Hungary's recent international bond issuance has been based on
the premise that the country has moved out of the bracket of
emerging market sovereigns and into the bracket of those countries
likely to benefit from EU convergence.
The likelihood of further rating upgrades and economic convergence
have enabled Hungary's central bank to price its bond issues this
year more in line with wide EU sovereign levels than emerging
market sovereigns. Is such pricing justified?
FROM 1990 TO 1995 HUNGARY WAS BY far the most prolific central
and eastern European borrower - raising $13.15bn through its fiscal
agent, the National Bank of Hungary (NBH), via 60 issues in a wide
range of currencies.
In the last two years the NBH has been a much rarer issuer in the international bond markets, launching only a DM500m six year floating rate note transaction in 1996 and a ¥50bn seven year fixed rate issue in 1997.
Judged by recent standards, therefore, the fact that the NBH has already launched three new deals in 1998 ranks is something of an issuance boom. But, since 1995, the central bank's primary objective in international bond issuance has been to command the best possible pricing levels. In that respect, this year's activity does not represent any departure from the country's recent funding policy.
The launch of a DM500m five year floating rate note transaction via DG Bank in late January was the first by a central and eastern European sovereign this year, following the turmoil caused by Asia's financial collapse.
The transaction served notice of the country's intent to extract the maximum leverage from its investment grade status, its OECD membership and future membership of the EU. With a coupon set at 37.5bp over three month DM Libor, the deal was priced to yield 44.4bp over Treasuries - a record low for the Baa3/BBB-/BBB rated issuer in the Euromarkets and, controversially, 5bp inside the trading spread on the Baa1/BBB- rated Hellenic Republic's most recent DM floater.
Such optically aggressive pricing soon provoked a barrage of criticism from a number of the syndicate members, who accused DG Bank of mispricing the issue and claimed that distribution had consequently been limited solely to German accounts.
DG Bank was quick to dismiss this claim, however. Bank officials pointed out that, with 90% of sales split between four main areas - Germany, Austria, Benelux and Italy - and additional distribution into France and Spain, the deal had achieved the Hungarians' principal aim of pan-European sales.
DG reported that the bulk of its own demand had come from small and medium sized banks and funds which were familiar with Hungary's investment grade rated credit story and which were happy to buy the deal at the 44.4bp re-offer yield.
The lead manager's other main argument - that the seemingly aggressive pricing was justified on the basis that Hungary should be viewed as an improving credit - received timely support with the news that Standard & Poor's had revised the outlook on its BBB- rating for Hungary from stable to positive.
The US rating agency cited Hungary's rapidly diminishing foreign debt burden, and increasingly favourable prospects for output and exports as the driving factors for its decision, which helped to give added momentum to the transaction.
By mid-February, DG Bank was able to inject further liquidity into the transaction, with a DM250m fungible increase that sold to the same group of investors which had participated in the original offering.
Having tapped the Euro-DM market for the first time in almost two years, the NBH opted at the end of March to re-enter the Eurodollar market with its first transaction since August 1994.
ABN Amro and Salomon Smith Barney led the $300m five year issue which was launched on an indicated spread of 80bp-82bp over the 5.5% March 2003 US Treasury and eventually priced with a 6.5% coupon and a fixed re-offer price of 99.707 to give a launch spread of 81bp.
Once again, pricing proved a contentious issue. Some members of the syndicate, which distributed 10% of the bonds, argued that the spread was overly aggressive compared to the trading levels for similarly rated central and eastern European sovereigns - such as Croatia, whose $300m 2002 bond was trading at 220bp over Treasuries at the time.
But others accepted the lead managers' argument that the pricing reflected the twin positives of likely EU economic convergence in Hungary and the country's improving credit ratings.
On a Libor basis, the dollar issue came at a margin of 39bp, compared to a 44.5bp trading spread on the NBH's DM750m five year floater.
The leads said this differential meant that the transaction had not been attractive to asset-swappers and had been sold to genuine fixed rate European investors - in line with the NBH's objectives.
A Salomon Smith Barney spokesman explained: "Hungary has made the progression from an emerging market to an EU convergence story. At 81bp over Treasuries, the pricing on this deal should be viewed as being at the wide end of EU sovereign pricing, rather than at the tight end of the central and eastern European sovereign spread range."
ABN Amro also pointed to Hungary's potential for rating upgrades as justification for the pricing. Shortly after the launch of the issue, Thomson BankWatch upped its rating from BBB- to BBB, while Moody's has its Baa3 rating on CreditWatch for possible upgrade.
Contentious as the NBH's issuance strategy may be with some market participants, investors and traders seem to have accepted the pricing rationale for both transactions. By the end of April, the DM floater was trading 34.7bp bid, 34.9bp offered, and the dollar fixed rate bond quoted at 79bp bid, 78bp offered.
Although no official issuance plans have been announced, most bankers believe the next logical step for the NBH in its aim of broadcasting its EU convergence story would be to launch a euro denominated offering.
Moving away from the sovereign, the pool of potential Hungarian Eurobond issuers remains a small one. With the country's banks and corporates generally either cash-rich or able to command highly attractive pricing in the syndicated loan markets, it is unlikely that these issuers will tap international bond markets.
The Hungarian capital, Budapest, however, is seeking to up its investment profile with a DM150m five year issue, which is due to be mandated shortly. EW