Timing was of the essence to achieve a strong performance on the two southern European sovereign issuances, which took place before coronavirus disruption hit. Edward Russell-Walling reports.

Team April

Left to right: Francesco Polon, Lee Cumbes, Yu Miao Yang, Harry Koppel, George Kailas

For many bond investors, there was a time when Italy and Greece counted among the eurozone’s untouchables. At the start of 2020, however, order books for their paper ballooned to unprecedented levels. Barclays was joint bookrunner on record-breaking issues for both sovereigns.

Unlike some other players, Barclays has been firmly committed to sovereign debt markets since the global financial crisis of 2008/09. “We knew we needed strength there, even as others came and went,” says Lee Cumbes, Barclays head of public sector debt for Europe, the Middle East and Africa (EMEA). “My team is one of the best staffed on the street and we have not shrunk in size.”

He adds that, in the sovereign, supranational and agency market, Barclays is the only bank to be ranked in the top four in each of the three major currency markets: dollar, euro and sterling.

Fewer opportunities

While 2019 was a year of ‘easy trades’ in the financial markets, 2020 is shaping up to be different, according to Mr Cumbes. “Prices had gone up in many asset classes and there are fewer obvious opportunities,” he says. “In our market, the US Federal Reserve had said that the barrier to raising is very high, and the European Central Bank is back doing quantitative easing again.” Mr Cumbes was speaking to The Banker before the Fed’s coronavirus-inspired basis points (bps) cuts.

Back in Europe, sovereign investors have surmised that the diminishing yields at the quality end of the market are here to stay and turned their attention to peripheral eurozone bonds.

Enter the Republic of Italy. By the time it chose to issue early in 2020, yields on its sovereign bonds were back where they had been in May 2018. That was when Italy’s president blocked efforts by the anti-establishment Five Star Movement and the anti-immigration Northern League to form a coalition government, and they responded with calls for mass mobilisation. On May 29th, bond prices had their worst day since 1992. Two-year bond yields, for example, rose 150bps to more than 2.7% before settling at 2.4%.

By January 2019, further out along the curve, Italy was paying 3.35% for a new €10bn 15-year bond. The following month a new €8bn 30-year issue, due in 2049, carried a coupon of 3.85%. To raise €18bn in four weeks was something of an achievement at any price, and went a long way towards strengthening investor confidence. That was helped, according to Mr Cumbes, by a big bid from Germany, known for the conservatism of its institutional investors. 

Prices recovered as 2019 progressed, and by January 2020 Italy was able to come back to market with another 30-year transaction paying 2.45%. One of the dynamics in the current market is that Italy accounts for about half of all government bonds from the eurozone with a positive yield. So if the relevant fund managers do not buy Italian debt, they risk underperforming their benchmarks.

While it would have been possible to tap the 2049 deal, Italy took the opportunity to announce a big new issue, led by Barclays, BNP Paribas, Citi, Crédit Agricole and Monte dei Paschi di Siena.

The political dimension

Politics is never far from the surface in Italian sovereign debt, and timing is often of material significance. The new 30-year deal, due in September 2050, was launched in mid-January, shortly before a closely watched regional election in the left-wing stronghold of Emilia-Romagna.

“The polls did not indicate a clear victory for either left- or right-wing parties, and the possibility was that if the right could win here, they could win at the national level,” explains Francesco Polon, a Barclays vice-president of debt capital markets (DCM) in public sector origination.

It was decided to go ahead with the issue before the election. “The investor feedback was that Italy would be a popular trade, and that many would like to buy before this event,” says Mr Cumbes. If the Emilia-Romagna election result was going to upset the market, extra-long bonds would be defensive for investors.

As it turned out, the centre-left Democratic Party held the region, fending off Matteo Salvini and his League party (which nonetheless drew three times as many votes as in the previous regional election in 2014). By then investors had already mobbed the new 30-year deal. Timing was still of the essence, however. Italy’s coronavirus crisis has since swung the investor mood 180 degrees.

Record demand

The transaction attracted orders of €47bn, setting a record for an Italian bond, from 360 investors in 35 countries. With initial price thoughts of 9bps over the prevailing price of the 2049 bond, the €7bn deal priced at 6bps over, with a 2.45% coupon and a re-offer yield of 2.499%.

Placement was gratifyingly diversified. While Italian investors rallied round, taking 32% of the deal, that left 68% spread across other nationalities. The UK and North America took 18% and 15%, respectively, with 8% going to France, another 8% to Germany, Austria and Switzerland, and a similar proportion to the Nordic countries. Iberia was allocated 4%, with a little under 4% going to Asia. Just over two-thirds of the issue was taken up by fund managers.

Another positive for Italy and other peripherals was the fact that investors expect eurozone issuance to shrink in 2020. “At the end of 2019, as sovereigns announced their intentions for 2020, there was a lack of commitment to provide the duration that the market desired,” says Yu Miao Yang, head of public sector syndicate EMEA, Barclays.

Restoring trust

After the world’s biggest restructuring, the Republic of Greece has become another hot ticket for investors, and it too has seen borrowing costs tumble over the past 12 months. “Greece has done great work in rebuilding its market,” says Mr Cumbes. He notes that its January 2019 issue, a €2.5bn five-year trade with a 3.45% coupon, is now trading at 27bps.

In March 2019 it sold a €2.5bn 10-year deal paying 3.875%, followed in July by a new €2.5bn seven-year transaction paying 1.875%. In October there was a €1.5bn tap of the March 2029 deal at 2.875%. “Greece never needed the money,” notes Mr Cumbes. “It was trying to rebuild trust.”

Then, at the end of January 2020, following an upgrade by Fitch to BB (with a 'positive' outlook), Greece returned to the market with a 15-year issue. This was notable for a number of different reasons, including the tenor, which was the longest issued by the sovereign since the financial crisis.

Significantly, this was its first all-new-money bond with a maturity stretching past 2032, when long-term relief measures for Greece’s debt are expected to expire. And, as a further indication of the issuer’s return to some degree of normalcy, it was the first since the end of the Greek fiscal adjustment programme to be priced versus mid-swaps rather than yield.

“This was a crossover trade,” says Ms Yang. “The investors were a combination of European government bond core rates buyers who stepped away from Greece in the more difficult years and those who supported Greece through thick and thin. Yield-hungry emerging market funds are starting to disappear, now that Greek yields are back to below 1%.”

With Barclays, BNP Paribas, Bank of America, Goldman Sachs, HSBC and JPMorgan as bookrunners, the deal was announced with initial price thoughts of mid-swaps plus 175bps area. Record-breaking orders of €18.8bn allowed the re-offer spread to be set at 165bps with a re-offer yield of 1.911%. The size was €2.5bn and the coupon 1.875%. The distribution was 84% international, with fund managers taking 68% of the bonds.

The success of both the Italian and Greek transactions underscores investors’ increased appetite for longer dated paper. As markets accept the ‘lower for longer’ thesis on interest rates, buyers seem happier to park their money for longer periods in credits they trust.

“Five years ago, the sweet spot in maturities for rates investors was seven to nine years,” says Harry Koppel, a Barclays managing director in public sector DCM. “Now it is a lot longer, at 15 to 16 years.”


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