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SSA borrowers must accept new reality


Higher premiums and investor-friendly terms are going to become the norm, not the exception

After Portugal printed a €3bn 10 year deal last week, other sovereigns would do well to look at the measures it needed to take to mitigate what is shaping up to be one of the longest sustained periods of volatility in more than a decade.

Portugal started off by making sure its deal looked cheap when it opened books, offering around 6bp in new issue concession. Considering that the issuer had managed to price a deal flat to one from its higher rated neighbour Spain at the start of the year, the generous starting point appears to have been a tactical decision to help get a deal across the line in a market made difficult by soaring inflation and tightening monetary policy.

It worked. The sovereign tightened pricing by 1bp for a 5bp final concession, but that was not where the real effectiveness of starting cheap was most apparent. During the day of book building, swap spreads moved so sharply that, if the concession was measured against the curve at the end of the day, rather than before the new deal was announced, it was closer to 3bp.

This was still a higher premium than Portugal had paid in January, but it showed the wisdom of building in a buffer to account for rapid changes in the conditions of this volatile market

But it is not just the spread where issuers can give themselves breathing room. In a bid to mitigate some of the volatility, several issuers have this month used sovereign bonds as pricing benchmarks for new deals rather than the mid-swaps they usually prefer.

Of all bond issuers, SSAs are the first to have to think about such strategies, as they tend to print tightest to (or furthest through) their pricing benchmarks, so any move in the underlying rate has an outsized effect on them.

Expectations, meet reality

When speaking publicly, funding officials often acknowledge that tough market conditions sometimes call for special measures — whether that is higher concessions, smaller deals or shorter maturities. In private discussions with syndicate bankers, they are understood to be less understanding.

But treasurers should take note of Portugal’s approach, which has proven sensible and successful in a time of great volatility. There were probably a few basis points left on the table, but the only alternative was to run the risk of limping over the line with a deal shunned by investors or, worse, having to abandon it.

Both of these are very real possibilities in 2022’s wild markets.

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