Central European Eurobond issuance remains largely confined to sovereigns within the EU as well developed local markets continue to provide most of the region's banking and corporate financing needs. Michael Winfield and John Weavers report.
As the appetite for sovereign risk has shifted since the turbulence in the credit markets in general last summer, the new issue markets have proven more challenging for the new EU member states. With relatively small borrowing requirements, much of the impetus to borrow in the international markets is driven by the desire of the new sovereigns to diversify the investor base they are able to access in preparation for full euro membership.
"Although having made the transition from emerging market credits, via crossover, to European sovereign rate products, current market conditions are deterring a number of issuers from accessing the market," suggested Maryam Khosrowshahi, co-head of EMEA sovereign borrowers at Citi.
Slovenia, rated Aa2 positive/AA/AA, is the most recent to have tapped the euro-markets in February 2008 with a €1bn 11-year trade at mid-swaps less 3bp. The deal attracted the participation of 82 different accounts and with €1.8bn of orders was comfortably oversubscribed, but was cheaper than its previous 11-year trade which was completed in 2007 at swaps less 8bp, reflecting the higher cost accession states are facing in accessing funds in the international markets.
Slovenia, which because of the similarity in its ratings, is often compared to Portugal, started using the euro at the beginning of 2007 having fulfilled the relevant qualifying criteria. It has also carried out a buyback programme of its less liquid 2013–2017 bonds as it seeks to conform to the standards of existing member states. This year's euro deal saw larger domestic distribution than last year at 13%, compared with 5% previously, because of the buyback programme.
The Slovak Republic, rated A1/A/A, is the next in line to participate in the euro from the beginning of 2009, although an ECB report in late March was critical of Slovakia's ability to meet the price conditions for Euro 'sustainability'. It has not been in the international market this year, although ARDAL, the state agency for the management of debt and liquidity, did raise €1bn in May 2007 as part of its €4bn total funding requirement for 2007. This deal also attracted fairly diverse support from 80 different accounts with just 4% being placed domestically. These figures are important as they underlie the intentions of the sovereigns to access a wider overseas investor base and, therefore, be able to more easily place new issues from their adoption of the euro.
Of the other non-euro based, accession states, Poland and Hungary are the most active borrowers, although also currently suffering from the outperformance of core-European assets. Poland, rated A2/A-/A-, raised 15-year debt at the beginning of 2007 at mid-swaps plus 18bp. It has also successfully been able to borrow funds in Swiss Francs and Japanese Yen, and in April 2007 Poland achieved the near impossible- unanimous praise from Swiss syndicate bankers, for a SFr1.5bn five and 12-year dual tranche deal.
Poland also completed a ¥50bn 30-year Samurai issue late last year at 28bp over Libor, the sovereign's seventh issue yen issue was the longest and the largest ever 30-year Samurai. It also marks the longest-ever tenor coming from Central Europe, and followed Hungary (A2/BBB+/BBB+), which had issued a ¥25bn of a 10-year Samurai at Libor plus 27bp. "The relatively larger borrowing needs have seen Poland and Hungary access these markets as an additional source of funding diversification," said Khosrowshahi.
The Czech Republic (A1/A/A+) has not been in the international market since it added its second euro issue in March 2005, probably due to the deterioration in the cost of borrowing. The Baa3/BBB-/BBB sovereign is thought to have mandated a €500m deal late last year, although this is yet to materialise.
The Balkan states remain a largely Eurobond-free region where financing needs are fulfilled by local markets. The Republic of Croatia (Baa3/BBB/BBB–), which remains the only country that has anything resembling a regular Eurobond issuance programme, is planning a return to the market with a €500m–750m issue to repay maturing debt having held discussions with several banks before Christmas 2007.
Croatia has also focused on domestic issuance in recent years after famously pulling a planned €500m seven-year Eurobond in February 2005 following objections from the Central Bank, which was concerned about excess domestic liquidity and kuna strength. The Republic last visited the market in April 2004 with a €500m 10-year that was priced at 100bp over mid-swaps.