SSA: Portugal considering euro bond, possibly next week (free content)

9 min read
Abhinav Ramnarayan

The Republic of Portugal is considering issuing a Eurobond via syndication as early as next week, according to a Treasury official.

The sovereign, rated Ba1/BB/BB+, is assessing a long-dated maturity, subject to market conditions, according to Tiago Tavares, head of issuing and markets at the Portuguese Treasury and Debt Management Agency.

Portugal last came to market in mid-January with a €5.5bn dual-tranche 10- and 30-year bond. The notes have rallied significantly since, on the back of ECB’s asset purchase programme, notwithstanding some recent weakness.

The 4.1% 2045 note, in particular, has performed strongly. It was trading at a bid yield of 2.48% at 11.45BST on Monday, according to Eikon prices, compared to a reoffer yield of 4.131%.

Accordingly, market expectations are that the country will issue a longer tenor to take advantage of continued demand for yield.

“We are looking at that aspect, we will take it into consideration in our final decision. One of our objectives this year is to extend duration, so I think a long-end [bond] would be better, but it depends on the market and where the investor demand is,” Tavares said.

The sovereign was rumoured to be considering the issuance of a 10-year note last week, although no transaction materialised.

Peripheral Europe - the subject of a storming rally in the first two months of the year - has lost some of its steam over the past two weeks.

However, the timing is still seen as good for Portugal.

“It is certainly a potential candidate after Easter, even taking into account some widening in recent days. It has been a while since it came to market so I would expect it next week,” said one syndicate banker covering public sector debt.

Transparency the key for burgeoning Green bond market

Green bond issuance could come close to tripling to US$100bn this year by one estimate, but growth in the market will depend on commonly agreed standards on what constitutes a Green bond and transparency as to how proceeds are used.

To this end, the International Capital Market Association (ICMA) announced revised Green bond principles on Friday – a voluntary set of guidelines for the sector, focusing on the issue of transparency.

“There is a strong emphasis on transparency and accuracy. To this end, it is recommended for issuers to use external assurance from second and third parties to get an independent verification of how the funds are directed,” said Nicholas Pfaff, senior director at ICMA.

The new set of principles devotes an entire section to assurance, and details how external reviews and consultation could be used and how an audit process can be established for allocation of proceeds.

One of the main concerns among issuers is that impact reporting standards could prove a costly exercise and could be a deterrent for potential Green bond issuers. Market participants at an ICMA conference warned on Friday that setting the bar too high would scare off possible borrowers.”Transparency is important, but we must set a low base and allow issuers to find their way to the framework,” said Christopher Flensborg, head of sustainable products and product development at Skandinaviska Enskilda Banken.

Marie Gerard, vice-president, sustainable development performance and management at GDF Suez, agreed, saying that too strict a requirement should not be imposed “in order not to kill the market”.

But improved transparency is seen as a necessary development to assure existing investors and to bring a broader set of buyers in.

“From an investor point of view, it is valuable to hear how the projects will lead to outcomes. The emphasis of impact reporting on environmental outcomes is a subtle but important change to the principles,” said Manuel Lewin, head of responsible investment at Zurich Insurance Group.

In addition, the market would lose its credibility if there were to be one incident where a corporate was deliberately misleading investors with a bond that was not green, said an analyst.

An ICMA source told IFR on the sidelines of the conference that reputational damage was always a concern, but that he was satisfied the current principles would keep issuers to green standards.

Changing Dynamic

Until now, the Green bond market has been led by public-sector issuers. In 2014, there was US$36.6bn of issuance, of which development banks and municipalities comprised 57%.

Last week alone, two new SSAR issuers completed deals and two others announced their intention to issue. EIB sold a €250m tap of its 1.25% 2026 ECoop issue, the longest Green bond outstanding, and KfW priced its first ever Green bond in the Kangaroo format, an A$600m 5.25-year trade.

Meanwhile, FMO and Ile-de-France have announced fixed income roadshows ahead of potential sustainability bonds in coming weeks.

Climate Bonds Initiative, a non-profit group based in London, believes Green bond issuance is likely to hit US$50bn in 2015 and could even reach US$100bn.

One of the most promising areas for growth, however, is in the corporate sector, according to analysts at Standard & Poor’s. Corporate Green bond issuance in 2015 could reach US$30bn, an increase of more than 50% on the US$19.1bn raised since the market began in earnest at the beginning of last year, the analysts said.

There is still an air of caution about this sector, given that issuance has so far been driven by a handful of issuers such as GDF Suez and Toyota.

“Green bonds are still in the early stages and a lot of the future development will be based on credibility and standards that are being set and met by corporate issuers,” said S&P infrastructure finance analyst Michael Wilkins.

The broadening of the investor base will be a key element.

“What we still have is a scarcity of large funds that have a mandate to invest by criteria that are green,” said a strategist. “Until there is greater acceptance, and there are accepted guidelines around funds that are against CO2 or dirty fuel or vice bonds, it is still a relatively small segment of the corporate bond world and reserved for more specialised investors rather than the mainstream.”

Asian Giant

The real game-changer could be when Asia – and particularly China – enters this sector with conviction. China needs a hefty amount of funding to fund green development, as it attempts to repair the damage from the heavily polluting industries that have fuelled its rapid economic growth.

A report by the Climate Bonds Initiative and the International Institute for Sustainable Development this month cited official Chinese data as saying the country would require annual investment of Rmb2trn (US$322bn).

Green bond issuance has been picking up in Asia in recent months. After Yes Bank last month printed India’s first Green bond in rupees, Export-Import Bank of India on March 24 sold a US$500m five-year Green dollar bond, the country’s first in the currency.

Poland offering 10-15bp new issue premium

Poland hit screens with a drive-by €1bn 12-year benchmark deal this morning that is more than 1.5 times covered, writes IFR’s Michael Turner.

The sovereign has set guidance on the May 2027 note at 35bp to 40bp over mid-swaps, and will price in that range. This compares to initial guidance of MS+40bp area.

“[At MS+40bp], we see that around 15bp-ish NIP [above] fair value,” said a banker away from the deal. A lead agreed that this figure was about right.

This means that if the deal prices at 35bp over mid-swaps, the new issue premium will be around 10bp.

The official away from the deal added: “The issue being that the Poland curve [has a] very high cash price at that part of the curve so very hard to quantify the impact of that.”

Poland’s euro-denominated 2025s were bid at a cash price of 142.492 at 1130 BST, according to Thomson Reuters.

“[The deal] should go very well,” added the official. “Scarce/strong name and euro bid has never been stronger.”

Barclays, Citigroup, Santander GBM and Societe Generale are running the trade, which is today’s business.