only in the later post-crisis period, cannot have helped.

“After the crisis, banking became more selective and smaller companies suffered the cost from banks,” admits Marchesini at Crédit Agricole.

But the banks insist they have gone a long way to cleaning up their balance sheets and are proactively trying to stimulate SME financing.

“Banks like Crédit Agricole are helping these companies now,” Marchesini says. “These companies can now get what they need in terms of financing.”

UniCredit has set up a dedicated platform to integrate its traditional banking offer for SMEs with a wider range of investment banking products, including M&A, capital markets, and financial risk and liquidity management. “One year in, there has been a notable pick-up in dealflow across all products, with client relationships deepening,” says Luca Milanesi, head of the bank’s platform in Italy.

Crédit Agricole Group helped finance the acquisition of Pioneer Investments by the bank’s affiliate Amundi in 2016. It has bought three regional banks that were in default and, via Indosuez Wealth Management, took a majority stake in the private bank Banca Leonardo in 2017.

“This has allowed the group to provide an additional €1bn of funding to SMEs in 2017, on top of the €10bn of funding already in place,” says Marchesini. “In the last couple of years the EIB has provided significant funding in Italy, but it is more linked to local communities. Crédit Agricole has made a concerted effort to finance small and mid-caps that are not known internationally, but which could, with the right financing, become the champions of the future.”

Marchesini argues that the appetite of banks is strong. “They could be more aggressive, but, due to regulation, they are being held back,” he says. “To avoid losses, the regulators are putting in place regulation that is not good for the SMEs.”

Giulio Baratta, head of investment grade finance and investment grade bonds at BNP Paribas in London, agrees that SMEs have enough access to funding, but warns that

Italy’s large companies had a bumper 2017 in the bond markets but they are well known names with investment grade ratings. What about the backbone of the Italian economy — how are the SMEs that form the supply chains of larger companies finding finance as the country emerges from its long economic winter and seeks out stable growth? By Nigel Owen.

Adding financial steel to Italy’s economic backbone

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Italian indicies vs European indicies

FTSE ITALIA STAR EUR TR ESTX 50 € NRt FTSE MIB Net TRFTSE Italia Mid Cap Ind FTSE ITAIM EUR

Jan '17 Mar '17 May '17 Jul '17 Sep '17 Nov '1790

100

110

120

130

140

150

Highcharts.com

Increase in value of SME indices versus larger caps in 2017

Source: Highcharts

048-49 JM_Financing SMEs.indd 48 05/02/2018 08:58


FINANCE FOR SMEs FINANCE FOR SMEs

they need to plan ahead, for the next crisis or further volatility.

“They have had enough access and have enough access today,” he argues. “The problem has been a willingness to gain further access when conditions are good. Rather than relying on vanilla loan funding, they need to look at further diversifying their sources of funding, and not only seeking those forms of finance when traditional sources are not available.”

New instruments for changeSecuritization is one area seen as having a role to play in financing Italian SMEs.

Companies that cannot take on any more debt, due to the cost historically, and banking regulations in more recent times, have to look at other options, including optimising working capital. For companies with weaker credit profiles, factoring and securitizing receivables are two ways of doing this.

“Securitization is a fantastic way to support the economy,” says Marchesini. “It is a really useful product to improve the financial profile of corporates.”

Once companies have started to improve their credit strength, one way for them to approach the capital markets is through private placements. The smaller size of these deals suits midcaps well.

“For midcaps we believe the right balance of funding is roughly 50-50 between bank debt and capital markets,” says Marchesini. “Within that, it could be a mix of short term borrowing, bank debt and private placements, with clips of between €20m and €50m.”

Baratta also sees private placements as a key step for SMEs: “Investors need to see continued

use of funding channels other than bank borrowing. In the last couple of years we have seen many types of lenders and investors being open to investing in Italian companies. It has just been about measuring the value of the investment.”

Milanesi also highlights the mini-bond market. “In Italy, an important moment for SMEs was the arrival of so-called ‘mini-bonds’, which allowed unlisted SMEs to issue debt even for a few million euros and to trade it on the ExtraMot Pro platform,” he says.

Baratta believes the improving legal framework will help make private placement funding easier for SMEs. “Finally, in the last 12-24 months, we can say that the legal framework is no longer a barrier to entry for investors in unlisted companies,” he argues.

Milanesi also points to local initiatives. “There has been an attempt to rebuild the positive connection between finance and the real economy through the Individual Savings Plans,” he says. “These offer tax incentives and enable people to save by investing in Italian SMEs. Stakeholders such as Borsa Italiana have addressed this issue by establishing the ExtraMot Pro segment dedicated to SMEs for the listing of bonds, commercial paper and project bonds.”

The Individual Savings Plans, called locally Piani Individuali di Risparmio (PIR), were introduced in December 2016. At least 70% of the invested amount must go to businesses which have a considerable stake in Italy and 30% to securities issued by companies not listed on the FTSE MIB. These investments are exempt from capital gains tax and inheritance tax if held

for at least five years. In the PIR’s first year of operation more than €7.5bn was invested in the plans.

“We could even argue there has never been a scarcity of money,” concludes Baratta. “It has been based on the quality of midcap companies. Investors have money to invest in companies seen as solid credits.”

Importing investmentA willingness to develop and maintain new financial relationships beyond national borders has been another barrier to SME financing historically, but this is starting to change. “This makes sense,” says Baratta. “Italian SMEs are, by their nature, very international-looking because they tend to be exporters.”

With the financing tools being offered to them, and the optimism around the Italian economy, to which they contribute so much, Italian SMEs may never have been better placed to achieve sustainable growth and produce the next Ima or Finmeccanica.

And for investors who feel they might have missed the best of the Italian investment opportunities, scratching below the surface could open up a world of untapped prospects. Italian SMEs are alive and well, and keen to succeed. s

Total Workforce by Company Size

27%39%

21%37% 33%

13%

16%

13%

20%17%10%

11%

10%

12%11%9%

8%

11%

11%9%

41%27%

46%

20% 30%

0%

20%

40%

60%

80%

100%

Spain France Italy Germany EU 28

≥ 250 50-249 20-49 10-19 0-9

Data Source: Eurostat

Number of employees per company

Total Value Added by Company Size

38% 45%33%

46% 43%

18%15%

18%

20% 19%11% 10%

11%

10% 10%8% 7%11%

8% 8%26% 23% 28%

16% 21%

0%

20%

40%

60%

80%

100%

Spain France Italy Germany EU 28

≥ 250 50-249 20-49 10-19 0-9Number of employees per company

Data Source : Eurostat

Total workforce by company size Total value added by company size

Source: Eurostat Source: Eurostat

“Italy is not just about food. It is a

high tech country“

Alessandro Marchesini,

Crédit Agricole

048-49 JM_Financing SMEs.indd 49 05/02/2018 08:58

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EUR 600,000,000

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EUR 600,000,000Inaugural Green Bond


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