August 24, 2018 / 4:21 PM / 3 months ago

Italian loan pricing rising as banks' funding costs climb

LONDON, Aug 24 (LPC) - Pricing on syndicated loans for Italian companies is rising as political uncertainty pushes Italian banks’ funding costs higher after the formation of an EU-sceptic coalition government in June.

Italian bond yields have spiked due to political uncertainty and are eroding banks’ capital buffers, which is expected to lead to the return of a loan pricing premium for Italian firms.

Many Italian companies had to pay hefty loan premiums during Europe’s sovereign debt crisis in 2011-2012 to cover peripheral risk and overcome international banks’ reluctance to lend.

As Italian banks recapitalised and problematic concentrations of risk were ring-fenced, inter bank competition saw these premiums shrink and, in some cases, return to pre-crisis pricing and maturities.

This encouraged many investment-grade Italian corporates to return to the loan market in 2016 and 2017 to take advantage of the improved terms on offer.

Italian loan market volume of US$43bn so far this year has been buoyed by a number of late cycle refinancings and acquisition loans on more favourable terms.

Big hitters such as Telecom Italia, Fiat Chrysler , insurance provider Generali, aerospace and defence technology firm Leonardo, state-owned railway company Ferrovie dello Stato and energy and telecoms cable maker Prysmian have all come to the market for multibillion syndicated loans from international and Italian lenders.

There has also been a steady stream of smaller deals for Italian firms including for industrial and packaging group Coesia, scooter maker Piaggio and steelmaker Arvedi, which were predominantly financed by Italian banks.

CONDITIONS CHANGED

Market conditions have changed, however, since the political crisis in mid-May led to the formation of a populist coalition of the League and the 5-Star Movement at the beginning of June.

Credit Default Swaps rates — a proxy for banks internal funding costs — have risen dramatically for Italy’s top lenders, making it more expensive for domestic banks to make loans.

Five-year CDS rates for UniCredit were at 171.89bp on Thursday, Intesa Sanpaolo was at 169.92bp, while Mediobanca was 180.98bp.

This compares to rates on top EMEA regional lenders BNP Paribas at 44.49bp, JP Morgan at 42.9bp and Credit Agricole at 42.73bp.

“If their funding costs are up, Italian banks will want a better return; it’s costing more so they need to earn more,” a syndicate head said.

“The extent of the rise depends on the deal - for a BB+ maybe up by 25bp. On a better credit quality and a big name, it might not be up at all as it will be absorbable,”

WARNING SIGNS

Although the initial impact from higher Italian bank funding costs is expected to be seen first in smaller mid-market, lower rated or unrated deals financed by domestic banks, bankers warn that higher rated credits may eventually be affected.

Italian banks are seeking higher yields to cover spiralling costs and international banks are looking to factor in increased risks.

“Other banks have not started to increase their return requirements for Italy - yet,” the syndicate head said.

“It depends how tricky Italy gets. If there is less liquidity from international and Italian banks, then there will be an increase in pricing.”

Market volatility saw a number of Italian investment-grade corporates avoid the bond market from May onwards and IPOs were abandoned or sidelined, while several Italian loans met with a mixed reception, bankers said.

One of the companies that sidestepped the bond market was Atlantia, the holding company of toll road operator Autostrade per l’Italia.

Baa2/BBB+ rated Atlantia gave up on a planned bond to replace a €2.5bn bridge loan backing its part of part of its joint takeover - with Hochtief - of Spanish toll-road operator Abertis.

The company turned to the loan market in July instead for a €1.75bn five-year term loan via Banco BPM, BNP Paribas, CDP, Intesa Sanpaolo, Mediobanca and UniCredit.

The new loan, which completed the refinancing of the Atlantia’s part of the takeover, pays an initial margin of 90bp over Euribor depending on rating.

At the same time, the company also put a €1.25bn five-year revolving credit facility in place.

However, the collapse of an Autostrade operated bridge in Genoa on August 14, which tragically killed 43 people, sent Atlantia’s CDS rates rocketing up to 277.98bp from 101.5bp.

Moody’s has placed Atlantia on review for downgrade, while S&P put the ratings on CreditWatch negative. (Editing by Christopher Mangham)

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