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Wednesday, 13 December 2017

Dollar preference

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Several Central European countries have reaffirmed their preference for the US dollar market in 2011 with Hungary, Croatia and Lithuania all taking advantage of American investors’ almost insatiable appetite for EM sovereign risk. In stark contrast the shallower euro market continues to struggle as the EU debt crisis deepens. John Weavers reports.

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Emerging Europe’s traditional enthusiasm for all things EU convergent – including the euro-denominated bond market to meet its hard currency funding requirements – has been undermined in recent years. Peripheral EU countries’ ongoing fiscal struggles have convinced government officials in Budapest, Vilnius and Zagreb that dollar issuance now represents the smoothest and most cost effective means of raising money in the international market place.

This year the Republic of Lithuania (Baa1/BBB/BBB) led the way on March 2 when it secured an astonishing US$5.25bn order book for an upsized US$750m 10-year Reg S/144a which priced at 6.375%.  This – the Republic’s fourth successive dollar issuance – completed the country’s 2011 funding requirement in one fell swoop. Earlier Slovenian and Polish euro deals had struggled for traction as the traditionally strong German bid softened, which Nick Darrant, head of CEEMEA syndicate at joint bookrunner BNP Paribas, sighted at the time as the reason it had opted to go the dollar route.

“It made perfect sense for Lithuania to again access the deeper and more liquid dollar market, which is extremely receptive to Eastern European sovereigns, especially in the red hot 10-year part of the curve,” he said.

Deeper, cheaper

As an EU member state, Lithuania had a general preference for euro issuance, said Stefan Weiler, executive director at fellow arranger JP Morgan, “but the dollar market is deeper and less expensive and ultimately it is price and size that counts.”

Croatia followed two weeks later when it raised US$1.5bn from its third Reg S/144a 10-year issuance within 18 months as US investors took another 50% plus allocation (58%). The Republic (Baa3/BBB-/BBB-) priced the new 6.375% 2021s at 98.250 for a yield of 6.607%, 330bp wide of Treasuries, in a transaction arranged by Barclays Capital, Deutsche Bank and JP Morgan.

Weiler offered two main reasons for the success of Croatia dollar deals: “There is an obvious scarcity and diversity element because Croatia represents a very small part of the EMBI+ compared with Brazil, Mexico and Turkey etc,” he said. “Secondly, inflows into EM are rising just as the EMBI+ debt stock is decreasing and the primary market represents a rare and attractive opportunity to put money to work in EM sovereigns.”

The Republic of Hungary (Baa3/BBB-/BBB-) hit the headlines for all the right reasons on March 24 with the largest deal to date from a CEE issuer. Making huge inroads into its €4bn (US$5.68bn) 2011 Eurobond target Hungary printed a US$3.75bn dual tranche, 10 and 30-year SEC-registered Global transaction.

Orders totalled an extraordinary US$11bn for the 2021s and US$3bn for the 2041s which enabled the leads to price the new 6.375% 2021s and 7.625% 2041s at 15bp inside guidance, or Treasuries plus 310bp and 330bp. US investors were once again at the forefront in terms of allocation as they received 68% of the 10-year and 58% of the longer-dated offering.

Two weeks later the Republic tapped the 2041s by US$500m to take its issue size up to US$1.25bn.

The dollar market has long been the first port of call for former Soviet nations and 2011 has been no exception. Belarus (B1/B+/NR) raised US$800m from its second ever Eurobond, an 8.95% seven-year, on January 19. Ukraine (B2/B/B) followed four weeks later with a US$1.5bn 7.95% 10-year while Georgia (Ba3/B+/B+) debuted via with a 6.875% US$500m 10-year on April 12.

Meanwhile Turkey (Ba2/BB/BB+) has hardened its dollar preference just as its EU enthusiasm wavers with April 2010’s €1.5bn 10-year offering representing Ankara’s first euro offering in three years.

The euro market is not being completely ignored, however. Hungarian officials meeting European fund managers in the middle of April to discuss a potential euro deal to take out the remainder of its 2011 Eurobond target, a transaction that could take place before the summer.

Montenegro(Ba3/BB/NR) did manage to raise €180m from a 7.25% five-year Reg S only transaction in April but specific factors were at work here, in particular the euro’s legal tender status in Montenegro.

Overall, supply and demand factors have undermined the fortunes of euro paper, giving it supplementary rather than a priority status for emerging European sovereigns seeking to raise funds internationally in the smoothest and cheapest way.

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