CEE sovereigns benefit from paying up early
Central and eastern Europe sovereigns enjoyed big demand for benchmarks at the start of 2023 but paid high new issue premiums. This was reversed later in the year, as investors became more confident about the path of interest rates and when borrowers had less to raise. George Collard reports
CEE sovereigns coming to the primary market in January 2023 had the task of engaging an investor base that had suffered a torrid 2022. To do so, they paid an average new issue premium on benchmark funding of more than 14bp, according to data from GlobalCapital’s Primary Market Monitor.
Hungary and Romania were among the first to issue in 2023, and they offered more than 30bp of new issue premium to investors. Slovenia had been the first CEE sovereign issuer of the year into the market and had paid a premium in the mid-single digits only — but it is double-A rated, a few notches above Romania and Hungary.
Investors faced uncertainty over inflation and how much further interest rates had to rise and how long that process would take as central banks tried to combat spiralling prices. With the increased likelihood of bonds losing value as rates rose, issuers had to compensate investors in the form of high concessions.
The trick worked. High new issue premia did tempt investors in, leading to some large order books, even for sub-investment grade rated issuers such as Serbia. The average subscription ratio in January on a CEE sovereign benchmark bond was 4.8 times the deal size, much higher than the rest of the year.
New issue premia started to decline after January, averaging 8bp on benchmark deals in February and March. This excludes, however, a new issue premium of more than 20bp, which Turkey — an issuer with unique problems, compared with CEE peers — paid on one of its deals. It paid elevated new issue concessions all year as those paid by others fell.
Naturally, investors appeared to lose a degree of interest as new issue premiums ebbed away. The average subscription ratio on benchmark funding fell to 3.2 times the deal size in February. In March it was 3.3 times.
The vast majority, 89%, of dollar issuance in 2023 came in the first half. In euros it was more even, with 62% of supply in the first half. Overall, 69% of CEE sovereign bonds came in the first half.
This was different to 2022, when just 56% of benchmark volume was priced in H1. CEE sovereign supply suffered in the first half of last year owing to Russia’s invasion of Ukraine. It shut the market for much of the period, and when it did reopen CEE sovereigns paid a heavy price for their proximity to Ukraine.
In the second half of the year, investor confidence had improved from January. The end of the rate rise cycle was in sight, many believed, even if it was still not certain, and outflows from emerging market bond funds had been nowhere near as bad as in 2022.
That handed further pricing power to issuers and new issue concessions fell further. Issuers were confident enough to leave less on the table without having to worry about a deal not going well, and investors were happy to accept a slightly lower premium for a new bond.
Since June, the average concession on benchmark funding has been just over 4bp – a far cry from January’s 14bp. Stripping out sub-investment grade Albania, that average drops to just 3bp.
But in turn, order book sizes relative to bond size also dropped. The average since the start of June has been 3.4 times, lower than the rest of the year. Stripping out a deal for Estonia, a highly rated and rare issuer for which investors showed very high demand in the form of an order book eight times the deal size, the average subscription ratio was just 2.8 times.