In the past 12 months Poland has consolidated its position as a mature EU sovereign credit. The country repeatedly confirmed this status by successfully pushing the boundaries of the size, maturity and pricing of its issues.
Perfectly illustrating this was the e3 billion, 15-year trade launched at the beginning of this year, the largest and longest-dated out of the region. One banker described the deal as "the first proper EU trade from central Europe". In this groundbreaking deal the sovereign increased the size of the issue from between e1.5 billion and e2 billion to e3 billion, as the order book reached in excess of e5 billion.
The bond was priced at 99.375 and carried a coupon of 4.2%, giving a spread of 27bp over mid-swaps. This was at the tighter end of original price talk.
"If you had asked me even six months ago I would have been cautious about forecasting this issue to be in excess of e1.5 billion. As it was demand was so great that we were able to borrow e3 billion in one go," says Andrzej Ciopinski, deputy director of the foreign policy department at Poland's ministry of finance.
"The fact that we are now an EU member and candidate for euro membership has made a big difference and we now have access to a much greater pool of funds," he adds. "This deal illustrated that the change in investors' attitudes is already substantial and deep-rooted."
Broader base
The 15-year maturity also let Poland develop the longer end of its maturity profile and broaden its investor base. "The deal attracted some pension funds and fund managers and we were very pleased with the diversity of the placement," says Ciopinski. "We also attracted new accounts from countries that had not been keen to buy our credit before our EU membership."
The official says that targeting Europe's investor base is a key facet of the country's funding strategy. "In a few years Poland will be a member of the eurozone and we will look to do further and larger funding in the euro currency."
Domestic funding fulfils 90% of the sovereign's borrowing requirements. "We will not switch overnight from zloty to euro funding but to avoid difficulties in the future we must prepare a sound euro investor base," says Ciopinski.
"However, this increase must be gradual because we do not want to saturate demand for our bonds."
This strategy was illustrated when the sovereign started its 2004 borrowing campaign by issuing a e1.5 billion, five-year bond. At that time it was the largest ever issue and offered a rare opportunity for investors to buy liquid five-year paper from a first-wave accession sovereign.
"It was important for us to improve the liquidity of our bonds," says Ciopinski. "The deal allowed us to improve the performance of the Polish credit curve. Some outstanding issues, smaller and less liquid, were not trading efficiently."
Poland also revisited the yen market last May with a ¥50 billion, five-year offering. This was only the second time the country had tapped the Japanese market and May's deal was twice the size of Poland's inaugural yen bond in 2003. "We need to be present in all key markets and this fits with our foreign debt portfolio," says Ciopinski. "There will be a new yen issue this year, but neither the date nor maturity, nor size have been decided yet."
The bond was priced at par with a 1.02% coupon to give a spread of 35bp over Euribor or 30bp over yen Libor – 10bp inside the pricing of Poland's debut yen deal. The five-year maturity, rather than the seven years of its inaugural issue, allowed the republic to widen its investor base in Japan, as it appealed to a broader range of accounts. Three times as many investors put in orders for the 2004 deal as did in 2003.
Bold move
Poland has continued to tap different markets this year. In a bold move the sovereign raised funds in the notoriously conservative Swiss franc market in February, with a Sfr400 million, five-year deal. "Of course I look upon all my deals as beloved children," says Ciopinski, "but this may be my favourite. It was the first time we tapped this quite difficult market and it was a great success." "We went to them with a good credit story and we predicted that our spreads would tighten in the secondary market. This is exactly what happened and everyone is happy."
For the rest of this year, Ciopinski says that the sovereign will continue to use its core euro market for most of its funding, although other currencies will be used strategically. Having returned from a successful non-deal roadshow in the US in early 2005, Ciopinski says that a dollar deal is also under consideration.
Ciopinski's attention is now focused on the Paris Club debt repayment schedule. Poland is the only EU country with outstanding debts to the Paris Club of official creditors. In February it reached a deal to repurchase most of its outstanding debt worth e12.3 billion at the beginning of the year. This will primarily be funded through the issuance of sovereign bonds.
"We will increase our overall borrowing to meet our repayment and prepayment foreign debt schedule," says Ciopinski.
Flexible ministry
To accommodate this increase in issuance Poland has increased the size of its EuroMTN programme to e20 billion. No formal repayment schedule has been announced and the ministry of finance is flexible in order to cherry-pick optimum market conditions for future issues.
"We will spread out the issuance of these bonds over the next 12 to 18 months in order to avoid saturation in the
market and we remain flexible in
considering our various options," says Ciopinski. "Ultimately this will enable us to achieve a more efficiently traded
government debt structure."