The Republic of Poland paid a stunning visit to the dollar market in July with a rare 10-year, $2 billion benchmark. Analysts say the deal should encourage other central and eastern European (CEE) credits to diversify their funding away from less liquid euro markets and into dollars.
Poland (A2/A-/A-) launched its first dollar benchmark in four years with a targeted benchmark size of $1–1.5 billion and a price guidance of 300bp area over US Treasuries. The SEC-registered global offering was hit by $8 billion of demand. This allowed 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 $2 billion.
Before the cost of euro funding for accession countries dropped in the bull run, Poland was one of the most active issuers in US dollar markets among its CEE peers. Its outstanding notes comprise: $1.4 billion 2012s, $1 billion 2014s and $1 billion 2015s. The two later notes provided the basis for pricing. On the extrapolated yield curve, the issuer paid a tight 15–20bp new issue premium, bankers on the deal said.
“This deal benefited from positive supply and demand dynamics and scarcity value,” says Fabianna Del Canto, an emerging market syndicate official at Barclays Capital.
The deal attracted over 280 accounts. The US bought 58%, UK 26%, continental Europe 15% and Asia 1%. Real money accounts dominated with investment advisers/asset managers buying 73%, banks and investment trusts 9%, hedge funds 9% and pension funds and insurance companies 8%.
Given the relatively strong liquidity in US markets, 10-year tenors for issuance are conventional while euro denominated credit is usually in five year. This boosted the appeal of issuing the dollar benchmark, says Anna Suszynska, deputy head of the public debt department at the Polish ministry of finance. “The five-year maturities in our yield curve were getting quite crowded, and we wanted to issue in dollars for diversification purposes.
“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,” says Del Canto.
Suszynska adds: “The pricing in US markets was not as good as the euro markets in recent years but this has changed.” Despite the competitive pricing, all-in funding costs have increased. In 2005, Poland issued its 10-year, $1 billion benchmark at a spread of 59.8bp. But the regional economic slump and the radical repricing of risk globally have transformed central and eastern European credit, in many cases, into a vanilla emerging market product.
“This deal can serve as a liquid dollar benchmark for central and eastern European sovereign credits for some years to come,” says Maryam Khosrowshahi, head of financing and liability coverage for CEEMEA (central and eastern Europe, Middle East and Africa) at Citi. The ease with which Poland tapped the bond again, for an additional $1.5 billion, also suggests it may have sufficient liquidity to serve as the pre-eminent regional dollar benchmark.