Italy: Regional bond buyback
To reduce the public administration's indebtedness as defined in EU Regulation 479/2009, the Ministry of Economy and Finance can issue government bonds to raise funds. These can be granted to Italian regions for the repurchase of outstanding regional bonds with an average residual life of at least five years and an outstanding nominal amount higher than €250 million ($324 million) and for the early termination of associated derivative transactions.
The proceeds arising from the issue of government bonds will be made available by the Ministry of Economy and Finance to those regions which have made the relevant application. This will be done through amortising loans with 30-year terms and a rate of interest corresponding to the market yield of treasury bills with a maturity as close as possible to that of the loans to be granted to the regions.
As a result, regional debt to the market will be replaced with debt to a public administration (the Italian Treasury), with a positive effect on the financial balance of the public budget. Regional funds previously directed to paying bondholders will now remain availabile to the Italian government as they will be recorded under the revenues items of the public financial statements, and according to the SEC Regulations, debts among public administrations will not be calculated for the purposes of the stability pact.
The derivative transactions associated with the regional bonds to be refinanced would need to be terminated early and the refinancing should not as a whole create any increase in the indebtedness of the public administration sector as a whole.
Any positive market value deriving from the early termination of derivative transactions should be used by regions for the buyback of bonds in addition to the funds granted by the Ministry of Economy and Finance. Any negative market value originating from the early termination of the underlying derivative transactions would need to be added to the repurchase price of the bonds to ensure that the market value of the derivative transaction associated to the underlying debt is not greater than the nominal value of the bonds to be repurchased.
The buyback transactions will be finalised in accordance with the law governing the relevant bonds. This will be done with the support of one or more financial intermediaries selected by the Ministry of Economy and Finance and directly appointed by the relevant region through specific mandate agreements whose terms and conditions will be defined with the support of the Ministry of Economy and Finance.
The buyback process and the fees of the financial intermediaries will be dealt with in the same mandate.
Despite the supervisory role of the Italian Treasury, regions are required to adopt their independent decisions on the buyback of the eligible bonds and the early termination of the related derivative transactions.
Susanna Beltramo and Francesca Ceccobelli