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Market volatility a bigger challenge for Italian HY bond issuers.

London: Fitch Ratings said market volatility is a bigger challenge for Italian high-yield (HY) bond issuers than those in many other jurisdictions, due to the lack of funding alternatives.

The recent selloff in Italian HY bonds was driven by political risk aversion rather than fundamental concerns over near-term credit performance. But even if domestic political volatility subsides following the presentation of the new government's budget law in October, this may coincide with the re-emergence of broader market volatility as ECB monetary policy starts to tighten, making issuance more challenging and expensive.

Fitch Ratings is a nationally recognized statistical rating organization (NRSRO) designated by the U.S. Securities and Exchange Commission. Thus far, there are no reports of unsyndicated commitments in the current pipeline and the impact on Italian issuers has been limited to secondary market discounts that have recovered modestly from last week's lows. Many strong Italian HY credits continue to trade above or near par, while some credits in sectors most exposed to the new government's uncertain policy stance are experiencing double-digit yields. In our view, these moves are unrelated to the kind of top-line revenue or operating profit concerns that accompanied recent selloffs in the US and UK HY markets. In those cases, weak credit performance in commodity and consumer sectors accompanied volatility from Fed tightening and Brexit.

Nonetheless, primary market activity has been muted for Italian HY issuers since the anti-establishment coalition was formed in May, and new issuance volumes are likely to suffer for the rest of 2018. Although coupons remain near historical lows, Italian speculative-grade companies may be tempted to take a wait-and-see approach to issuance rather than pay a new issue premium, particularly as improving economic conditions in Italy and cash flow performance remain supportive of their credit fundamentals.

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Publication:Daily the Pak Banker (Lahore, Pakistan)
Date:Sep 4, 2018
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