Bulgaria braves new
ground
Borrower:
Bulgaria
Deal type: Brady exchange
Deal amount: $2.2 billion
Advisers: JPMorgan, Citigroup
Sovereign debt exchanges can be politically controversial. So
they are often only considered by a government that is either
fairly secure in its power, or - like Argentina - is desperate. So
some were surprised that Bulgaria's government, after only a year
in power, would want to take the risk of undertaking Europe's first
Brady exchange, particularly when both the finance minister and his
deputy are former investment bankers and so perhaps easy targets
for populist accusations of access capitalism.
Krassimer Katev, Bulgaria's deputy finance minister and a former
emerging-market trader at Paribas, Daiwa Europe and AIG Asset
Management, says: "Obviously we took some calculated risks. It's
quite difficult politically to perform flexible debt restructuring,
because all transactions related to the public debt have to be
passed through government. So the opposition obviously attacked the
measure, and tried to make short-term political gains out of it.
They actually challenged the transaction in the constitutional
court. The president got involved. It was high political
drama."
But ultimately finance minister Milen Velchev and Katev managed
to bring Bulgarians round to the benefits of doing a swap.
Observers attest to their intelligence, articulateness and obvious
love of their country. This can, however, translate into an
impatience with alternative views. Katev says: "The swap was a
no-brainer. I knew we should do it from the very beginning. Anyone
who doesn't see the benefits is either too indecisive or too
stupid."
Katev has a point. The deal makes obvious sense. Bulgaria's
Brady debt was collateralized on US treasury slips, which were
sitting unused. This was a sleeping asset, worth some $330 million,
that Bulgaria could convert into cash if it exchanged the Bradys
for pure Bulgarian debt.
This tallied well with the government objective of increasing
the size of its fiscal reserve account, which Velchev wanted in
order to give the government security against market vagaries such
as less-than-expected revenues from privatizations or worsening
global economic conditions.
From the point of view of the lead managers - liability
management veterans JPMorgan and Citigroup, which have worked on
debt swaps for Mexico, Argentina, Venezuela, Peru and others - the
challenge was to get as many investors as possible on board.
As Jonathan Brown, managing director at JPMorgan, says: "A risk
was that people were comfortable in their Brady debt. They'd only
sell if they felt enough other people were selling, otherwise
there'd be no liquidity in the new bonds." It was something of a
confidence game, as with all bond exchanges, involving persuading
the investors to let go of the devil they know in favour of the
devil they don't.
Usually, at least in such crisis situations as Argentina's 2001
debt swaps, investors are persuaded by an increase in interest
rates. But the interest rates stayed stable on this deal, and what
persuaded investors was partly the poor liquidity on the Brady
debt, partly the lure of new benchmark bonds, partly the distant
promise of EU accession, granting Bulgaria the protection
previously supplied by the US government. The ability of JPMorgan
and Citigroup to persuade big-fish investors such as Pimco and DWS
to swim with the exchange also helped.
The minimum target for the exchange would have been $1 billion.
In fact, Bulgaria ended up exchanging $2.2 billion in two deals,
one in March and one in September, and in the first deal exchanged
e835 million of the Brady debt into euro debt. The swap was thus
not just the first public Brady exchange in Europe - it was also
the first exchange to swap dollar for euro debt. The banks also
structured the deal to give Bulgaria longer maturities than the
Brady debt, and a better yield curve in dollars and euros. Bulgaria
launched a 2015 dollar benchmark and a 2013 euro-denominated bond
(which joined the existing 2007 euro benchmark, issued in November
2001 and also lead-managed by JPMorgan). All in all, in both swaps,
it exchanged around 50% of the Brady debt for new debt.
Swapping into euros obviously made sense in the long term
because of the country's planned accession to the EU. But in the
short term it also enabled some US investors, looking for yields
more usual for emerging-market assets, to exit Bulgarian debt, and
some special EU convergence funds, such as DWS and Deka, to buy
it.
Bulgaria was thus enabled to sell the US treasury slips and
increase its fiscal reserve account to more than e2 billion. This
played a major part in the upgrade in outlook by both Standard
&Poor's and Fitch to positive, on the BB rating of Bulgaria.
Fitch's sovereign report of October 2002 said: "Brady bond
exchanges have improved the currency, interest rate and maturity
profile of the debt. Moreover, Bulgaria benefits from a fiscal
reserve equal to around 1.7 times total 2003 public debt service,
and strong external liquidity." The report says these "significant
improvements" make another upgrade likely in the next two
years.
This - in addition to the other upgrades over the past year,
means "investors holding Bulgarian debt have had a very good year",
as Brown at JPMorgan puts it. The banks haven't done badly either,
earning 0.55% fees on the first, $1.4 billion, deal and 0.325% on
the second, $800 million, deal. That's nearly $11 million in
total.
And politically, the domestic press coverage was not too bad.
The country is now in a good position financially for the
foreseeable future. As Katev says: "The coming year will probably
be very boring as a result of our prudent measures, as we can
refrain from net borrowing, unless we achieve better ratings or can
borrow at much better rates, though we do want to continue to
aggressively reduce our public debt."
Poland's bond proves
sterling
Borrower: Poland
Deal type: Sovereign issue
Deal amount: £400 million
Lead manager: UBS Warburg
Poland is one of eastern Europe's most frequent and innovative
borrowers, and its funding requirements mean it is likely to remain
so in the next few years. In some ways, it is the Italy of the
converging states - it needs to borrow regularly but has a strong
treasury team who use innovative multi-currency deals and liability
management programmes.