FILE PHOTO: A logo of sports car manufacturer Ferrari is seen in Monaco September 30, 2016. REUTERS/Eric Gaillard
May 31, 2018
By Alasdair Pal and Abhinav Ramnarayan
LONDON (Reuters) – Italy’s luxury carmaker Ferrari and Exor, the owners of Juventus football club, are among a host of companies that can now borrow money more cheaply than the country’s crisis-hit government.
Italian sovereign bond yields rose this week to some of their highest levels in years on fears that the country’s eurosceptic politicians could win a stronger hand in potential elections, reviving the possibility of a eurozone break-up – or at least a repeat of the European Union’s 2011-2012 crisis.
Even though Italy’s government bonds recovered some of their losses on Thursday, the bonds of nearly two-thirds of non-financial companies in Italy’s FTSE MIB equity index have lower yields than that of the sovereign, suggesting that investors find them more creditworthy than the government.
Italian corporate bond yields have also risen over the past week but not as dramatically as the government or sovereign bonds. The yield on a bond maturing in May 2024 from utility Enel, rose 18 basis points on Tuesday to 1.21 percent but the equivalent Italian six-year benchmark bond saw yields rise 91 bps to 2.91 percent.
Sovereign bonds are usually considered safer than bonds issued by companies, given the latter have a higher chance of defaulting on creditors or going bankrupt. But a select group of powerful global multinationals carry higher credit ratings than the country where they are based.
In Italy, Enel as well as energy giant ENI boast credit ratings above Italy’s BBB/Baa2.
“The list of Italian firms includes a large number of global companies, many of them are global corporates with an Italian heritage,” said Andrew Jackson, head of fixed income at Hermes, an investor with £33.6 billion of assets under management. “Of course they will be faced with major challenges if there is the worst-case scenario of redenomination, but perhaps not as much as the more Italy-focused borrowers,” he said, referring to the risk of euro break-up. Hermes did not hold any Italian government bonds and maintained its Italian corporate bond holdings through this latest political crisis, Jackson added.
Shares in such companies have also generally outperformed the rest of the Italian stock market – while the Milan index has fallen 2.7 percent so far this week, Ferrari for instance is down 0.7 percent and ENEL has slipped 0.9 percent.
Ferrari’s 2023 bond, not currently rated by any of the major ratings agencies, carries a yield of 1.29 percent, lower than the 1.98 percent yield paid by an Italian sovereign bond that matures two weeks earlier.
Meanwhile, Exor’s 2022 bond yield, rated BBB+ by S&P, is currently around 0.9 percent lower than its sovereign equivalent while the yield on bonds from ENI and ENEL is even lower.
Italy is ranked BBB by Standard &Poor’s, two notches above junk. Moody’s has warned of a possible downgrade to Italy’s rating if the fiscal policies of the next government did not put the country’s public debt ratio on a sustainable downward trend.
To view a graphic on Italy corporate v sovereign yields, click: https://reut.rs/2L9T5Ak
A 2024 bond from Luxottica, the maker of Ray-Ban sunglasses, currently yields 0.71 percent, less than a third of Italy’s six-year borrowing cost of 2.26 percent.
Many of these companies benefit from their low exposure to the domestic market.
Ferrari, for instance, makes just 17 percent of its sales in Italy, Reuters data shows, while for ENEL and ENI the figure is around a third. Just over a fifth of Luxottica’s sales are in Europe, with the majority in the United States.
But a banker who manages debt sales for large European companies said that while domestic political issues may not hugely impact on Italy-based firms with global sales, investors would not necessarily rush to lend to them should they attempt to sell bonds in the near term.
Italian government bond markets have recover from the selloff on hopes that new elections can be avoided, plus polls showing most Italians still support the euro. A thumbs-up from a large Japanese investor has also helped. But questions remain over Italy’s future within the European Union and even the eurozone.
That is keeping a significant risk premium in Italian sovereign bond prices, with 10-year yields still more than 200 bps above Germany’s. That will make investors wary of any new Italian exposure.
“Confidence has been shaken and I can’t see any Italian corporates getting transactions done at a reasonable price for a while yet,” the banker said.
(Reporting by Alasdair Pal and Abhinav Ramnarayan; Additional reporting by Sujata Rao. Editing by Jane Merriman)