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| Best borrowers resultsMethodology |
In April, Greece attracted €20 billion of orders for a €3 billion five-year issue offering 4.95%. Such an outcome would have been unthinkable a year ago and is only the most extreme example of the near-perfect funding conditions now enjoyed by many peripheral sovereign borrowers that were locked out of the market until recently. It is also an indication of the pent-up demand for sovereign paper offering yield when such sovereigns as Spain and Italy are now offering a fraction of what they were two years ago. Yields on Spain’s 10-year bonds dropped below 3% for the first time in late May, offering just 2.97%. In June 2012 the 10-year had offered 7.1%.
Reinvigorated investor appetite for peripheral borrowers is reflected in this year’s best borrowers survey, in which several sovereigns have made big strides. Spain jumps from a ranking of 12 in 2013 to 6 this year, although Italy has slipped one place from 8 to 9. Most striking is the performance of Ireland, which returned to the markets with a €5 billion 10-year deal in March this year. The borrower jumps from being unplaced in last year’s survey to a ranking of 23 in 2014.
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“While we have had numerous reverse enquiries our policy has been to utilize our relatively small issuance needs to demonstrate our full return to normal market funding” -Oliver Whelan, NTMA |
“Against the generally positive tone of fixed-income markets a number of developments specific to Ireland have helped us,” Oliver Whelan, director of funding and debt management at the National Treasury Management Agency (NTMA) in Ireland, tells Euromoney. “The new arrangement put in place in relation to IBRC [the Irish Bank Resolution Corporation] whereby the relatively short-dated promissory note was replaced with long-dated Irish government bonds and the lengthening of the maturities of the EU loans to Ireland under the Troika programme together reduced our funding needs over the next decade by €40 billion. The unambiguous evidence that economic growth, especially as evidenced by the sustained increase in employment and the consequent decrease in unemployment, has gained real traction has helped to convince the markets that the Irish debt ratios are set for a sustainable downward trajectory, having peaked in 2013.” The belief that the worst is over is certainly behind much of the positive sentiment now flowing towards the former Piigs. “Ireland’s gradual and measured engagement with the markets since 2012 has generated a confidence which was copper-fastened by the decision to exit the Troika programme in December 2013 without the support of a precautionary credit line,” reckons Whelan. “Finally, the continued positive and improving assessment of the Irish credit by the rating agencies, especially the upgrade by Moody’s to investment grade in January, has brought more investors into the Irish market.”
Another sovereign that benefited from a ratings upgrade last year is Mexico, which was upgraded to A3 by Moody’s – the country’s highest-ever rating. Following this upgrade the sovereign made a particularly astute foray into ultra-long-dated issuance in March this year, selling £1 billion ($1.67 billion) of 100-year bonds in the sterling market at a yield of 5.75%. The strategy did not go unnoticed and Mexico rose from a ranking of 29 in last year’s survey to 13 this year.
“Mexico is pushing for structural reforms and received upgrades from all three US ratings agencies, moving it into the single-A category for the first time ever when upgraded by Moody’s,” says Alejandro Diaz de Leon Carrillo, head of the debt management office in Mexico. “Mexico is seen to have strong fundamentals. There has been a lot of volatility in the emerging market space, but Mexico is not linked to China as it hasn’t had a commodity-led boom. It has more of a manufacturing economy. On reforms we have tried to have a close communication with investors, keeping them up to speed with what is going on.”
Mexico’s 100-year bond was an ambitious move that enabled the country to diversify its funding sources with a very cheap swap cost – the 30-year sterling-dollar basis swap rate in May was just 0.75 basis points. “This was only the second time someone has done a 100-year sterling bond, following EDF,” notes Carrillo, proudly.
Sovereign borrowers are acutely aware that the benign funding environment they now enjoy is very much dependent on central bank policy and they have been quick to make hay while the sun shines. “We are almost 86% pre-funded of our 2014 borrowing requirement,” says Bogdan Klimasziwski, deputy head of the public debt department in Poland. “In US dollar issuance there’s been a substantial increase of real-money accounts. Long-term stable investors are welcomed with an approach based on fundamental issues rather than rates. If the ECB lowers interest rates in June, Poland may use it to pre-fund 2015 borrowing in the first quarter of 2015.”
Poland is another sovereign borrower that has made substantial progress in Euromoney’s best borrowers survey this year, moving from 33rd place in 2013 to 16th this year.
The rise in real-money investors now looking at formerly challenged sovereign borrowers will likely continue for as long as credit conditions remain as they are. “The continued decline in the Irish spread over Germany has convinced more traditional real-money investors to buy Ireland,” says Whelan at the NTMA. “That buying has been reinforced by the hunt for yield as the returns on the bonds of the core euro area issuers continue to decline against the expectation of possible action by the ECB,” he says.
As Euromoney went to press the expectation was that the European Central Bank would cut rates by 15bp on June 5. Alberto Gallo, credit analyst at RBS, reckoned that while the central bank will enhance liquidity measures at the same time it will still hold back from quantitative easing. ECB president Mario Draghi has made it clear that any potential asset-purchase programme will focus on private-sector assets rather than just public-sector assets, but Gallo says that such an asset-purchase programme is unlikely at this stage and will only happen if there is a material deterioration in the medium-term inflation outlook.
It is a move that many borrowers that Euromoney spoke to would welcome. “If the ECB deepens its monetary stimulus, it would give Mexico another reason for tapping into potential interest from European investors in the future,” says Carrillo. “We will keep our eyes open for funding alternatives. Mexico offers an attractive market – we have already seen interest from Europe when Mexico issued its last two Eurobonds in April last year and again in April this year.”
As more and more real-money investors chase returns in the SSA sector the demand for long-dated deals grows ever stronger. This is encouraging a surge in reverse enquiry approaches from investors, desperate to put money to work for longer durations. SSA borrowers themselves have proved increasingly receptive to such approaches. Speaking to this magazine last month, BlackRock’s chief investment officer of fixed income, fundamental portfolios, and head of European and global bonds, Scott Thiel, observed the rise in reverse enquiry approaches to sovereign borrowers. “The debt management offices of the sovereign issuers in Europe, especially the periphery, have been open to these kinds of suggestions recently in ways they never were in the past and indeed many of their public syndicated deals grow out of these kinds of reverse enquiries,” he told us. “Previously reverse enquiry wasn’t something that sovereigns contemplated so this has been a totally new development over the last two years.”
But it is a development that not all borrowers are embracing unreservedly. “While we have had numerous reverse enquiries our policy has been to utilize our relatively small issuance needs to demonstrate our full return to normal market funding through syndications and scheduled auctions and to support the liquidity of our relatively small market,” says Whelan. Carrillo at Mexico’s debt management office tells Euromoney: “We have received reverse enquiries in terms of issuance” but insists: “We did not do the sterling centennial bond on the back of this.”
With funding conditions this favourable, some sovereign borrowers could be forgiven for assuming that investors desperate to put money to work will greet every deal with unbridled oversubscription. When the European Stability Mechanism brought a long five-year benchmark deal in early May the €3 billion no-grow trade immediately attracted orders of more than €8 billion and books were open for less than an hour. The deal priced at mid-swaps minus 3bp.
Even the geopolitical situation does not seem to be ruffling investor appetite for these borrowers. “Events in Ukraine and Russia are always a cause for concern, but if the geopolitical situation does deteriorate further it affects all financial instruments,” says Carrillo. “But it gives European investors a reason to diversify away from Europe and possibly into Mexico,” he observes, opportunistically.
However, it is important not to lose sight of the fundamentals. Those borrowers that have made particular progress up the rankings in Euromoney’s survey have done more than just take advantage of investor appetite, they have been rewarded for diligent engagement with the investor base in good times and bad. “The key has been the ongoing and active engagement with investors since the beginning of the crisis,” says Whelan. “We have clearly set out the fiscal assumptions behind our funding plans and have discussed those plans themselves in an open and transparent manner with investors. As we approach each market event we provide maximum clarity on our intentions so there are no surprises for the market. We also maintain an active ongoing dialogue on these matters with our 18 primary dealers.”
