Poland shrugs off rating shock to consolidate leading status
When Standard & Poor’s (S&P) downgraded Poland from A- to BBB+ on January 15th, it was not just the Polish authorities that were astonished by the announcement. According to the Ministry of Finance’s website, which described the rating action as “incomprehensible”, a Reuters survey published the previous day suggested that fewer than one in three investors expected a downgrade. Among other agencies, this year Moody’s has revised its rating on Poland from stable to negative, while Fitch has left its stable rating unchanged
Bankers insist that the strength of investor appetite for exposure to Poland since the S&P downgrade suggests that there is a clear disconnect between market sentiment and the views of the rating agencies. Since the S&P announcement, Poland has tapped its 2036 euro benchmark, issued a successful 10 year $1.75bn trade, and launched the first Panda bond by a European sovereign borrower.
In this roundtable, bankers and the Ministry of Finance share their views on the outlook for Poland’s economy and the funding strategy of the Republic.
Participants in the roundtable, which took place in London in September, were:
Susan Barron, managing director, head of CEEMEA debt capital markets and risk solutions group, Barclays, London
Rafal Benecki, chief economist, ING Bank Slaski, Warsaw
Rafal Deptula, head of trading, global corporate banking division, Bank Zachodni WBK, Warsaw
Marzena Fick, head of CEE debt capital markets, Citi, London
Odilbek Isakov, director, debt capital markets,
global banking and markets, HSBC, London
Maryam Khosrowshahi, managing director, head of CEEMEA public sector bond origination, Deutsche Bank, London
Bartlomiej Malocha, head of financial markets division, Bank Zachodni WBK, Warsaw
Stephane Marciel, managing director, CEEMEA debt capital markets, Société Générale Corporate & Investment Banking, Paris
Piotr Nowak, Undersecretary of State, Ministry of Finance, Warsaw
Martina Reissenweber, director, public sector origination, UniCredit, Munich
Alexis Taffin de Tilques, head of debt capital markets CEEMEA, BNP Paribas, London
Mirek Urbanski, executive director, debt capital markets Central Europe, JP Morgan, London
Phil Moore, moderator, GlobalCapital
: If we can start with a quick overview of the latest developments in the Polish economy, the IMF is projecting an expansion in GDP of 3.5% this year and 3.7% in 2017, with unemployment continuing to fall. Does this tally with the ministry’s economic forecast, and does this healthy growth outlook dispel any lingering concerns about the risk of deflation in the Polish economy?
Piotr Nowak, Ministry of Finance: We’re assuming that the Polish economy will grow at 3.6% next year because we’re slightly more cautious than the IMF about the global outlook, the prospects for the European economy, elections in Europe and the impact of Brexit. We also have the Italian referendum ahead of us this year, the possible impact of which is still underestimated.
We’re comfortable with the balance of the domestic economy. Consumption is still growing, so we don’t foresee a problem with deflation which we think will turn around in Q4 with inflation expected to rise by 1.3% next year.
Rafal Benecki, ING: We’re also more cautious than other forecasters and see growth next year of 3.3%. We worry that some of the demand created by the government’s fiscal stimulus may be offset by rising imports. As a result, net exports may be less supportive than people are expecting.
We’re also concerned about investment which was quite weak in the first half of this year. It is mainly the gap between EU budgets which has depressed public outlays, but also Polish corporates are worried about the situation in Germany, and they are still waiting to see what the impact of the UK referendum will be.
So far, the impact of Brexit on the eurozone economy has been minimal and is seen in a few leading indicators rather than hard data. Nevertheless, uncertainty about the outlook for Europe is having a negative impact on spending in the Polish corporate sector.
The bottom in investments should be reached in the second half of 2016, when private outlays should start to pick up, according to recent surveys, while outlays co-financed with EU money may be delayed. We expect overall investments to speed up in the second half of this year, and to grow by 4% or 5% next year.
The big question mark in the external environment is whether there will be a rotation from monetary easing to fiscal stimulus, which would mean external growth over the next two years could be strong. It is more likely in the US following the presidential elections, while in Europe nothing is likely to happen before 2018 — in other words, until after the elections expected in the Netherlands, France, Germany and Austria. So all in all, we are rather more cautious than the IMF and the Ministry of Finance on the outlook for growth.
: This time last year we were asking what Poland had to do to get an upgrade. Now, following this year’s downgrade from S&P, and the more recent revision of the Moody’s outlook from stable to negative, the question should be, what does Poland have to do to get this year’s negative moves reversed?
Nowak, Ministry of Finance: When we spoke with market participants after the S&P announcement in January, everybody was surprised about the downgrade. If you read the S&P report, it recognised from the figures it quoted that the Polish economy was quite strong. In fact, some of their forecasts were even more optimistic than ours were.
From our perspective, it was irrational for S&P to go straight to a cut in the rating before changing the outlook from positive. But it was clear from the S&P report that the main reason for the downgrade was politics. The concerns raised in the report did not materialise, but S&P still have not changed their view. So we still don’t understand the downgrade.
The solid performance of the economy speaks for itself, and the Responsible Development Plan points to continued growth. This will change the engine of growth from a cheap labour force to a knowledge-based economy, which will bolster productivity. We’re committed to making this transition, although we know it won’t be easy and we assume some mistakes will be made along the way, which we will learn from and correct.
We hope S&P will respond to this with a revision to the outlook and eventually an upgrade. In the meantime, all we can do is continue to meet them and be professional with them. We have no intention of breaking our relationship with them.
The last time we spoke with S&P they softened their language. Perhaps they feel under pressure from the market and recognise they made a mistake.
Odilbek Isakov, HSBC: The S&P decision was unexpected to everyone, to say the least.
Immediately after the elections, the agencies, including S&P, announced that they were maintaining their ratings and the outlook was unchanged. What happened in January was not in line with what they had written a couple of months earlier. So it represented a big change in S&P’s position without any notice, which to my mind was not justified.
: What was impact of the downgrade on investor sentiment, given that it came so soon after the launch of the Republic’s two-tranche 10 and 20 year €1.75bn benchmark in January, which generated total demand of €2.3bn?
Marzena Fick, Citi: The bookbuilding process was completed before the downgrade, and both the 10 and 20 year tranches were oversubscribed.
I agree with Odilbek that the S&P announcement was a shock to the market because the economic situation in the Polish market by no means pointed to a downgrade. Ironically, the numbers that were coming out of Poland at the time were mostly positive, and if anything people would have been more likely to have betted on an upgrade rather than a downgrade at the beginning of the year.
But investors did not react negatively and there was no impact on confidence. While Polish rates and levels were inevitably affected by the downgrade, investors themselves generally agreed that the rating decision was premature.
As for the Moody’s affirmation of the rating this month, they stated at the time that they saw the biggest risk as being fiscal. But if you look at the numbers coming out of Poland today, the data is very positive and it is hard to see how fiscal policy can be regarded as a risk. And as the IMF projections show, the outlook for growth is also positive.
Stephane Marciel, SG: Immediately after the announcement of S&P’s decision to downgrade Poland, the Minister of Finance had a series of meetings with investors in Europe, the US and beyond, and the reaction of the huge majority of them was one of surprise at S&P’s move.
Benecki, ING: From a tactical point of view, the downgrade was a buying opportunity, especially in the local debt market.
The question now is what will the next step be from Moody’s, and have there been any fundamental changes since their previous review? The answer is that the two main risks they identified have now been mitigated. First of all, the bill on the Swiss franc mortgages is much less costly for the banking sector than was originally feared.
This is very important, because a strong banking sector is a key pillar of sound fundamentals of the Polish economy. If that pillar is weakened, it would certainly affect the rating. But what we’ve heard from policymakers is that the resolution of this issue will be significantly less harsh than expected, so the risk arising from this story has been minimised.
Secondly, the fiscal balance for 2016 may surprise on the positive side. Moody’s forecasts a general government deficit this year of 2.8% of GDP, while we believe it will be between 2.5% and 2.6% of GDP. There is still a fiscal risk associated with the government’s election pledges, such as decreasing the pension age. But this decision has been postponed and will be contingent on a real improvement in tax collection. So Moody’s ought to stay on hold while it waits for confirmation of better fiscal data.
Maryam Khosrowshahi, Deutsche: If you compare the investor response to Poland’s two benchmarks this year to what the agencies have said, there seems to be a disconnect. The perception of the market towards the credit is completely different from that of some of the other third party players.
Poland completed its euro benchmark in one of the most difficult Januarys that I can remember in a very long time. I don’t think too many sovereigns could have successfully issued 10 and 20 year tranches in that environment. In March, when Poland printed its $1.75bn 10 year dollar transaction, markets were still very difficult, but the issue was also very successful, generating demand of about $3.6bn.
If you look at the performance of those trades, both have tightened, with Poland now trading close to Ireland.
: Isn’t it true that there has been a divergence of views among ratings agencies and investors across the entire emerging market universe this year? I understand there have been more sovereign downgrades in 2016 than in any year since 2011, and yet emerging market debt has continued to perform well.
Alexis Taffin De Tilques, BNP Paribas: If you’re an investor, even if you may have some questions about the ratings, Poland is still a very attractive asset. Even if you believe the performance of the economy is not going to be as strong as expected, even if you say the debt to GDP ratio is a little bit higher than expected, even if the fiscal deficit looks like being higher than you thought, these three variables alone would make half the countries on this planet envious of Poland.
It’s very hard these days to find economies with fundamentals as strong as Poland’s. Poland also stands out because it is the largest economy in the region.
On the downgrade, I think we need to see this in context. Increasingly over the last two years we have seen ratings agencies diverge more and more from market sentiment. This means that the market has consistently priced in ratings revisions from the agencies well in advance. Take countries like Hungary and Slovenia as examples.
Globally, agencies have been consistently negative since last autumn. If you think back to the IMF meeting last October, ever since then the agencies have had a negative stance towards any growing or emerging countries perceived as vulnerable to interest rate increases in the US. That negative sentiment has probably been over-amplified by the ratings agencies, which has been translated into a series of downgrades or negative outlooks.
For example, you may recall that the agencies downgraded virtually the whole of the Middle East, including Saudi Arabia, on the belief that oil prices would continue to fall.
As we’ve seen from the strength of investor demand for Poland’s euro and dollar deals, these ratings actions are fully discounted by the market long before they happen. We had the same issue a few weeks after the Poland euro trade when we priced a deal for the Kingdom of Bahrain. It’s a totally different credit in a very different geography, but it was the same story in the sense that the issuer was downgraded immediately after we priced. So we had to put the trade on hold, and a week later the transaction was closed successfully.
Susan Barron, Barclays: Although the sovereign was downgraded, if you look at the dollar transaction in March, there was almost no change in the US distribution. There was also an increase in the Asian distribution, an investor base whose investment mandates can be constrained by ratings.
It’s important to emphasise that the ratings are only one of the elements considered by investors. They also do their own credit analysis and they appreciate the fact that Poland has a very clear strategy which it communicates to the market on a regular basis. Consistent with previous years, the finance ministry’s team is committed to ongoing investor marketing and makes sure that investors always have the information available to them to allow them to make their credit decisions.
This strategy means that whenever Poland comes into the market, be it in euros or dollars or any other currency, the ministry’s commitment to being a regular capital markets user by providing liquid benchmarks, coupled with all the non-deal work they do, is appreciated by investors. That is visible not only in Poland’s secondary performance, but also in the primary distribution of its benchmarks.
Mirek Urbanski, JP Morgan: I have a strong feeling that there is too much discussion within the market about the Polish rating. I agree that the downgrade in January was a shock to everybody, but as long as Poland continues to deliver strong economic fundamentals, I don’t think it matters much what the agencies say.
Reissenweber, Unicredit: I agree that the largest investors in the euro and dollar markets tend to do their own research. Their view obviously differs from those of the rating agencies, which could explain why Polish spreads have even tightened versus swaps since the downgrade.
: The consensus among the bankers around the table seems to suggest that the S&P downgrade had no impact on investor sentiment towards Poland. But to what extent do ratings actions force the funding team at the Ministry of Finance to change the way it markets the Republic of Poland? As an issuer, what feedback did you get from the international investor base after the announcement from S&P in January?
Nowak, Ministry of Finance: The feedback we had both from our investors and from our banks is that they are very comfortable with the way we market the Polish economy. We travel so much that my wife hardly recognises me these days, but we see no reason to make any changes to our investor marketing strategy.
Khosrowshahi, Deutsche: One of the things that Poland has done extremely well compared to other sovereigns is the way it has developed its investor cultivation strategy. For more than 15 years the funding team has been committed to visiting the key financial centres every year and meeting key accounts, even if they knew that account was not going to buy the Polish credit in the immediate future.
The ministry recognises the importance of cultivating investors and making sure they become familiar with the story. For example, the team took the trouble recently to go to the Middle East and meet sovereign wealth funds and other big buyers there, all of which are sensitive to ratings. They have done this extremely well and it is clearly paying off, because Poland is now attracting top quality accounts such as central banks and other official institutions, and we’re seeing increased participation from these accounts each time Poland goes to the market. This is very evident from the Asian demand we’ve seen for this year’s transactions.
: Where does Poland sit as a credit? Is it seen as a developed or an emerging market, and does it matter how it is pigeon-holed? Is it good news to be defined by some market participants and index providers as an emerging market because it means Poland can tap into two very different investor bases and perhaps generate pricing tension between the emerging market and unconstrained funds? Where does the ministry believe Poland should be positioned?
Nowak, Ministry of Finance: We don’t really want to be positioned in any category. As long as we’re classified both as an emerging and a developed market, more accounts can buy us. If we were positioned as one or the other, one of those investor bases wouldn’t be allowed to buy us.
Martina Reissenweber, Unicredit: It depends how you define emerging or developed markets. If your definition of a developed European market is that it is a country within the eurozone and covers most of its funding needs through euro-denominated transactions then maybe Poland is an emerging rather than a developed economy.
But if you define markets based on their trading levels, Poland is already trading close to Ireland, as Maryam said, and it is trading tighter than some countries defined as being developed, like Italy or Spain. So on that basis Poland is clearly a developed market.
And if you use investor bases to determine whether a market is developed or emerging, it is true that there are many pure emerging market funds that are currently buying Poland, even though the very tight levels at which Poland is now trading may not be very persuasive for emerging market investors. But those spreads are highly attractive for rates investors.
Another consideration is the professionalism of the Republic of Poland’s funding team and its range of funding options. For example, not many emerging market borrowers can afford to maintain an MTN programme, as Poland does, given how time-consuming each issue is. This is also an example of the investor work that the funding team is doing, which is more characteristic of a developed rather than an emerging market issuer.
Marciel, SG: I would also ask how many emerging market issuers are able to tap as many different markets, currencies and pockets of investor demand as Poland does? Some parts of the investor base buying Poland’s bonds are highly conservative rates buyers and confine themselves to high grade markets. Others run portfolios that are looking for carry in the local currency bond market.
Bartlomiej Malocha, Bank Zachodni WBK: I think this is a fair question, because from a trading perspective there is a certain duality to the Polish market. When markets are calm we tend to be closely correlated with core markets like German Bunds, but in risk-on markets we tend to go into emerging market mode in terms of pricing and in terms of liquidity.
: From a practical perspective, how does all this affect pricing? When Poland issued its $1.75bn 10 year benchmark in April, for example, which borrowers were regarded as comparables?
Fick, Citi: I would argue that Poland has its own benchmark in the dollar market.
Barron, Barclays: I would agree. Poland has a liquid dollar curve which will be used as a primary reference off which new issue pricing is considered. Poland is also in a comfortable position of having an overlapping investor base between the credit and rates market universe. As such, the secondary curves of western as well as central and eastern European sovereigns that have issued in dollars will also be considered. There is always a combination of factors.
This is of particular interest this year given the low level of global rates. As more recent deals have evidenced, new issue pricing also needs to consider investor preferences and yield targets, as well as issuers’ spread objectives, and combine all these elements.
De Tilques, BNP Paribas: We see this pricing dynamic from the other way around. When we talk to issuers from other geographies that are looking at issuing dollars, they ask us which peers we have in mind as a pricing reference, and, where appropriate, we often show them the Poland curve which is one of the best in the market. So I would say that Poland has now become a point of reference for issuers around the globe who want to price in dollars.
Isakov, HSBC: If you look at the situation in the euro market, it is slightly different in the sense that Poland has the most developed euro curve among central and eastern European sovereigns. But the ECB is not buying Poland in euros, whereas it is buying Slovenia, Slovakia, Lithuania, Latvia and so on.
So the curves of other CEE sovereigns which are eurozone issuers have become distorted, whereas Poland’s has not. This has meant that Poland has been a beneficiary of investors moving away from negative yielding sovereigns.
When we priced Poland’s two-tranche euro transaction in January, and when we priced the tap in April, we looked at some of the developed European market peers, because the distorted curves of some CEE borrowers may not be the right comparable. Ireland, which has a more liquid curve and a similar type of rating, probably makes most sense as a pricing comparable, but we also looked at France for extrapolating the 20 year tranche.
From a pricing perspective, we try to be very pragmatic and take account of investor feedback from the ministry’s roadshows. Listening to what investors think is a very important exercise, because at the end of the day they are the ones who buy the bonds and determine pricing.
: You make an interesting point about the ECB’s Public Sector Purchase Programme. More generally, how has the ineligibility of Poland’s bonds for the PSPP impacted its funding strategy and its euro curve?
Isakov, HSBC: In terms of PSPP flows, it’s simple. When the ECB buys into a relatively illiquid market like Latvia or Lithuania, by definition an investor on the other side is selling. This investor then needs to replace the bond with another which is at least comparable in quality from a credit perspective and fits in with the investor’s regional credit limits.
As Poland ticks all the necessary boxes, it has clearly been a beneficiary of PSPP-induced flows from both a spread and a yield perspective. This is visible in the way spreads have come down this year. For example, the 2036 euro benchmark is down by 10bp-15bp on a spread basis. If we also look at how swap rates have come down over the same period, it will be clear that Poland has outperformed the rates market.
: We’ve talked about the euro and dollar benchmarks in some detail, but more broadly, how would you define the Republic of Poland’s funding programme and strategy in 2016? Have there been any notable differences from 2015 either in your overall funding requirements or in the way the programme has been implemented this year?
Nowak, Ministry of Finance: For this year we have already completed our external funding programme of €6.2bn. Of our total requirement for the year, about 86% has now been financed. Most of our financing still comes from the local market where we still have three or four tenders to do.
As to our programme for 2017, our strategy in previous years has been to do about 20% in pre-funding. Market conditions permitting, we would like to stick to this strategy which we think is beneficial for us and appreciated by investors.
I don’t want to suggest that we’ll do nothing for the rest of this year in terms of external debt, because if opportunities arise we will certainly look at them. But we’re under no funding pressure.
Next year our external funding requirement will be between €6bn and €7bn, of which we will aim to raise about €4bn from the market, with the remainder coming from IFIs. Our total need is about Z178.5bn (roughly €41bn), most of which again will be raised in the local market.
We’re optimistic about our funding programme for 2017 because we are comfortable that we have established a very high level of credibility among international investors. When we roadshow, our assumption is that we can maintain this credibility by being conservative rather than over-optimistic with our economic and fiscal forecasts. This minimises the risk of negative surprises and leaves open the possibility of surprising investors on the upside.
Benecki, ING: If you look at the composition of local Polish debt, in the first half of this year the holding of foreign investors was stable, while the local banking sector was the main buyer. This is because of the composition of the banking tax, from which local debt is exempted.
Since March, we have seen very significant inflows to emerging market local currency debt worldwide. So far, Poland has not been a notable recipient of these inflows, but I think things are now starting to change. Many emerging market high yield issuers are now looking quite fragile, given that we may be approaching a hike in US interest rates, so we are seeing indications that international investors are once again interested in Polish local currency debt as well as external debt.
There are various reasons for this. The possibility of a US fiscal stimulus after the elections lifts some of the pressure on the ECB to act. Some people are worried that the ECB is reaching its limits in terms of providing aggressive QE and that the euro may be about to strengthen. Exposure to the Polish zloty and local debt is a high beta proxy for a strong euro story. So although we may be joining the emerging market debt party quite late, we think this is an opportunity for the ministry of finance to attract more overseas investors to the local debt market.
Fick, Citi: I’m not an economist, but I slightly disagree with this analysis. From what I understand, foreign participation in the local currency debt market in Poland is roughly 35%. At one point last year it was 40%, so it has come down. But if you look at the redemption profile in the local Polish market, a lot of bonds have been bought back. The ministry in recent years has consistently been saying that foreign participation is obviously good, but the question is, what is the optimal level of foreign ownership in the local bond market?
Looking at the geographical split of investors coming into the local market, we have seen some decline in US demand which could be explained by the reasons just described by Rafal. On the other hand, we have also seen much higher participation coming out of Asia — especially from Asian central banks, which have been very active in the Polish local currency market.
Coming back to the point Susan made earlier, these are very cautious investors, so I think that having Asian central banks coming into the Polish local market is a very good indication of the strength of international confidence in the market and the economy.
: What sort of maturities are attracting the interest of these US and Asian accounts?
Rafal Deptula, Bank Zachodni WBK: Most of the demand has been at the long end. But when you’re looking at demand among foreign investors for Polish local currency debt, you can’t just look at the notional amounts. In notional terms their exposure is slightly lighter than last year but that is mainly because of redemptions. If you look at their actual risk exposure to Poland, this is well up on last year because I would say that as much as 70% or 80% of the debt that has matured was very short-dated, with maturities of less than one year. Much of this been reinvested further down the curve — five years, 10 years or longer.
So from my perspective, this shows that investor appetite for Polish risk is increasing because holding three month to one year paper is not really a risk.
I can also confirm that we are seeing more and more investors coming into the local market from Asia. The fact that they are comfortable with taking longer-dated exposure to the market is a very positive signal for Poland.
Urbanski, JP Morgan: We’re primary dealers in the Polish treasuries market, so in every auction we have a very good view of the flows coming in to the market. If Polish local currency bonds can attract demand from central banks in the Middle East and Asia, it sends a very strong signal. So I don’t believe there is any reason to be worried about instability or volatility in the Polish local currency bond market. There is no doubt that it will remain the key pillar for funding the Polish Republic.
: Does the Ministry have a target for foreign ownership of local currency bonds?
Nowak, Ministry of Finance: No. We don’t set any targets beyond indicating that foreign investors are more than welcome to participate in the market.
I can confirm that the notional exposure of foreign investors in the local market was down last year from 39.5% to 35%, but Bartlomiej is absolutely right to say that these figures do not tell the whole story.
: Poland chalked up a notable first in August when it became the first European sovereign borrower to issue a Panda bond. What was the background to this three year RMB3bn transaction, and in more general terms what is Poland’s strategy outside the core euro and dollar markets?
Nowak, Ministry of Finance: Our reason for issuing the Panda bond was to widen our investor base. Chinese investors have so far not been participating much in our market, so the question was, how could we approach them? We thought that to encourage them to become more familiar with our credit it would be sensible to issue in their local currency.
We think Chinese buyers will eventually come into our domestic market, but this won’t happen overnight. We roadshowed there in May but we will need to visit again, which we plan to do next year.
The second reason we issued in the Panda market was that the pricing was so attractive. The deal was twice oversubscribed and after we swapped the proceeds back into euros we ended up with a negative yield of minus 0.173%. That is very good pricing, and if we find other markets with similarly attractive terms which gives us the opportunity to reach out to new pockets of investor demand, we will do the same thing in those markets.
Isakov, HSBC: One thing I would highlight is that the Chinese onshore market is now the third largest in the world. It is also a very new market for foreign issuers and we’ve only seen a handful of issues globally, but as you said, the Poland Panda bond was the first sovereign deal from a European issuer.
Throughout the documentation and marketing process, the ministry did a tremendously good job of educating the Chinese investors about Poland. The team had a very busy schedule in Beijing and Shanghai, which led investors in China to start working on credit approvals and applying for country limits.
Investors in Europe and the US and the Asian central banks that were mentioned earlier have all gone through this process in different time periods. For example, US investors did their homework a long time ago and have been familiar with the Polish market for years because Poland has been issuing dollar bonds for many years. But Chinese investors are much newer to the credit.
If you look at the investors who were attracted by Poland’s RMB3bn three year deal, apart from the large Chinese banks and fund managers we also saw demand from some international investors. That was a relatively new phenomenon for the Panda market, because normally in the Chinese onshore market you don’t see much participation from international investors. The fact that we are now seeing this involvement is a very healthy development and an encouraging vote of confidence in the onshore market.
: Are there also persuasive non-financial reasons for issuing in the Chinese market? Presumably anything which helps strengthen commercial ties between Warsaw and Beijing must be positive for the Polish economy?
Nowak, Ministry of Finance: Yes. We think the transaction was helpful in political terms but also because it sends a signal both to Polish and Chinese financial institutions that we are familiar with each other’s economies. So a secondary benefit of the Panda bond could be that it supports the development of bilateral relationships between Polish and Chinese banks.
: Which other currencies are you looking at? Poland used to do quite a lot in yen, didn’t it? Does the ministry have any plans for revisiting the Samurai market?
Nowak, Ministry of Finance: The last trade we did in the yen market was in 2013. If the opportunity were to arise we would certainly look at the Samurai market again, but at the moment the basis swap is not favourable for issuers without a yen funding need.
Last year we issued in the Swiss franc market, which offered us a very attractive window of opportunity. But right now that market isn’t offering any great opportunities.
: How else can a borrower like Poland make use of the very benign funding conditions generated by this low interest rate environment? Granted, it might be on its last legs if the Fed decides to hike soon. But for the time being, are you looking at extending duration or using the low rate environment to do any asset-liability management?
Nowak, Ministry of Finance: We recognise that this environment will not last for ever. So we think this is a good opportunity to extend duration. But we have already continued with this process by issuing the €750m 20 year tranche of our euro bond in January. If we can continue to issue longer dated bonds next year at equally favourable terms we will take the opportunity to do so.
Not only Poland but virtually every sovereign borrower is trying to extend duration as much as they can. But sometimes extending duration can be a political challenge because you have to explain why you’ve paid more to borrow for 20 years than you could for 10 years. So there are some obstacles to overcome but if we can extend the average duration of our debt we’d like to do so.
: How — if at all — would the bankers around the table advise Poland to develop its funding strategy next year, be it in terms of currency, duration, structure or distribution?
De Tilques, BNP Paribas: I believe in being pragmatic and responding to opportunities when they arise, which is what Poland has done consistently. So I would advise Poland to be opportunistic but not to be in any rush to come to the market. Sometimes the banks can be a bit pushy, but patience can also be a virtue.
I would also advise Poland to continue to use all the engines at its disposal. It has shown that it has good access to the market in euros, dollars, yen, Swiss francs and Chinese renminbi, and to alternatives such as Schuldschein. In most of these markets it can issue short, medium and long term debt.
Finally, I would also advise the ministry to continue with its investor marketing strategy which has been a model for other treasuries to follow.
Marciel, SG: Coming back to what Maryam was saying earlier, the ministry has been implementing a strategy for many years now which is extremely efficient and is supported by a team of highly qualified and experienced professionals.
I agree with Alexis that Poland should continue with its investor communications programme, and maintain its flexible approach to the market.
Reissenweber, Unicredit: Looking at what Poland has done for the last 12 years in the euro market, it has found a perfect mix issuing at the long end, as we saw with the 20 year tranche in January, but without neglecting the shorter end of the curve. Last October it issued a very successful six year transaction, which was very important for meeting the requirements of investors that are unable to go out to 10 or 20 years.
But of course I agree that Poland should also make use of this historically low yield environment to explore opportunities at the longer end of the curve — perhaps even going out to 30 years, depending on market conditions.
Khosrowshahi, Deutsche: I don’t know if this is something the ministry would be open to considering, but given how low interest rates are, there is an opportunity to take out of the market some of the government’s higher coupon debt and switching it back into much lower coupon instruments, extending the curve and locking in the long end.
This is certainly worth looking at, because as the minister pointed out, this current environment is not going to last indefinitely. So this would be a good opportunity to replace some of the older and more expensive debt.
Barron, Barclays: The minister mentioned earlier the government’s strategy of reducing the percentage of foreign debt from 34% of the total to 30% over time. While Poland has the nimbleness and flexibility to look at a range of different products and currencies, its commitment to coming to both the euro and dollar markets regularly is appreciated by the investor community. In part, this is driven by Poland’s size as a borrower as well as its share of the indices which several investors follow.
Nowak, Ministry of Finance: We are flexible and open to all ideas. We don’t have a fixed strategy. We know that investors are our customers and need to be served well. So we understand very well that it’s not a case of dictating terms to investors. We’re also dependent on market conditions which often dictate terms to us.
: The broader level of non-government supply from Poland and the central and eastern European region has been low for a while. Given a combination of the government’s successful issuance and investors’ continued hunt for yield, can we expect more supply from Polish FIG or corporate borrowers over the next year or so?
Reissenweber, Unicredit: We’ve seen many Polish non-sovereign borrowers in the market in recent years. So I think there is an increasingly diverse market for Polish corporate and financial borrowers. We’ve seen in a number of countries that the sovereign needs to pave the way for other borrowers, with agencies coming first and then corporates and financials, and given the success of the government’s issuance, I would expect to see more Polish issuers tapping the international capital market.
Fick, Citi: I would express it even more strongly. Is the appetite there from the investor perspective? Yes. Is there supply? Yes, some, but not enough to satisfy the demand. On the other hand, the sovereigns have always been the biggest issuers across the entire region.
De Tilques, BNP Paribas: This has been especially true this year. 2014 was a very active year but over the last 12 months there has been little Polish issuance outside the sovereign.
The market would love to see more names, and we think that next year we may see a pick-up in non-sovereign supply throughout the region.
Khosrowshahi, Deutsche: I agree that there would certainly be plenty of demand for more issuance from Polish corporates and financial institutions. But for the time being, supply will continue to be limited.
Isakov, HSBC: One thing that differentiates the Polish market from a number of other countries in the region is that historically corporates have had access to much cheaper funding in the local banking market in zloty which was available out to five and even seven years.
All the Polish corporates and banks that have gone to the international market have been highly professional in the way they have roadshowed and marketed themselves. But given the documentation and marketing requirements, together with the pricing differential between the Eurobond market and the local bank market, Polish corporates have had very little incentive to go to the euro or dollar markets.
Will this change in the future? Perhaps — especially if new capital regulations make the cost of borrowing at home more expensive.
: Presumably with the economy growing at between 3% and 4%, there will be a requirement for funding to support capital expenditure from Polish companies?
Fick, Citi: That capex requirement has been there for many years. But as we’ve just heard, there is so much liquidity available locally, and this is not just in the domestic banking system. The local bond market is also a very liquid source of funding, giving corporates the opportunity to issue paper under Polish law.
So on the one hand we’re not seeing vast supply coming out of the corporate sector and financial institutions. But on the other, if you compare Poland with the rest of central and eastern Europe, there is a lot more supply coming out of Poland than from other countries. And if you look at the Polish corporate curve it acts as a benchmark for the rest of the region because Poland has everything from the high rated investment grade utilities and financial institutions to the single-B, high yielding corporates.
Urbanski, JP Morgan: I agree that Polish corporates have historically preferred to use the local market. However, the price differential between local and international markets is starting to change, and I think it is only a matter of time before we start to see more DCM activity out of Poland, especially from the corporates and financial institutions. For example, we recently saw mBank in the market with the first issue from a Polish financial institution since January 2015 when the Swiss franc mortgage story started to emerge. I believe this transaction will open the door for other Polish banks.
Also, I think that over the next few months we will start to see the first international issuance of bonds under new Polish law on covered bonds that was passed at the beginning of this year, which will open up a new sector and a new investor base for Polish issuance.
Finally, I agree that with projected economic growth of 3.6% or 3.7%, there will be a growing need for capex which could support more corporate issuance. I agree that the Polish banking sector is very liquid, but I also believe that Polish corporates recognise the benefits of diversifying their funding sources, so I think it is only a matter of time before we see more non-government supply coming out of Poland.