The Republic of Poland paid a dazzling visit to the dollar market this week in a deal that should encourage other central and eastern European credits to diversify their funding away from less liquid euro markets and into dollars — the home turf of emerging market issuers. On Tuesday, Poland (A2/A-/A-) launched its first dollar benchmark in four years after announcing the 10 year deal on Monday afternoon with a targeted benchmark size of $1bn-$1.5bn and a price guidance of 300bp area over US Treasuries. By Tuesday morning, the SEC-registered global offering was assaulted by $8bn of demand. This allowed the lead managers, Citi, Barclays, and HSBC to price the deal tightly at 99.788 to yield 6.404%, or 290bp over US Treasuries, boosting the deal to $2bn.
This is Poland’s first dollar benchmark in four years. Poland has been the most active issuer in US dollar markets in recent years with outstanding $1.4bn 2012s, $1bn 2014s and $1bn 2015s. The two later notes provided the basis for pricing and on the extrapolated yield curve, the issuer paid a tight 15bp-20bp new issue premium, bankers on the deal said. As a rare, high yielding issue from an investment-grade EU sovereign, the deal attracted a diverse profile of investors. Over 280 accounts participated in the geographically diverse order book. The US bought 58%, UK 26%, continental Europe 15% and Asia 1%. Real money accounts dominated the book with investment advisers/asset managers buying 73%, banks and investment trusts 9%, hedge funds 9% and pension funds and insurance companies 8%.
"This deal benefited from positive supply and demand dynamics and scarcity value," said Fabianna Del Canto, an emerging market syndicate official at Barclays Capital. The bonds traded up to 101.00 in the aftermarket as real money accounts and private banks looked to add to their allocations.
Poland’s day
After embarking on an extensive roadshow visiting Germany, Los Angeles, San Francisco, Boston, and ending in New York on June 30, the issuer waited until this week to avoid the July 4 US independence day holiday. Given the historic depth of liquidity in the US, 10 year tenors for issuance, across the credit spectrum, is conventional while euro denominated credit is typically in five year format, said bankers on the deal. This boosted the appeal of issuing the rare dollar benchmark, said Anna Suszynska, deputy head of the public debt department at the Polish ministry of finance. "The five year maturities in our yield curve was getting quite crowded and we wanted to issue in dollars for diversification purposes," she told EuroWeek. "From the feedback on the roadshow, we understood that there was growing interest in Polish credit and an appetite for a large benchmark." Poland was last in the cross-border market with a Eu1bn five year deal in January, and May with a Eu750m retap on the 2014 notes. Poland is the only economy in Europe set to grow this year but faces a bigger-than-expected budget deficit. "Investors appreciated how Poland was able to issue a big, liquid benchmark without putting pressure on its euro curve — or further crowd its five year maturity profile," said Del Canto.
Suszynska said the market for central and eastern European credits has changed. "The pricing in US markets was not as good as the euro markets in recent years but this has changed now". Despite the competitive pricing for the deal relative to euro denominated issuance, all-in funding costs have increased in absolute terms. In 2005, Poland issued its 10 year $1bn benchmark at a spread of 59.8bp before the cost of capital globally rose sharply. In the bull run, central and eastern Europe issuers, like Poland, narrowed concessions to as low as 10bp over mid-swaps for euro benchmarks as compliant investors banked that eurozone convergence would prove a smooth journey.
But the regional economic slump and the radical repricing of risk globally has transformed central and eastern European credit, in many cases, into a vanilla emerging market product. "In recent years, the spread compression in central and eastern Europe drove many EM dedicated investors to focus on other regions, but the change in market dynamics has brought EM investors back," said Alan Roch, director of emerging markets syndicate at Royal Bank of Scotland. Central and eastern European sovereigns can now expect competitive pricing in dollars — the home of emerging market investors, said bankers. US-based specialist investors have little exposure to euro denominated credit, while EU convergence funds are still stinging after the flaccid performance of emerging European paper against other regions in 2008. This has sapped the firepower of euro investors.
Pre-funding possibility
Poland has completed its overseas funding needs for the year, but Suszynska said the ministry would eye, "any windows of opportunity". She refused to elaborate on future dollar issuance, adding that the reference level remains the cost of 10 year government zloty notes that now yield 6.3%. "Poland is successfully building a track record in diverse markets to give it flexibility in funding," said Maryam Khosrowshahi, head of financing and liability coverage for CEEMEA at Citigroup. Poland wants a track record with global investors "before joining the eurozone, becoming a small fish in a big pond," said a banker close to the deal.
There are few dollar benchmarks among central and eastern European sovereigns apart from Poland’s 2014s and 2015s and Hungary’s dollar 2015s, all of which trade rarely. The 2019s could be a benchmark. "The $2bn size of the issue coupled with strong investor demand, especially from real money US accounts, suggests that this deal can serve as a liquid dollar benchmark for central and eastern European sovereign credits for some years to come," said Khosrowshahi. "This great Poland deal shows how central and eastern European issuers will see a strong bid from emerging market investors as the market has now gone back to being a traditional high yielding product," said a banker away from the deal. "The days when borrowers and investors looked to see what pick-up paper issued by a transitional EU sovereign over eurozone government paper could achieve is over — for now."
Primary market activity is still strong ahead of the traditional summer lull. Hungary this week concluded a non-deal roadshow in Europe via BNP Paribas, Citi and ING for an expected Eu1bn-Eu1.5bn benchmark. Bankers on the deal said feedback has been positive but timing is unknown. Rumours are flying that Gazprom (Baa1/BB) is set to issue a dual-tranche deal in euros and dollars this month, but leads have not yet been recruited.