Poland's plan to return to the euro bond market for the first time in nearly two years comes at an interesting juncture for the Central European country.
Economically, Poland (A2/A–/A–) is one of the EU's best performing member-states having clocked nominal GDP growth of 8.5% in the first quarter on an annualised basis, according to official initial estimates. That was far higher than the 7.9% forecast by a Reuters poll of analysts.
However, as Standard & Poor's pointed out in a recent note affirming the sovereign's A– rating, the war between Russia and Ukraine is likely to have a negative impact on Poland's growth. The rating agency has lowered its forecast for real growth this year by 1.4 percentage points to 3.6%.
Politically, the country is at the forefront of the EU's efforts to help Ukraine, sending military support to Kyiv and receiving more than three million of refugees following Russia's invasion, according to the United Nations. Related housing and social services spending is likely to reach 2% of GDP this year alone, according to S&P.
The Warsaw government has also refused to play along with Russia's demands for gas payments in roubles, drawing Moscow's ire in the process. It is one of two EU countries, along with Bulgaria, that has seen supplies cut off by Russia.
Yet at the same time Poland's tense relationship with the EU, especially a dispute over rule of law, remains an important consideration for investors. The European Commission has refused to release billions of euros in recovery funds because of what it argues is Poland's politicisation of the judicial system and restrictions of civil rights, accusations Warsaw denies. There might, though, be a thawing in relations due to Poland's support of Ukrainian refugees.
"Fundamentally, Poland is a strong issuer with moderate public debt levels and a relatively balanced budget," said Kasparas Subacius, fund manager at CEE investment manager INVL Asset Management.
Another investor agreed: "The Poland story is very strong, and it is setting itself apart politically by supporting Ukraine as much as it can, whereas Hungary is quite pro-Russia and Germany is behaving like Ukraine is Greece and merely kicking the can down the road."
Technicals, though, will also drive demand. Poland last issued in the euro market in July 2020 - a €2bn three-year note that came with a 0% coupon and priced at a negative yield. Clearly, those targets are not in play with this latest issuance, which will be for a 10-year tenor (they wouldn't be in play even if Poland had announced another three-year bond).
The two best reference points in the sovereign's euro curve are its March 2029s and January 2036s (the February 2035s were issued in 2005). The 2029s are bid at 65bp over swaps, according to Refinitiv, and the 2036s at plus 99bp. A simple interpolation of the curve suggests fair value would be around 81bp, though a banker said that Poland's curve has not been refreshed recently so feedback from the roadshow will be critical.
The investor thinks the sovereign should achieve a good price for itself. "Poland is Single A, hasn't borrowed internationally in a while [in euros - it issued in renminbi last year] and has seen its spread widening be contained, especially when compared with Greece and Italy," he said.
At the same time, Poland offers value compared with other regional high-quality investment-grade sovereigns in the region, such as Lithuania or Latvia, said Subacius.
As for potential size, the investor pointed out that Poland has €1.5bn coming due in January. "The ministry of finance has a habit of pre-funding," he said.
The deal could come as early as Wednesday. Citigroup, Commerzbank, ING, JP Morgan, PKO BP and Santander are the leads.
(Additional reporting by Robert Hogg)