Object: €3.0 billion issuance of Obrigações do Tesouro (OT) (fixed rate bonds), interest rate 5.65%, annual coupons

On May 6th the Republic of Portugal issued its first new government bonds since requesting an international bailout two years ago, in a heavily-oversubscribed offer of 10-year debt that raised €3bn. The bonds will pay fixed annual coupons of 5.65%, and they will mature in February 2024 (10-year maturity). The new bond is redeemable at maturity, with the possibility of stripping (a stripped bond is a bond that has had its coupon payments and principal repayment split into two separate components and sold individually). Moody’s rated the debt as Ba3, S&P gave a BB rating (speculative grade).

Portugal, like other peripheral countries of the eurozone, has suffered significantly from the sovereign debt crisis (with 10-year yields that reached 17% at the peak of crisis), and it was bailed out in March 2011 by the Troika of the European Commission, IMF and ECB.

The country has currently a public debt to GDP ratio of 119.7% (source: IMF), an unemployment rate of 14.8%, and it is under an Economic and Financial Assistance Programme (EFAP). The overall programme included a €78 financing package, of which €63bn has already been drawn. The remainder of the funds is meant to cover Portugal’s financing needs till June 2014, making the restoration of full market access by that time imperative.

The bond issuance is the first in two years and it is part of a strategy by the Portuguese Government to complement the funding under the EFAP with funding in the market, provided market conditions are positive and demand for Portuguese bonds remains stable on secondary market. In this way, Lisbon has already collected the €11.5bn that are needed by the Portuguese Government for 2013 and it is now considering exploiting favourable market conditions to obtain the resources that will be needed next year. The positive trend is broadly in line with the commitments that Lisbon took in 2011: in particular, at the start of the programme the IMF had expected 2013 to be the year when structural reforms would begin to deliver results and markets would regain confidence.

The deal followed a syndication structure: this method fulfils the dual objective of simultaneously placing a larger amount of securities at market prices and achieving a greater diversification of the investor base, both geographically and by type of investor.

Investors demanded more than 3 times the total amount issued and international investors (US, France and Scandinavian in particular) were supportive to the transaction, subscribing for 86% of the debt placed. The Portuguese Treasury Agency reports that asset managers were allocated 51% of the overall bonds, insurance and pension funds obtained 12%, and banks 17%.

Like Ireland last July, which did its own return to the markets with a long term issuance at a yield of 5.95%, it seems that a yield of less than 6% is the magic level that other countries such as Greece and Cyprus should look at if they hope to re-enter the markets. Greek Government bond yields now stand at 9.6%.

The joint lead managers for the syndicated deal were Caixa BI, Citi, Credit Agricole, Goldman Sachs, HSBC and Societè Generale.


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