Periphery makes renewed push

IFR SSA Special Report 2020
11 min read
Julian Lewis

The coronavirus crisis prompted a marked increase in international bond issues by peripheral eurozone sovereigns, regions and agencies. This intensified push culminated in the record-breaking €31bn raised by Italy and Spain in April.

With the eurozone’s periphery severely hit by the coronavirus pandemic, sovereigns and public sector entities from across the Mediterranean region stepped up their funding in international bond markets. Their new push culminated in as much as €31bn raised by key issuers Italy and Spain on consecutive record-breaking days in April.

“In the periphery, we saw sovereign issuers reacting very quickly to the new funding situation, adjusting their borrowing programmes in a number of different ways,” said Pierre Blandin, global head of SSA DCM at Credit Agricole.

These responses – launched mostly when infection and death rates were still rising rapidly in Italy and Spain – included additional and larger government bond auctions. Moreover, they brought new and/or shorter maturity syndications than usual (Spain’s first seven-year, a five-year from Italy), larger syndicated deals than previously (Italy’s €16bn dual-trancher, Spain’s €15bn 10-year) and significant retail distribution (Italy’s record €22bn BTP Italia).

Besides the two heavyweights, regional peers Cyprus, Greece and Portugal were all active in the period too. Portugal’s €5bn seven-year particularly stood out – its largest single-tranche bond ever and only the second sovereign bond to emerge from the periphery after primary markets began reopening in late March.

Cyprus’s €500m 30-year was notable too as the period’s only ultra-long periphery sovereign issue until Italy later followed suit.

The speed of the sovereign actions reflected past lessons. “I think there was a very quick response as many issuers have learned from their experiences in the global financial crisis and the subsequent eurozone crisis,” said Asif Sherani, head of public sector syndicate at HSBC.


Equally, their scale sent important signals. “Some in the market were focused on how some lower-rated sovereigns would fund responses to fill the gap in economic activity and stimulate economies, and the amounts involved were clearly going to be large. But seeing syndications come through in such huge size, all driven by confidence from private investors, took the pressure off and made it easier to see how the larger task gets completed,” said Lee Cumbes, head of public sector debt EMEA at Barclays.

“The depth of the market for these credits, allowing them to immediately start covering the additional funding required,” was a positive surprise, said Blandin.

While the volumes required by periphery sovereigns have precedents in the eurozone crisis of the early 2010s, they are “back to peak levels”, Cumbes judges. Spain has upped its 2020 net borrowing target to €130bn from the original €32.5bn, for example.

This time, however, the bloc’s institutional capacity has been significantly strengthened. This is through the European Central Bank, European Stability Mechanism and other vehicles such as the European Union’s SURE – Support to mitigate Unemployment Risks in an Emergency – programme.

Peripheral sovereigns are likely to borrow under the €100bn SURE and the ESM’s ‘Pandemic Crisis Support’ fund. Spain has indicated that it will seek €15bn under SURE, while Cyprus is to make use of the ESM fund.

The €500bn EU recovery fund agreed by France and Germany but as yet without full member state backing could also be a significant source of funding. The fund’s political sponsors envisage it dispensing grants rather than loans.

Most notably, though, the ECB’s PEPP - Pandemic Emergency Purchase Programme – scheme has provided a vital backstop for peripheral credits. In tandem with existing ECB quantitative easing initiatives, the €750bn scheme turned around a growing sell-off in Italian debt in particular.

"The announcement of the PEPP saw a material turnaround in risk sentiment and spreads, allowing for issuers to continue to finance themselves in a smooth and effective manner,” said Sherani, who noted that despite the increased borrowing requirements, net SSA supply is likely to be very low (and even negative in some cases) as a result of the ECB’s €1trn-plus overall purchases.

“The various ECB asset purchase programmes played a critical role in stabilising euro fixed income markets and contributed to the reopening of the primary market in the second half of March, allowing a very broad range of issuers to raise funding in much larger size than initially anticipated,” echoed Blandin.

Even so, Cumbes would not have forecast that Italy and Spain would each attract record order books of some €100bn for their benchmark offerings. “That was a phenomenally positive message for the market,” he said.


The “enormous range” of Italy’s funding products enables it to generate price tension between markets, Cumbes judges. Last year saw the Tesoro active again in significant size in conventional bonds out to 50 years, as well as inflation-linkers, zero coupon and floating-rate notes, bills and foreign currency debt.

Accordingly, it was the last of the peripheral sovereigns to surface in international markets. Indeed, a €500m social bond from Cassa Depositi e Prestiti was the only sign of the country’s public sector credits in the first month of the primary reopening.

Yet Italy was funding very actively during this period through auctions. Strikingly, it was able to raise as much as €19bn in three days of bill and bond auctions shortly before its jumbo syndication.

“That was a reminder that the Italian treasury has developed a very strong machine with a lot of features that investors like – not least liquidity,” said Cumbes.

After its landmark dual-tranche syndication in late April – the first bond offering to attract over €100bn in demand, with an order book that eventually exceeded €110bn – the sovereign also sourced an unprecedented €22bn from primarily local retail buyers of its domestic inflation-linked BTP Italia.

The landmark itself packaged a new five-year and September 2050 tap, allowing the sovereign to maximise size without cannibalising demand. Lead managed by Banca IMI, Bank of America, Deutsche Bank, JP Morgan, Nomura and Societe Generale, it underscored the post-crisis necessity of enticing investors with significant concessions.

Italy offered 19bp premiums on both tranches at initial price thoughts – 27bp area over the BTP February 2025 in the case of the €10bn five-year and 15bp area over the September 2049 in the case of the €6bn 2050 tap. With rampant demand almost equally distributed across the two tranches, it was able to drive down its spreads to 21bp and 9bp, respectively.


In contrast to Italy, Spain was the periphery’s first mover. By printing as much as €10bn in its first post-crisis issue the sovereign “allowed for some immediate funding pressure to be taken off and for smooth functioning in the subsequent auctions,” said Sherani.

Priced in late March, the seven-year also “instilled great confidence in the broader markets and showed that periphery issuers had access to the markets, in size”, he added.

Its selection of the 2027 maturity - a compromise between the sovereign’s desire for longer-dated funding and investors' risk aversion - led others such as neighbouring Portugal and Belgium to follow suit

"We have been studying the possibility of a seven-year benchmark for several years. Italy has syndicated in this maturity quite successfully," said Pablo de Ramon-Laca, general director of the treasury and financial policy, at the time.

The tenor was also attractive as Spain would have faced "abnormally low redemptions" in 2027, de Ramon-Laca said. This is because, back in 2012, it was unable to issue its usual 15-year bond under its offering programme.

With a smaller borrowing requirement to meet than Italy’s and a stronger credit, Spain’s strategy had already been to maximise the liquidity of its benchmarks. Its post-crisis jumbos furthered this approach of drawing on banks’ sales and trading capacity to promote its debt as the eurozone periphery benchmark.

The day after Italy’s landmark, it resurfaced with a €15bn 10-year that drew the record order book for any single-tranche transaction in any currency - more than €96.5bn (including €10.5bn of interest from lead managers Barclays, BNP Paribas, Citigroup, HSBC, JP Morgan and Santander) across 560 line items.

Spain followed a similar playbook to its peer, offering a significant concession while pricing against a comparable bond (the April 2030 Bono, in its case) to shield the transaction from volatility in swaps. At initial guidance of 22bp area, the new issue premium was some 17bp to fair value. The unprecedented order book allowed Spain to narrow its concession to 12bp.

Investors were incentivised to show rapid support. Under an ‘Early Bird Special’, the Tesoro offered an undisclosed "incremental allocation larger than zero" to indications of interest made before guidance was released. The benefit is one of several measures Spain uses to try to accelerate the jumbo deal process.

“The core strategy of targeting liquidity has been rewarded,” judges Cumbes. “Spain has been accepted as a core investment by some of the largest investors in the world and got enormous support.”

Its strategy also paved the way for the country’s agencies and sub-sovereigns to access international funding amid the crisis – each with responsible debt products. The Autonomous Community of Madrid’s €700m seven-year stood out in particular as the first green bond from a Spanish governmental entity (ahead of the sovereign’s planned green debut in the second half of the year).

Like Madrid’s offering, Instituto de Credito Oficial’s €500m five-year social bond and the Basque Government’s €500m 10-year sustainable bond were heavily oversubscribed.

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Periphery makes renewed push