Strong economic growth and relative political stability have
made Poland a sought-after credit in the capital markets. The
country's foreign financing needs are limited, however, and
appearances in international markets will continue to be
In the absence of regular opportunities to gain vanilla exposure to
Poland, bond buyers have increasingly had to look at structured
plays on the country, or to offshore telecom plays. Further
corporate issuance may help close the gap between supply and
demand, as may once-delayed debuts from the municipal sector.
AS ONE OF CENTRAL AND EASTERN Europe's most dynamic economies,
with GDP growth averaging 7% over the last three years, Poland has
emerged as one of the darlings of the international bond markets,
allowing it to leverage its position as a member of the OECD and a
future member of Nato and the EU.
The country's position as one of the central and eastern Europe's leading credits was cemented earlier this year when French export credit agency Coface opted to securitise its exposure to Poland via a twin tranche financing package led by JP Morgan (books) and Crédit Commercial de France.
The heavily oversubscribed $800m equivalent offering via special vehicle Delphes was divided into two: a Ffr1.25bn eight year and three month French franc portion, paying 175bp over French government bonds, and a $600m 11 year and three month dollar tranche, paying 225bp over US Treasuries.
Secured on a cashflow subparticipation under a bilateral agreement between France and Poland, the issue represented the first public structured transaction to give exposure to Polish risk. It also provided investors in Europe with an alternative investment option to Poland's Brady, Eurobond and Yankee issuance.
With international bond issuance by the Baa3/BBB-/BBB rated sovereign unlikely to exceed $500m in 1998, the innovative transaction was notable for offering first time exposure to Poland in French francs and for avoiding cannibalisation of Poland's outstanding dollar denominated debt.
Meanwhile, Credit Suisse First Boston (CFSB) is preparing to roadshow a twin tranche, high yield bond issue in Europe and the US in May for Polish cable TV and telephony concern Bresnan International Partners - the latest in a series of such transactions to emerge over the past year.
The financing package is to comprise a $100m element and a DM185m portion, with both tranches having 10 year non-call five tenors.
Bresnan International Partners' parent company is Bresnan Communications Inc, which operates in the mid-western and southern states of the US.
The sole Euromarket offering of 1997 came at the end of April when Bank Handlowy w Warszawie made a welcome return to the international bond markets with the launch of a $150m three year issue, which proved that central and eastern Europe's top issuers are able to command ever tighter levels of pricing, given the scarcity of investment grade paper from the region.
Launched via the bank's Netherlands registered financing vehicle Handlowy Finance BV, and lead managed by JP Morgan, the Baa3 rated issue had a 7.125% coupon to yield just 60bp over Treasuries - at the time the tightest launch spread for a Polish credit and the tightest launch spread for a fixed rate non-sovereign credit from central and eastern Europe.
The launch spread represented a 35% reduction in the bank's funding costs since it first tapped the international markets with a $100m 7% three year issue at 88bp over in April 1996. Also led by JP Morgan, the issue had since traded in to 55bp/50bp on a bid/offer basis by the time of Handlowy's second Eurobond launch.
Some 80% of the lead's paper was placed in Europe, with interest out of Brussels, Frankfurt, London, Paris and Zurich. The 20% balance went to Asia, the bulk to banks in Hong Kong and Singapore, rather than in Korea, as with Handlowy's previous deal last year - further proof of the widening bid for the region's leading issuers, which was a principal theme throughout most of 1997.
JP Morgan reported that the strongest bid had come from institutions, which took around 75%-80% of the deal, but that the bid from retail, at around 20%-25% of the total, had also been very encouraging - marking the first occasion on which there had been substantial retail interest for a short dated dollar deal from Poland.
Says a JP Morgan spokesman: "This deal exemplified the fact that Poland and Bank Handlowy have made the move from emerging market to investment grade type credits, which was reflected in the type of issuers who bought into it - there were a lot of mainstream accounts who were investing in Poland and Handlowy for the first time."
Following the Handlowy transaction, the focus of new issue activity swung towards the US, where the sovereign and a trio of Polish telcos all launched debut issues.
The first of these was Polish mobile phone operator Polska Telefonia Cyfrowa, which in late June became the first telecoms concern from central and eastern Europe to test the appetite for high yield debt in the US bond markets with the launch of a $253m 10 year Yankee/144A issue via Salomon Smith Barney.
PTC's landmark transaction came against the background of a central and eastern European telecoms sector experiencing rapid growth - digital mobile phone services are increasingly replacing outdated analogue fixed line systems.
Issued via Netherlands registered finance subsidiary, PTC International Finance BV, the subordinated senior notes featured a step-up structure comprising a zero coupon until July 1, 2002, and a 10.75% fixed rate coupon thereafter - equating to a margin of 434bp over US Treasuries at the issue/fixed re-offer price of 59.241 - at the tight end of the 10.75%-11% coupon range at which the deal had been roadshowed.
The pricing structure was designed to accommodate the fact that since PTC only started operating in September 1996, it is not yet in a financial position to be able to service interest payments.
The issue found a willing audience among a wide range of high yield mutual and hedge funds, insurance companies and money managers in the US and Europe all looking for a high yield alternative to telecom issues from more developed economies.
Shortly after the PTC transaction, the Republic of Poland launched its keenly awaited debut Yankee bond, with positive investor sentiment allowing it to add a $100m 20 year tranche to the previously expected $300m seven year issue.
According to Polish finance officials, the incorporation of the 20 year tranche reflected investors' willingness to take a favourable long term view of the rated country's economic prospects.
At the issue/fixed price re-offer price of 99.491, the seven year tranche was priced to yield 7.219% or 75bp over the blend of the US Treasury notes due May 2004 and August 2007.
Meanwhile, the 20 year tranche was priced to yield 7.82%, or 100bp, over the 6.5% November 2026 Treasury bond at the issue/fixed re-offer of 99.299.
The pricing on the seven year tranche implied an 85bp spread for a 10 year issue that was 40bp tighter than where the then Baa3/BBB rated Indonesia was trading in the Yankee market.
The pricing on the 20 year element was 25bp inside Baa3/BBB- rated Hungary's Yankee trading spread.
Overall, the pricing was acknowledged to be extremely competitive for a triple-B sovereign credit on its inaugural outing in the sector - the rarity value of the transaction was emphasised in the run-up to launch, when finance ministry officials announced that the Yankee issue would be Poland's sole international bond offering in 1997 even though that year's budget had allowed for up to $500m worth of issuance.
JP Morgan reported it was fully sold going into pricing on the back of a two times oversubscription. Demand was split between insurance companies, pension funds and investment advisers. The tight pricing meant that the issue achieved the issuer's goal of attracting investment grade, rather than emerging market, buyers.
Although the bulk of the transaction went to US investors, there was also strong demand from Asian and European accounts keen to add to existing holdings of Polish debt.
At the end of October, and against a background of growing Asian-inspired turmoil in the emerging market debt sector, Merrill Lynch launched the largest ever international bond issue by a Polish corporate - raising the equivalent of $400m in cash proceeds for Poland's leading private sector fixed line telecoms operator Netia Holdings SA.
European interest in the transaction, launched via the Netherlands registered financing vehicle Netia Holdings BV, was such that the lead manager added a DM207.062m portion (DM135m cash proceeds) to the $325m twin tranche dollar transaction initially planned.
The zero coupon step-up format of the Deutschmark element was particularly noteworthy in that it marked the first time that such a structure had been applied to a high yield issue in the German currency.
However, growing market turmoil forced Merrill Lynch to reprice all three of the 10 year non-call five elements two days after launch to compensate investors for the perceived increase in risk attached to the B3/B rated transaction. The US investment bank guaranteed the original price to the issuer.
The $200m 10.25% overfunded cash pay element, originally priced at par to yield 425bp over the 6.125% August 15, 2007 US Treasury, was amended to 98.274 to yield 460bp over.
Pricing on the $193.55m zero coupon dollar portion ($125m cash proceeds) was changed to 63.13 from 64.585, with the margin over the US benchmark rising to 560bp over from 525bp.
The Deutschmark element, which had a zero coupon structure for the first five years, stepping up to an 11% coupon thereafter if not called, was repriced at 63.73 from 65.198, with the premium over the 6% July 4, 2007 Bund rising to 564bp from 535bp.
In addition to issuer call options in year five, all three tranches allowed for up to 33% amortisation in the event of an IPO within the first three years.
The entire DM tranche was placed in Europe, with the dollar elements going to a mix of US and European institutions.
In contrast to the bearishness displayed by mainstream investors to most emerging markets-related issuance in the run-up to launch, Netia's debut transaction attracted a strong cross over bid, with interest coming from pension funds, insurance companies and high yield and mutual funds.
The final telecoms issue of the year came in even more testing circumstances. The $120m 144A issue for Poland Telecom Operators was launched in late November when even investors in the US high yield bond markets were beginning to fight shy of emerging market related credit stories. However, by combining an equity warrant option - giving investors the right to acquire 15% of the company - with a fixed income element featuring a 14% coupon giving investors a 819bp over Treasuries yield on an issue price of par - lead manager Citicorp Securities was able to ensure a strong reception for the deal from specialist telecom fund managers.
Although unrated, the issue has performed well since its tricky launch, trading up to 114,116, with the spread narrowing to 550bp-575bp.
Looking ahead to the rest of 1998, the main focus of fixed income investors' interest is likely to be on Poland's municipal credits.
Warsaw and leading industrial centres such as Krakow and Lodz are all believed to be reviving their plans for debut Eurobond issues in either dollars or Deutschmarks this year after they were forced to shelve them at the end of 1997 in the wake of the Asian crisis. EW