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Sunday, 22 October 2017

Pressure off

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Portugal successfully raised US$10.16bn in the last financial year, with investors lapping up the sovereign credit. Even after ratings agencies downgraded the country’s long term debt, Portugal is likely to still be able to meet its borrowing target this year. Han-Nee Tay reports.

Portugal came to the market four times in the 2009/10 financial year, in four hugely oversubscribed deals: three medium term notes and a 10-year jumbo bond.

Especially impressive was the fact that two of the deals were done early in 2010, in increasingly difficult financial markets. At the time, worries over Greece’s fiscal position had already started to spread to other southern European countries, thought to be facing similar fates. Portugal still achieved its goals, albeit at wider spreads than seen in 2009.

Portugal’s budget deficit is a staggering 9.3% of its GDP. European Union guidelines state that its members must keep their budget deficits below 3% of GDP. There are lingering concerns about Portugal’s ability to cut its huge budget deficit. However, for now investors have been calmed by sweeping austerity measures the government has already announced this year.

Given the government’s commitment to reigning in its huge debts, analysts believe Portugal will have few problems coming to the market for the near future. “One of their major bond maturities in terms of medium- to long-term debt was in May which they achieved. So the immediate pressure is off for now, although they do have a sizeable amount of short term debt to roll over,” said Brian Coulton, head of sovereign ratings for EMEA at Fitch Ratings, which downgraded Portugal’s long term debt by a notch to AA- on March 24. “In terms of medium- to long-term bond financing, the worst pressure for Portugal is over.” Portugal raised €1bn in May and its debt agency has announced borrowing targets of €24-25bn this year.

Investors appear to like Portuguese credit. All the deals done in the last financial year were priced at tighter levels than initial market guidance, the order books swollen with accounts. At the end of May 2009, Portugal raised €3.25bn from a 3.6% five-year government bond, maturing October 15, 2014. Orders from 149 accounts had reached €6bn, allowing lead managers Caixa-Banco de Investimento, Citigroup, HSBC, ING and Morgan Stanley to close the deal at mid-swaps plus 67bp, the cheap end of initial guidance. When the deal first went to market, price guidance was mid-swaps plus 70, which was subsequently tightened to mid-swaps plus 67-70bp.

But spreads blew out by early this year, when markets were rocked by turbulence over Greece. As investors fretted about whether Portugal would lose its grip on its public debt, the country faced an increased cost of financing when it came to the market to raise another €3bn at the end of February.

Prices were now quoted in three digits. The issue finally set at mid-swaps plus 140, albeit at the lower end of the marketed range of mid-swaps plus 145-150bp. Demand was again strong, with the book bulging to €13bn. It finally closed with an impressive 280 orders. The ten-year bond, sold by Barclays Capital, Banco Espirito Santo, Credit Agricole CIB, Goldman Sachs and SG CIB, is due June 2020 and yields 4.8%. A syndicate member told IFR that a day after the deal was priced, the bond was quoted in the market at 10bp tighter.

From there, spreads tightened further for Portuguese credit. In March, it launched a five-year dollar deal through Deutsche Bank, Goldman Sachs, HSBC and Morgan Stanley, the first Portuguese Reg S/144a dealsince 1999. With demand fairly strong, it priced at mid-swaps plus 97bp after being marketed at mid-swaps plus 100bp, considerably tighter than its February deal. The 3.5% March 2015 raised US$1.25bn.

In the midst of these three deals, Portugal also quietly raised ¥30bn (US$328m) via a Euroyen five-year note, through sole lead Citigroup, in June 2009. Given the successful year it had in raising funds, analysts are hopeful that Portugal will not be faced with the hostility in the market that Greece did before its bailout.

“Investors are looking at the bigger picture and also what the Portuguese government has done,” said Carsten Brzeski, senior economist at ING. “On the one hand, Portugal would have European countries jump in if the need arises. On the other hand, the Portuguese government is committed to fiscal consolidation. From both points of view, we know that there is a commitment, therefore, investor worries should disappear.”

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