US funds help Lithuania out of Baltic woes
Lithuania emerges from regional firestorm with 9.50% 5-year Eurobond
The Republic of Lithuania cheered beleaguered Baltic issuers this week by launching a yieldy Eu500m bond thanks to strong demand from offshore US investors. The deal’s success, despite historically wide credit default swaps for Baltic sovereigns, one of the weakest links in emerging market debt in recent weeks, further demonstrates the market hospitality for credits willing to pay the price.
On Monday, the A3/BBB/BBB issuer attracted Eu750m of demand for a five year Reg-S bond to yield 9.50%, 650bp over mid-swaps. In the morning, leads Citigroup, Credit Suisse and Royal Bank of Scotland released official pricing guidance of 9.50% area and attracted Eu750m of orders by the afternoon. Lithuania’s 2013s and 2016s were referenced for pricing.
When the new benchmark was announced the 2013s yielded 8.3% and the less liquid 2016s traded at 9.375%. On the interpolated curve, the new issue concession is therefore around 55bp-60bp, said a banker on the deal.
The deal has been in the offing since the sovereign embarked on an international roadshow for a euro-denominated benchmark three weeks ago. However, the timing proved unlucky as it coincided with market rumours of a devaluation of the Latvian lat. This fuelled fears the whole Baltic region was on the brink of an economic meltdown given its close financial and trading links. Lithuania’s CDS then widened from around 350bp in mid-May to 470bp last Friday (June 12).
However, the deal gained momentum after leads dropped soft pricing whispers to investors the week before the transaction. "Despite various comments on Latvia during the roadshow, the investor call held on June 8 ensured the investors remained fully engaged in a bond transaction," said Alan Roch, director of emerging markets syndicate at Royal Bank of Scotland.
The rare international issuer decided to seize the day and pay up to cement a relationship with global investors. "We are unsure how markets will develop so it is difficult to forecast that there is a better to time to issue a bond so we saw this Monday as window of opportunity," Mykolas Majauskas, adviser to the Lithuanian prime minister Andrius Kubilius, told EuroWeek in an interview.
Lithuania, which has not ruled out going to the IMF for a bailout package, will use the cash to shore up the public finances in the grip of a severe recession that has eroded government revenues. Underscoring the radical repricing of risk after the global bull run, the sovereign in October 2007 printed a Eu600m 4.85% 2018 bond.
Money on the table
"Clearly the price is expensive but the reason we made the decision to go to the market is to demonstrate that we can do it and prove investors have faith in Lithuania’s economy," said Majauskas.
"We also left money on the table on this transaction to keep investors hungry," he said and suggested the 2014s may be tapped for a further Eu500m depending on financing needs and market conditions over the next year. A five year tenor is the sweet spot for central eastern European-focused investors who are wary of longer dated paper compared with Latin American and Gulf investors, said market players.
A banker close to the deal said: "You can price high-grade names and single-A blue chip corporates tighter but for assets that are less liquid you still require a new issue premium of around 50bp."
In addition, Croatia’s (Baa3/BBB/BBB-) Eu750m long five year bond at the end of May, which dropped full two points on the break, weighed on the leads. "I did not see anything wrong with the execution of the Croatia deal," said a lead on the Lithuania deal. "So we wanted to price an investor-friendly deal to attract enough orders from buy-and-hold accounts." But he cited the stable aftermarket performance of the bond as proof the deal did not offer too much juice. On the break, the 2014s 9.50% traded at 100.30–100.55 versus the 99.52 reoffer price. The 100.50 price represents 9.24% yield and 625bp over mid-swaps.
Offshore US asset management funds based in the UK offset the decline in demand from cash-strapped EU convergence funds, traditional buyers of CEE paper, said a banker on the deal. By geography, offshore US accounts bought 28% of the paper, UK investors 21%, Germany 19%, Nordic region 12%, Greece 4%, Switzerland 4%, and others 12%. By type, funds grabbed 62%, banks 31%, corporates 5%, insurance funds 1% and others 1%.
Underscoring the divergence between ratings and pricing levels, traditional real money emerging market investors flocked to the investment grade paper while high grade buyers snapped up a lower proportion of the deal compared with previous CEE sovereign transactions. "In recent years, the spread compression in the CEE drove many EM dedicated investors to focus on other regions, however, the change in market dynamics has re-invited EM investors back to a region they have historically been very engaged with," said Roch.
The Republic of Poland has mandated Barclays Capital, Citigroup and HSBC for a possible Eu1bn benchmark, said bankers on the deal. On Monday, the issuer will embark on a roadshow in Germany, taking in London on Tuesday and Wednesday, Los Angeles on Thursday, and San Francisco on Friday. The roadshow will continue the following week in Boston on Monday (29 June) and conclude in New York the next day. The Polish finance ministry has previously indicated its intention to issue a $1bn five or 10 year bond this year.