Until recently, fixed-income investors looking to gain exposure to the appreciating zloty have been largely limited to Polish government bond markets. Polish T-bill yields have been as high as 24% in recent months, but convertibility, settlement and credit risk have deterred many international investors.
In late January the EBRD offered $30 million of dollar-denominated one-year bonds carrying a 20.5% coupon payable in dollars but with the overall return linked to the performance of the zloty. The proceeds of the deal were swapped into floating-rate dollars.
According to syndicate officials at the deal’s lead manager, Chemical Investment Bank, assuming a stable zloty/dollar exchange rate performance from the launch date, the deal offered an effective yield of some 20.62% over its one-year tenor. Although the transaction offered no protection on the principal should the zloty fall in value, the high interest rate carried by the deal would nevertheless still guarantee investors a healthy return. In Chemical’s worst-case scenario, were the zloty to fall by 10.5% in value versus the dollar this year, the issue would yield 10.12%. This still represents a significantly higher level of return to investors compared with those offered by plain-vanilla dollar issues and is in line with the yields on Czech koruna-denominated Eurobonds, the only east European currency in which Eurobonds have been issued.
The deal shows the level of demand for exposure to Poland’s economic boom. Estimates for economic growth this year are 5.5%, after 6.5% last year, with annual inflation forecast at 18%-20%, down from the nightmare level of 447% in 1990. Since 1991, the National Bank of Poland has devalued the currency through a crawling peg. But heavy foreign currency inflows meant that the zloty appreciated by 3%, last December.
In February, the International Finance Corporation (IFC) inaugurated the Euro-zloty bond market when it offered Z100 million of two-year bonds with a 18.5% coupon via JP Morgan Securities. Unlike the dollar-denominated but zloty-linked deals, the IFC’s zloty bond carries convertibility risk, but JP Morgan calculates that the zloty would have to fall to Z3.50 to the dollar from its current level of about Z2.50 before international investors would be out of the money.
The deal also offered investors the chance to lock in current Polish interest rates for two years at a time when Polish rates are falling. Richard Luddington, vice president at JP Morgan, says: “Market sentiment towards the issue was definitely improved by Moody’s upgrading of Polish Brady bonds to Baa3 investment grade. The deal also benefited from investors switching out of Euro-rand and Euro-koruna bonds.”
In a near carbon copy of the IFC deal, GECC offered Z100 million of two-year bonds in a deal once again lead-managed by JP Morgan Securities. GECC’s transaction carried a 18.25% coupon, some 25bp tighter than the IFC’s issue the previous week. Luddington says: “The pricing on the GECC issue simply reflected both falling yields in the Polish T-bill market and the strength of investor demand we have identified for this product.” Although the zloty is not yet convertible and Euro-zloty bonds carry restrictions requiring all flows to be managed in US dollars, international investors will diversify into this new sector out of other high-yield markets for as long as strong Polish economic data offers hope for zloty appreciation.
The sector received a boost in March when Ford Credit Europe announced a Z200 million commercial paper programme. Guy Norton
