The Italian Treasury has implemented a flexible and diversified funding policy to manage the amount of Italian public debt. Here Laura Maridati, Digital Markets Structures, Market Hub, Intesa Sanpaolo IMI CIB Division* describes the main characteristics of the direct listing of treasury bonds, specifically BTP Italia and BTP Futura**, and the reasons for the successful implementation of this funding process.
Italian treasury bond issues have more than one route to market:
- Public auction: The Italian Treasury prefers public auctions for issues on the domestic market, normally to guarantee access for an extensive group of investors and to maintain a high level of competition and transparency;
- Syndicated Placement: The Italian Treasury limits the use of syndicated placements (composed by banks within the specialist groups) when introducing new instruments or when very in-depth evaluations need to be made as regards market interest, the quantity to offer or the issue price of the bond (like the first issue of BTP€ in 2003 and of CCTEU in 2010);
- Direct listing on the Italian Exchange’s trading venues: This new funding channel was introduced first in 2012 for BTP Italia, the Government bond linked to Italian inflation, using the Italian Exchange’s MOT electronic platform (a regulated bond market dedicated to retail size orders). This innovative method has been successful because retail investors could purchase BTPs directly on-line, through any home-banking system that has an on-line trading feature, during the placement period. This avoided having to physically go to a bank or post office, which turned out to be extremely useful over the last two years of Covid emergency.
BTP Italia is the first Italian government security indexed to the Italian inflation rate, issued for the first time in 2012 through direct listing, to meet retail investors’ needs. This type of issuance was characterised by different maturities (4, 6, 8 years) and the last issuance in 2020 was 5 years. BTP Italia guarantees a minimum annual real rate; semi-annual coupons calculated on the revalued capital; an immediate inflation hedge through principal revaluation paid every six months; nominal principal guaranteed at maturity, even in case of deflation; and a final bonus for investors (individual investors and other persons similarly classified) who purchase the bond during the first phase of the placement and hold it until maturity, to make it more attractive for retail investors to ‘buy and hold’.
Since April 2014, the placement has been organised in two phases dedicated to two potential categories of subscribers: retail investors and institutional investors.
In 2021 the Italian Treasury, considering the absence of matured issues, decided not to issue a new BTP Italia. Unlike 2021, this year will see a BTP Italia maturing in an amount of slightly more than €2bn. Therefore, the Treasury, to keep the instrument’s viability, as written in the guidelines for 2022, is evaluating the opportunity of issuing a new BTP Italia during the year in order to satisfy the demand of institutional and retail investors, and continue to provide a well-established instrument to protect their savings.
With reference to secondary market, BTP Italia results in less liquidity than traditional BTPs. Among the reasons for this are 1) the large placement to retail investors, habitually ‘buy and hold’ investors, 2) the loyalty premium that is received if the bond is kept to maturity and finally, (3) the recent prospects of rising inflation.
Following the successful placing of BTP Italia, the Italian Treasury decided in 2020 to introduce a new instrument, the BTP Futura, via two issues aimed at financing the measures launched by the Government in order to deal with the health and economic-financial crisis resulting from the Covid-19 pandemic (with total funding of over €11.9bn). In 2021 this instrument was offered via another two issues, reserved exclusively to retail investors, and aimed at financing the measures launched by the government to support the country’s economic growth (with total funding of over €8.7bn). At the end, BTP Futura confirmed its successful distribution among retail investors.
As written in the guidelines for 2022, this year will see the Treasury issue at least one BTP Futura, with the possibility of a second placement later in the year according to financing needs and to continue to offer retail investors an instrument to protect their savings and support country’s growth.
In addition to the innovative coupon structure based on the ‘step-up’ mechanism, which provides for nominal semi-annual coupons calculated on the basis of a series of pre-established rates, increasing over time, with minimum guaranteed yields, the two 2021 issues saw the Italian Treasury introduce a double bonus paid at two different times to reward savers who hold the security until maturity. In particular, this formula provides for the payment of an intermediate bonus at the end of an initial period of the life of the security to investors who have held the BTP Futura since issuance, and a final bonus to investors who hold the security without interruption from issuance to maturity.
Again, when it comes to the secondary market, BTP Futura results are not very liquid. With similar reasons to BTP Italia: the exclusive placement to retail investors, habitually ‘buy and hold’ investors, as well as the final bonus which is paid only to investors who purchase the bond at issuance and hold it until its maturity.
Total volumes issued and number of contracts of BTP Italia & BTP Futura show record numbers (see Figure 1). BTPs Italia have been placed for around €172bn through sixteen issuances and BTPs Futura have been placed for around €21bn through four issuances. The total number of contracts issued was around 2.46 million (see Figure 2).
With regard to BTP Italia, analysing the contracts with reference to the first phase of the placement period, about 47% of the contracts had a size of less than 20,000 Euros, while around 80% of the contracts were less than 50,000 Euros.
With regard to BTP Futura, which was targeted only to retail investors, the average size of contract was 39,000 Euros, with about 61% of the contracts less than 20,000 Euros, and 87% less than 50,000 Euros.
Moreover about 60% of BTP Futura investors had not participated at the last BTP Italia issue on May 2020, recording an important increase in the direct involvement of Italian investors.
In this context and with these numbers, it is easy to think that the issuances placed on the MOT electronic platform and dedicated to retail investors will continue to represent an excellent way of Italian government funding.
*Laura Maridati is indebted to Rosaria Capozza for her assistance in composing this article
**BTPs Italia are the first Italian government securities indexed to the Italian inflation rate, issued for the first time in 2012, and conceived principally to meet the needs of retail investors.
BTPs Futura are Italian government bonds designed with the aim of supporting the national economy: its proceeds are entirely used to finance the measures adopted by the government to support the country’s growth and to cope with the emergency from Covid-19.
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