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Egypt was right to try for bigger

egypt

Smaller print should not be seen as a failure

The Arab Republic of Egypt printed a $3bn dollar triple trancher at the tail end of last week, which would have been hailed as a triumph in volatile markets were it not for leads having outlined a larger targeted size of $3.5bn-$4bn. But the smaller print should not be seen as a failure.

When Egypt released price guidance for the deal on Thursday morning in London, there was immediate pushback from investors and analysts. The problem was not the price; it was the size. The targeted amount of $3.5bn-$4bn was too big, they said, and comments flew around the market to the effect that the index buyers were “maxed out” and “most accounts” were still overweight.

The leads responded by reducing the size at the next pricing update and changing the target to $3bn.

Syndicates obviously do not like to reduce size targets midway through a trade. It ruins momentum and gives investors reason to worry that follow on demand will be weak.

But if you have an ambitious target, that is the risk you run.

Egypt’s initial target was certainly ambitious — according to one analyst, $3.5bn-$4bn would have taken out the sovereign's entire international bonds target for its fiscal year, allowing it to avoid any further market volatility to come.

And there seems to be plenty of that on its way.

If Egypt had succeeded, it would have relieved itself of the pressure to return to the market again amid widening US Treasuries, concerns around global contagion from an Evergrande default and chunky competing supply that is expected to come from other EM sovereigns. It was a risk worth taking.

The $3bn of bonds that it did issue have not performed beautifully. By Monday, the 2027s were trading around 99.15/99.55, the 2033s were at 98.75/99.20 and the 2051s were at 99.05/99.65. All three tranches were printed at par.

Investors blamed a sell-off in US Treasuries as well as the deal itself. Had leads stuck to their guns and jammed an extra $500m-$1bn into the market it would have been disastrous.

So the execution was not ideal, and an assessment of the success of this bond, in isolation, could lead one to draw the conclusion that the bookrunners should have known better. They should have been able to tell that the market appetite was not there and steered the issuer to go smaller from the outset.

But in the context of Egypt’s funding needs for the year more broadly, going big was the right — albeit not the textbook — move.

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