Friday, 14 December 2018

SSAR Bond: Portugal's €5.5bn dual-tranche bond

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Seizing the day

Several peripheral sovereigns have seen their debt levels soar to unprecedented levels in recent times as a consequence of a series of debt crises in 2010 and 2011. Even though the latest crisis itself has subsided for most, those countries still have to find a way of managing the proliferation of short-term debt over a remarkably short period of time.

Early this year, there was an incredible opportunity to do just that. Sovereigns’ bond spreads had tightened in anticipation of the European Central Bank’s quantitative easing programme, and the consequent hunt for yield meant there was voracious appetite for the long end of peripheral sovereign curves.

Ireland, Spain and Italy were all contenders alongside Portugal to kick things off, but it was Portugal, the lowest rated of the quartet, that was the first to take the plunge in the 30-year space as part of a dual-tranche deal that included a 10-year.

And its bravery was rewarded: it printed a €5.5bn dual-tranche deal on the back of storming demand from a broad range of real-money investors.

It included a €3.5bn 10-year tranche that generated €8bn of demand and a €2bn 30-year that recorded €6bn of orders. Notably, there were over 590 orders in the book: 290 in the 10s and 300 in the 30s.

It was the country’s first 30-year bond since 2005.

“It’s not every day that Portugal is able to launch a 30-year and it played a big part in helping us extend the duration of our debt profile, which was one of the objectives at the beginning of the year,” said Cristina Casalinho, president and chief executive of Portugal’s debt management agency.

“We thought that the market was ripe for that, for deals of that maturity. It was an opportunity that was there for us to take,” she said.

The deal was a strong one in isolation. But it also set the tone for a year in which Portugal vastly improved the sustainability of its public debt.

Over the course of the year, Portugal’s average debt maturity increased from 7.7 years at the start of the year to 8.7 years in November, and privately held debt has moved from 5.8 years to 6.8 years, according to Casalinho.

This was made possible by other factors, such as the prepayment of part of an IMF loan, but the issuance of the dual-tranche trade played a massive part.

It even had a knock-on effect: Italy announced a 30-year bond two days after, and Ireland followed suit a couple of weeks later.

The deal looks an inspired one in retrospect. Given the distortions introduced by the ECB’s QE programme and the political issues that followed in the eurozone, such a deal would have been challenging to print at a later stage.

To see the digital version of the IFR Review of the Year, please click here .

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