It is hard to pinpoint the most impressive aspect of the eurozone periphery’s start to the year in capital markets. How about a €10bn 10 year syndication — the largest ever by a eurozone sovereign — from Spain? Storming deals for an Ireland freshly departed from its bail-out programme, or similar blow-outs for Portugal which will leave its own package later this year? Or $37.7bn of syndications from peripheral sovereigns, regions and agencies by March 7, a euro era record for this point of the year — and all that with the biggest issuer of the batch, the Italian sovereign, yet to print.
It could also be the return of smaller issuers like the Spanish regions, which have taken advantage of tightening spreads over Bonos to print small — by sovereign standards — but perfectly formed syndicated deals, along with private placements up to 30 years out the curve.
“The books and deals speak for themselves — plenty of investor diversification, new issue premiums not too high and new deals performing well in secondaries,” says Emmanuel Smiecench, head of SSA syndicate at Société Générale in London. “Italy and Spain also broke the 200bp over Bunds spread barrier. There hasn’t been any profit taking on recent bad news and investors are happy with risk. Ireland left its bail-out and it — along with Portugal — is pretty well funded. Italy and Spain have to manage a larger debt but for Italy at least that’s nothing new.”
All of this means that nothing is off the table for the issuers.
“The full toolbox is available to the periphery — euros, dollars, inflation linkers or nominal bonds,” says Achim Linsenmaier, joint head of European SSA syndicate at Deutsche Bank in London.
“So far they have done the right thing strategically. Italy and Spain accessed the market regularly during the crisis, even when they had to pay up. That shows credibility, keeps investors onside and provides liquidity. They just have to keep going as they have done over the last three years, [but] can be raising the amounts they offer at auctions or sell in larger syndicated deals.”
Going long
But the first concern for some peripheral sovereigns is to extend their maturity profiles. After investor concerns about the future of the eurozone forced them to print paper in tenors of three and five years in 2011 and 2012, the luscious conditions they find themselves in this year mean they can start focusing on regular long dated deals again.
“There is considerably less volatility and treasuries have the breathing space to think strategically rather than tactically,” says Pablo de Ramón-Laca, head of funding and debt management at the Spanish Treasury in Madrid.
“We all have to extend along the curve, steep though the curve may be. We are better equipped to meet the challenge than in 2012 and early 2013. We must control our redemptions as much as possible, by extending as far as we can along the curve. This comes naturally with the recovery of our investor base. We’ve issued debt with an average life of 8.8 years over the first two months of 2014, which is a great improvement. But the process of recovery involves auctioning 10 year to 30 year tenors as frequently as we used to.”
Indeed, restarting bond auctions is the next piece of the puzzle for Ireland and Portugal. With syndications under their belts already this year, the next stage for these issuers should be about regaining a regular market presence, say bankers. Spain and Italy should also bolster their auctioning ability before thinking about more adventurous plays like the dollar market, they add.
“Non-core European sovereign issuers need to get back into a regular issuance pattern to show familiarity with investors and to show continued access to the market,” says Sean Taor, head of European DCM at RBC Capital Markets in London.
“While it might well be that they could successfully access the dollar market — demand is strong across a wide range of investors — I would expect to see further rounds of euro issuance first.”
But while euros remain the focus of the issuers, funding officials are keenly observing opportunities elsewhere. Spain can print non-euro currencies using its Euro-medium term note programme and is willing to take on such deals, although as it has to swap all foreign currency exposure back into euros, any activity will be basis swap dependent.
Spain also returned to the Schuldschein market for the first time since 2010 this year — another sign of the periphery’s recovery, given the conservative nature of that product’s investor base — while Italy sold a €250m 30 year inflation-linked private placement to add to 40 year and 50 year fixed rate private deals last year.
But for Spain, not all deals suit private formats.
“Our dollar deals have always been in public syndications,” says de Ramón-Laca. “We strive to provide liquidity in that currency, although it will never be on the same level as euros, obviously. We’ve traditionally printed one and at most two dollar issues every year. Last year we had a good deal that was 6bp through our equivalent euro curve and we’d be open to another deal this year. We’ve sold privately placed yen deals and we also printed sterling. But we’re open to return to these currencies and the EMTN programme affords us a lot of flexibility.”
Spain is also keen to launch inflation linkers in the medium term in a drive to boost its investor base. While it is waiting for market conditions to allow such a trade, bankers believe there will be demand if it and others decide to come.
“We could see peripheral sovereigns each executing one inflation linker this year as more encouraging signs emerge of inflation beginning to stabilise,” says Smiecench at Société Générale.
“Apart from Italy, a new Bonos linker would represent an alternative funding tool for Spain. Italy is the only non-core issuer that has sold inflation linkers, so a new Bonos linker would be a good development for the inflation market.”
Greece: comeback kid?
While much of the attention early in the year was on blowout deals for Spain, Ireland and Portugal, the prospect of a return for Greece has started to gain momentum. The sovereign’s 10 year yields dipped below 7% — viewed by many analysts as a threshold above which debt becomes unsustainable — in late February and stayed there, despite political unrest in eastern Europe.
“That’s where Portugal was in July — investors are more bullish for Greece,” says Société Générale’s Smiecench. “They could potentially be in the market in the near future.”
But in private, some bankers point to obstacles to a Greek bond, regardless of how long it can maintain its rally.
“A Greek return will be a political decision,” says a head of SSA syndicate in London. “There is demand for Greek bonds but there is a problem with their outstanding curve, which starts at 2023. If they went for a five year — as they have hinted at — then they would need to estimate where the curve should be and come up with a level. My guess would be that the level would be significantly higher than its current refinancing costs. It would definitely not be as cheap as the loans from the Troika, for instance.”
However, in the near term at least the tightening of non-core spreads over Germany is only likely to continue.
“There is potential for peripheral spreads to tighten further,” says Société Générale’s Smiecench. “A lot of it depends on funding needs. Rating upgrades are already priced in. Spain is likely to outperform Italy, as it has moved further on reforms. A target spread to Germany of 150bp should be achievable by year end and is seen as a target by many investors.”
But the level of investors’ holdings of emerging market debt could act as a break on tightening, according to Deutsche Bank’s Linsenmaier.
He suggests that many investors were over-weighted in emerging market and high yield paper compared with their normal investment parameters during the height of the eurozone sovereign debt crisis.
“At one point every major investor wanted to say, ‘We’re not invested in peripheral sovereigns anymore,’ which was in many instances even a board decision,” he says.
“Even when the periphery started to perform, not all investors would come back in — some would still buy emerging market and high yield debt. That’s because it’s not good for the ego or the brand to sell at a low cash price and buy back at a high one. But then they realised the liquidity issue with emerging markets and high yield. So they realised they weren’t in their natural environment and that triggered part of the reinvestment in the periphery. But whether investors are still low on periphery and high on emerging market is hard to say. My personal feeling is [that] most investors are back closer to the benchmarks, which at the same time means there might be fewer unnatural investors in emerging market debt than last year.”
