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Comment

Portugal should take private route to duration

Portugal could bolster its reputation and prove market access by printing at the long end of the curve. With the issuer fully funded for 2013, a private placement would be the ideal way to do it — as Italy has already proved this year.

Portugal is starting to fall behind its peripheral eurozone peers in the market recovery stakes. A return to the long end of the curve through a private placement could be the perfect statement to round out the year.

Strong economic data this week — with industrial production up 8.2% over August — does not hide the fact that Portugal still has work to do to prove it has regained full market access.

The sovereign hinted at further Troika support in recent weeks, worrying investors. Despite revealing plans to restart regular bond auctions to EuroWeek after its last syndication in May, the market is still waiting.

But the country has another route to market that could improve that picture — private placements.

Portugal printed a handful of privately placed medium term notes each year between 2009 and 2011 but, aside from a €50m five year puttable floating rate note in October 2012, has been absent from the market since.

While a successful syndication would be a powerful statement of investors’ faith in the sovereign, it is a risky move. If it goes wrong, it will go wrong very publicly and could widen its whole curve. A much better route would be to use private deals to improve its standing before a return to the public markets.

For one thing, it could access long dated funding through private placements to investors desperate for yield — a part of the curve that could remain closed to it for a long time in public markets.

There is a precedent. Italy shelved plans for a 50 year syndication this year after realising there was insufficient demand at that point of the curve. But it was able to find a home for a €500m 50 year private MTN in May and followed up with a €500m 40 year note in September.

While well below the €5bn-€6bn Italy achieved with its benchmark syndications this year, €1bn of ultra-long money is not to be sniffed at. Aside from boosting Italy’s maturity profile, it also bolstered its returning reputation.

Placing such a deal is a serious statement of intent and will boost Portugal’s maturity profile — things investors want to see.

And Portugal has no need to print in benchmark size — its only syndications this year have been used pre-funding for next year anyway, so it should dedicate itself to making strategic placements with small groups of investors.  

With an MTN programme already in place and a history in the private markets, Portugal has everything it needs. While it should not rush into a deal — paying over the odds for a long dated deal could smack of desperation and push up its borrowing costs long term — it should be in constant contact with bankers and be ready to pounce at the first whiff of an opportunity.

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