Italian Company Bonds Rebound to First From Worst: Euro Credit

Italian Company Bonds Rebound to First From Worst
An employee works on a jet engine at Finmeccanica SpA's plant in Naples, Italy. Finmeccanica’s 5.25 percent 2022 notes jumped 17 cents, or 25 percent, this year to 85.1 cents on the euro, driving yields to 7.5 percent. Photographer: Victor Sokolowicz/Bloomberg

Italian corporate bonds account for seven of the top 10 performers this year as investors renew their holdings of securities they shunned at the peak of Europe’s sovereign debt crisis.

Bonds of Finmeccanica SpA, Italy’s largest defense company, Telecom Italia SpA and Lottomatica SpA climbed as much 25 percent this year, the biggest price increases in the Markit iBoxx Euro Non-Financials index, which tracks 743 securities with a face value of 631 billion euros ($829 billion). Italian issues, the third-biggest national group in the global index, fell more than any other euro-region company notes last year, plunging as much as 31 percent. Italy was one of six European nations downgraded by Moody’s Investors Service yesterday.

“Yields were at a level indicating that companies were on the verge of bankruptcy, which wasn’t true,” said Angelo Drusiani, who manages about 3 billion euros at Banca Albertini Syz & C. in Milan. “Some fund managers who decided to exit from Italian corporate bonds are now piling back in.”

That’s helping Italian borrowers benefit more than other euro-region firms from a two-month rally fueled by the European Central Bank’s flood of cheap three-year cash. The rally is also a vote of confidence in Prime Minister Mario Monti’s 20 billion euros of budget cuts and tax increases to reduce the region’s second-biggest debt load after Greece.

Finmeccanica, Lottomatica

Finmeccanica’s 5.25 percent 2022 notes jumped 17 cents, or 25 percent, this year to 85.3 cents on the euro, driving yields to 7.4 percent, Bloomberg Bond Trader prices show. The yield on securities sold by the Rome-based developer of the Eurofighter rose to as high as 11.2 percent on Nov. 29. Lottery company Lottomatica’s 500 million euros of 5.375 percent notes due 2018 rose 11 percent since the start of the year to 99.2 cents on the euro, while prices on Rome-based Telecom Italia’s 7.75 percent securities due 2033 climbed 13 percent.

Italian companies offered some of the widest yield premiums to government debt at the start of the year, according to Andrew Sheets, head of European credit strategy at Morgan Stanley in London. “They benefited from the fact that investors had reduced their exposure to Italian credits quite a bit in the fourth-quarter, which was more conducive for improved performance,” he said.

Bond Rally

The extra yield investors demand to buy Italian company bonds instead of government debt has tumbled to 288 basis points, or 2.88 percentage points, from 377 basis points at the end of December, according to Bank of America Merrill Lynch’s EMU Corporates, Non-Financial Index. That compares with an average of 168 basis points for the whole index, which tracks securities issued by companies from Deutsche Telekom AG and GDF Suez SA in France to Moline, Illinois-based Deere & Co.

Italian corporate bond prices have tracked the rally in the nation’s sovereign debt, where yields on 10-year government debt have tumbled to 5.56 percent after reaching a euro-era record

7.3 percent on Nov. 25.

The yield premium on Italian debt compared with German bunds fell for a second day today, declining one basis point to 366 basis points. The spread fell to a low for this year of 347 on Feb. 9.

The spread versus bunds on France’s 10-year note rose seven basis points to 105, while Spanish spreads increased five basis points to 337 and the extra yield on Greek securities widened to 3,108 basis points.

Monti Fans

Borrowing costs for Italy, which had its credit rating cut to BBB+ from A by Standard & Poor’s last month, surged in 2011 amid concern the nation would struggle to refinance its 440 billion euros of maturing debt. Prime Minister Monti has garnered praise from French President Nicolas Sarkozy for “spectacular progress” after pushing through spending cuts and tax increases designed to eliminate Italy’s budget deficit by


“If Italian sovereign yields perform well, then it makes sense for investors to look for performance from corporates,” said Chris Bullock, a fund manager at Henderson Global Investors Ltd. in London, which oversees 18 billion euros in fixed-income assets. “The market essentially likes Mario Monti.”

Italy was downgraded to A3 from A2 with a negative outlook, Moody’s said in a statement yesterday. The company also reduced ratings on Spain, Portugal, Slovakia, Slovenia and Malta, citing “uncertainty over the euro area’s prospects for institutional reform of its fiscal and economic framework.”

The ECB’s 489 billion euros of three-year loans to 523 lenders in December is also underpinning investor faith in both banks and euro-denominated bonds. A second longer-term refinancing operation, or LTRO, is planned for Feb. 28.

‘Outsized Help’

“The LTRO and the improvement in sovereign and bank funding markets has probably helped Italy more so than most,” said Morgan Stanley’s Sheets. “The LTRO has boosted confidence in this ability to refinance, which has been an outsized help to Italian corporates as well as banks.”

The corporate bond rally has renewed investor demand for higher-yielding debt from the euro region’s so-called peripheral nations such as Italy, Spain and Ireland. Italian corporate securities yield 4.4 percent on average, according to Bank of America Merrill Lynch data. That compares with 3.1 percent for French company debt and 2.4 percent on German company bonds.

“Four weeks ago, no one wanted peripheral risk, now they can’t get enough of it,” said Suki Mann, a credit strategist at Societe Generale SA in London.

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