Bulgaria’s dollar bond return on Wednesday was set to be priced at an attractive spread to central and eastern European peers, said emerging markets fund managers, ahead of the country’s expected accession to the euro, which will bring spreads tighter.
Bulgaria, rated Baa1/BBB/BBB, started book building for a March 2037 dollar bond at 170bp area over US Treasuries on Wednesday morning, its first new bond in the currency since 2002.
At guidance, Bulgaria pulled the dollar tranche to 150bp area over Treasuries on a book of over $4.1bn.
Bulgaria may be able to tighten to about 135bp over, said an EM sovereign fund manager in London before guidance. Another EM sovereign investor in London put fair value at 120bp-125bp, meaning 25bp-30bp of new issue premium at guidance.
“If you believe Bulgaria will enter the euro then it’s attractive,” said the first investor. “Then its euro bond spreads will converge to Croatia’s. That does not have a dollar curve but if it did it would be pricing around where Latvia trades, so there is a nice pick-up here to that.”
Latvia, rated higher than Bulgaria at A3/A+/A-, returned to the dollar market in May for the first time in over a decade, selling $1.25bn 5.125% 2034s. That equated to a spread to Treasuries of 83bp over, one of the tightest from any CEEMEA sovereign in the past two years.
They were bid at a spread of 100bp on Wednesday, according to Tradeweb. Were Bulgaria to tighten to 135bp over as the first investor thought it could, then it will be offering 35bp of premium to Latvia.
“I’m surprised the dollar tranche has not come with a slightly higher premium to get the dollar curve started,” said the second fund manager. “But it’s quite attractive. Moody’s has flagged the euro adoption as a when, not an if, and by 2026 at the latest, so that should compress Bulgaria’s spreads closer to EU countries like Croatia.”
BNP Paribas, Citi, ING and UniCredit are arranging the trade. The dollar tranche has Reg S documentation, making it unavailable to US-based investors. That is not unusual — 52% of the dollar bonds sold by EM sovereigns since the start of 2020 did not have 144A documentation which permits certain US onshore investor participation, according to Dealogic.
Euro pair
Bulgaria is also printing two euro tranches, maturing in September 2032 and September 2044. Combined with the dollar tranche, the second investor expected a €4bn-equivalent size.
Initial price talk for the euro bonds was 165bp area over swaps and 220bp area respectively. Guidance was 145bp area for the eight year, on orders of over €4.6bn, and for the 20 year it was 200bp area, on an order book of over €2.8bn.
Fair value for those tranches was about 115bp-120bp and 170bp-175bp over swaps, thought the second investor, suggesting 25bp-30bp of concession at guidance.
Bulgaria last printed in euros in November. It is not as regular an issuer as some of its central and eastern European neighbours, which will spur demand.
“I expect good interest,” said the first fund manager. “Spreads in investment grade bonds are super tight and there are not that many good opportunities.”
The country’s fundamentals are sound, agreed to the two investors. Debt is low, fiscal policy is steady and Bulgaria has a path to euro adoption. The only concern is politics – it has had six parliamentary elections since April 2021 and another looms in October, despite there being one in June this year.
“It’s just politics that is the concern,” said the second investor. “There is still no government.”