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Market Monitor: EMERGING CURRENCY EUROBONDS - What a lot of zloties

The opening of zloty-linked and zloty-denominated international bond markets suggests that Poland might replace the Czech Republic as the standard-bearer for eastern and central Europe in the capital markets.

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.

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