Sovereign borrowers in the Balkans reaped the benefits of the European Central Bank’s quantitative easing programme in March in the form of large chunks of long-dated euro funding at record low yields.
| Slovenia has improved strongly as a credit but remains a smaller player on the stage with domestic issues to resolve|
Croatia set the ball rolling at the start of the month with a 10-year euro-denominated bond that attracted more than €6 billion of demand. Bankers say the size of the order book indicated a big shift in approach by euro investors, given the maturity of the deal and Croatia’s double-B rating.
“The euro market has traditionally only been fully open for investment-grade borrowers because for emerging market dollar buyers it is off-benchmark,” says Nick Darrant, head of CEEMEA syndicate at BNP Paribas. “Lower-rated deals have fallen between two investor bases, so tenors were limited to seven years and books tended to be smaller.”
The dramatic tightening of spreads prompted by the start of QE in Europe, however, has forced euro bond buyers, traditionally more conservative, to expand their investment remit, he adds. “Investors are having to move in new directions in terms of geography, credit spectrum, moving out on the curve, or a combination of all three.”
This was further demonstrated by EU aspirant Montenegro, which followed its larger Balkan neighbour to market with a €500 million bond. It was the borrower’s largest deal to date and was priced to yield just 4%, a sharp reduction on the 5.5% achieved for an equivalent five-year bond last May.
Igor Milosavljevic, a senior DCM transactor at Citi who worked on the deal, says Montenegro would have had access to maturities out to 10 years despite its Ba3/B+ split rating but preferred to optimize pricing.
A week later, Bulgaria took even more dramatic advantage of the new investment climate created by QE. The EU member state, which counts as investment grade for index purposes but is still rated BB+ by Standard & Poor’s, raised €3.1 billion of funding in maturities out to 20 years. Not only was this well above the €2 billion Bulgaria had been aiming for, it was also the largest ever euro-denominated transaction from an emerging market issuer.
Some market participants argued, however, that Slovenia’s 20-year bond, which came to market in the same week, was the more ambitious of the two deals. As a eurozone member, Slovenia had seen yields on its 10 year bonds fall below 1% at the start of the month in anticipation of ECB buying, making them too expensive for emerging market funds. At the same time, says Darrant, who worked on the deal, there were concerns that the name would be seen as too risky by core European rates investors.
“Slovenia has improved strongly as a credit but remains a smaller player on the stage with domestic issues to resolve, not precisely on a par with Italy or Spain in terms of fundamentals, so there was a risk that it could fall between investor bases – particularly as spreads had collapsed so sharply that it was a question whether the market had had time to adapt,” he says.
The gamble paid off, however. Slovenia succeeded in raising €1 billion of funding in the longest maturity ever achieved by the borrower and at a level below where Spain and Italy were trading at the time. German investors, traditionally seen as some of the most conservative on the continent, took 40% of the deal.
|Deal flow for the second half of the year could be very light, given smaller countries have much lower funding needs [now]|
Tomas Cerny, Erste
Fellow eurozone member Latvia was expected to be next to market, having reportedly picked banks to manage a bond sale in mid-March. The Baltic state’s debt was trading even tighter than that of Slovenia by the end of the month, prompting some bankers to question whether investors could be found at that level for a new bond given the borrower’s proximity to Russia.
Erste DCM head Tomas Cerny, however, says such concerns were unjustified. “The Baltic countries have slightly more geopolitical risk than Slovenia but otherwise are fundamentally in very good shape and should have no problem doing a successful issue provided they don’t try to push too hard on tenor,” he says.
Other central and eastern European names due to sell euro-denominated bonds before the end of June include larger borrowers Romania and Poland, neither of which had made their debut for the year by the end of March, as well as Lithuania.
Other Balkan sovereigns such as Serbia, the former Yugoslav Republic of Macedonia and Albania could also look to take advantage of the highly favourable funding conditions, say bankers.
“We will definitely see more names coming to the euro market because the levels available are too good for issuers to pass up,” says Martin Hibbert, head of CEEMEA DCM origination at Deutsche Bank.
Cerny added that an opportunistic deal from Hungary could not be ruled out.
“Hungary has been absent from the euro market for many years and has no need to issue from a funding point of view – but they have a good story to tell at the moment and if market conditions remain extremely favourable they might look to lock in cheap euro funding,” he says.
However, he says that overall sovereign activity is likely to remain low. “Deal flow for the second half of the year could be very light, given that the smaller countries in the region have much lower funding needs than last year – in some cases due to prefunding – and most will likely have filled them by the end of the first half,” he says.