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Friday, 15 December 2017

Greece and the art of taps

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The Hellenic Republic has continued to pursue a policy aimed at front loading its issuance requirements during the first six months of this year. Although at one point this looked like a tall order, it is back on course having completed over 90% of its stated funding requirement, including the two largest sovereign taps of the year. Mike Winfield reports.

The story of Greece's funding this year reflects the market's uncertainty about the single currency. It flits between believing the single currency itself may be in jeopardy, to believing that the stronger members will provide support, to a view that no support will be needed. Funding the projected €43.7bn budget deficit of the A1/A-/A- sovereign has involved treading a fine line between these changes in sentiment. Although at an advanced point, Greece and its peers will likely be subject to continued spread volatility in the months ahead. The early borrowing estimate may ultimately be exceeded: some commentators expect the annual requirements of the Hellenic Republic to reach €50bn this year.

Greece's 2009 borrowing strategy has been so far to issue in the main benchmark maturities of three, five and 10-years, increasing these issues as changes in investors risk appetite have permitted. "The front-loading of issuance this year is in line with the traditional pattern which sees around 75% of funding completed by May. This year 68% of total redemptions also fell within the first quarter," said Massimo Antonelli, director in the sovereign solutions group at RBS. It's first financing was a €5.5bn 5.5% August 2014 deal sold in January which offered a spread of 260bp over mid-swaps. This was followed by a €7bn three-year offering which was priced at the tighter end of the mid-swaps plus 190bp-200bp guidance.

Both deals attracted a high level of domestic accounts participation at around 50%. "For Greece, as well as other eurozone sovereigns, the domestic bid has been increasingly important this year. This is a function of the refinancing facility in place with the ECB which is helping to blunt the impact of increased funding needs for sovereigns across the Euro area," Antonelli added.

The Minister of Economy and Finance of the Hellenic Republic, Ioannis Papathanasiou, said in early February that he expected positive economic growth to continue after averaging above 4% for the last decade. At the same presentation, made in London on behalf of the Public Debt Management Agency, he signaled its intention to proceed with a 10-year issue at the earliest available opportunity. The resulting issue, sold in early March, was priced at 265bp over mid-swaps – or slightly over 300bp above 10-year Bunds. As Bunds were yielding just 3% at the time, Greece offered investors their best chance of the year to pick-up yield by diversifying away from German assets. Nearly €12bn of orders in the final book is testimony to this fact.

Apart from a general malaise in the peripheral bond markets, Greece also had to contend with a deteriorating domestic landscape with public unrest resulting from the shooting of a young protestor in Athens late last year. Officials sought to distance the political events in Greece from the economic situation, emphasising it would have no trouble meeting its borrowing needs and its future as a fully integrated member of the EU and the common currency.

The sovereign was sold a €7bn tap of its five-year bond as March drew to a close, attracting a final book of around €10.5bn. "The tap was timed to coincide with the improving tone of peripheral markets seen and the resulting €12.5bn deal was quoted at mid-swaps plus 220bp, or 261.5bp over Germany, the day after pricing at plus 225bp (or 268.7bp over the 4.25% July 2014 Bund), as investors responded positively to the new supply," said Martin Weber, head of SSA syndicate at Goldman Sachs at the time.

The size of the five-year tap has only been surpassed by Greece itself. In late April it tapped its €7bn 4.3% March 20 2012 deal for a further €7.5bn, making it the largest sovereign tap of the (May-April) year. The increase was priced at the tighter end of the original mid-swaps plus 145bp–150bp guidance, or 189.6bp over the OBL150. This leaves Greece with a tap of its 10-year issue which may in itself be sufficient to complete its funding needs for the year. There also remains the possibility that some off the run issues may be increased in size.

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