Slovenia’s finance ministry undertook a liability management exercise at the end of August – that is to say, it sold new euro-denominated bonds and used the proceeds to buy back some of its dollar debt.
The process marked another step in Slovenia’s rehabilitation as a sovereign borrower. When a banking crisis hit the Balkan state in 2012, the main buyers of its bonds in continental Europe took fright. As a result, Slovenia, a eurozone member since 2007, was forced to turn to the big emerging market bond funds in the US and UK for financing, which meant issuing in dollars.
Two years later, with its ratings heading back towards investment grade, the sovereign was able to return to the euro market – and by May this year, thanks to a little help from the ECB’s quantitative easing programme, was in a position to start replacing its dollar bonds with ultra-cheap, long-dated euro funding.
Slovenia, of course, is not the only sovereign borrower in central and eastern Europe to have seen dramatic changes in its creditworthiness, and thus its investor base, over the past eight years. Poland, Hungary, Romania and Latvia all turned to the dollar market after credit spreads blew out in the wake of the financial crisis.
Time for change
When a number of western European countries started to follow a similar trajectory a couple of years later, some investment banks took this as a signal that their sovereign coverage models for both regions needed adapting.
Barclays was one, as its head of public sector debt capital markets for EMEA explains. “Before the eurozone crisis, the market felt quite segmented between rates, emerging markets and credit in terms of the way investors viewed bond issues,” says Lee Cumbes. “But as borrowers dropped down the rating spectrum they were having to diversify their buyers. We therefore needed to make the way we approached investors much more fluid.”
The UK bank’s solution was merge its rates and emerging markets syndicate desks and bring its teams closer together on the debt origination side. “This allows flexibility and gives clients access to the broadest range of experience should their condition change,” says Cumbes. “I believe it has been a big factor in our success in this sector over the past few years.”
Other banks have responded to the changing credit dynamics of CEE sovereigns by transferring the highest-rated to pan-European sovereign and supranational (SSA) teams – indeed, some have reportedly used this as a marketing tool when approaching debt management officials in the region.
Goldman Sachs has taken a slightly different approach. The US bank maintains the distinction between western European and CEEMEA sovereigns on the origination side, but has split the latter between regional SSA and emerging markets teams.
“Several CEE sovereigns are frequent borrowers with full-blown primary dealer systems, regular auctions in the local market etc,” says Martin Weber, Goldman’s head of SSA and CEEMEA debt business. “This obviously requires a different coverage model from ‘typical EM sovereigns’, and that has been put in place as they have been transferred to the SSA side.”
He notes, however, that despite the ratings volatility in the region over the past eight years, the process has been “mostly one-way”. “In the same way, when Portugal lost its investment grade rating we didn’t change our coverage of the sovereign,” he says.
Meanwhile, some of the biggest players in the CEE sovereign bond market make a virtue of the fact that their coverage models have remained constant throughout the market upheavals of the past eight years.
These include Deutsche Bank and Citi, both of whom continue to divide sovereign coverage up on a purely geographical basis. “We believe that the best people to cover clients are those who understand the region and have built up long-standing relationships with the decision-makers there,” says Samad Sirohey, head of CEEMEA DCM at Citi.
His counterpart at Deutsche Bank, Zoltan Kurali, agrees. “CEEMEA is an important market for us and we have not felt the need to change the way we cover clients,” he says.
At both banks, the distinction between CEE sovereigns is made at the distribution stage, when the bonds are parcelled out to separate syndication teams.
“The sales force we would channel deals through will reflect demand patterns for a specific credit,” says Sirohey. “We use all our credit as well as rates sales capabilities.”
Similarly, Deutsche distributes CEE sovereign bond issues through discrete rates and emerging market syndicate desks, depending on the creditworthiness of the borrower.
Unlike some of their global rivals, both Citi and Deutsche retain a physical presence in key markets such as Poland and Hungary. Deutsche has recently cut staffing levels in the region as part of the strategic review launched last year by chief executive John Cryan but, apart from a well-publicized pullback from Russia, has so far kept its CEE footprint intact.
“Having local coverage means we can be in constant contact with all the key people in these markets,” says Kurali.