Central European sovereigns rush to beat the Fed to the punch

By bne IntelliNews January 13, 2014

Tim Gosling in Prague -

Joining a host of global emerging markets, Poland and Slovakia leapt last week to issue new sovereign debt. Latvia is set to copy them, despite the premiums paid, ahead of an anticipated second round of tapering by the US Federal Reserve, which is likely to mean borrowing costs will rise.

Poland sold €2bn in 10-year Eurobonds on January 8 as it pushes to raise cash before the US central bank moves again to reduce its asset buying programme. The Fed's $85bn of monthly purchases helped boost emerging market borrowing over the last 18 months or so as it sent yields to new lows. While the start of tapering announced last month hit EM bond markets less than feared due to the fact that it limited the pullback to $10bn a month, anticipation of a similar cut in January is putting pressure on the markets. Yields on 10-year US Treasuries are near two-year highs of around 3%.

However, investors are still happy to hunt for better returns, as a series of heavily oversubscribed issues from emerging markets last week illustrated. Thus far in January, emerging borrowers have raised $18.5bn, compared with $11.3bn in the same period in 2013 and surpassing the $16.9bn chalked up in 2012, according to Reuters. Latvia, Romania and Slovenia are set to join the action, with Kenya and Israel also having mandated banks for bond deals.

Poland leveraged its prospects of a rapid economic recovery to push its 2014 borrowing €2bn closer to targets after it spent much of the second half of 2013 pre-financing. The sale of the bond, which offered a yield of 3.032%, came a day after the yield on Poland's existing euro-denominated notes, due in July 2024, dropped to a one-month low of 2.89%, according to Bloomberg. Fitch Ratings gave the issue an 'A-' rating, noting the recovery and the country's banking stability, while mentioning the risk of loosening fiscal policy and rising debt levels.

Investors are likely to be offered the chance to increase their exposure to Poland over the next fortnight. Finance Minister Mateusz Szczurek told a press conference on January 10 that Warsaw plans to have raised 50% of its 2014 borrowing target by the end of the month. The ministry said in the wake of the recent issue that it has now raised 35% of the funds needed for the year.

"By the end of January we want to finance 50% of borrowing needs," Szczurek said, according to cbonds. "We are enjoying the advantage of favorable economic, financial environment as well as excellent review of Poland by international agencies and institutions."

Warsaw has a $1bn bond in the pipeline - an issue analysts at Commerzbank suggest could even see Poland finish its international borrowing for the year. Following the dollar-denominated bond, "just the steady trickle of local T-bonds through the remainder of the year may be expected," they write.

Poland paid investors a 12-basis-point premium to its existing bond yield curve, points out Reuters. Although not as steep, Slovakia still had to offer a single-digit concession to investors buying its €1.5bn, 15-year bond on January 9. That helped swell demand to €4bn, according to debt manager Ardal, and drop the spread to mid-swaps by 10bp to 105bp.

Ardal said the issue was motivated by the recent increase in swap rates and the wish to avoid higher costs further down the line. Analysts at Citigroup note that better-than-expected 2013 fiscal indicators and the prospects for continued recovery helped fuel demand, as did the fact that Slovakia has not been in the market for some time.

Latvia has long planned to issue international debt after it joined the Eurozone at the start of the year. To that end, the Baltic state should achieve lower yields despite the environment ahead of the Fed decision. Market sources said on January 7 that Riga has hired Citigroup, JP Morgan and Societe Generale to lead the issuance of a euro-denominated international bond. The treasury said in December it might borrow up to €2bn on the international markets in 2014, reports Reuters.

According to Leta, Latvia has to pay down government debt to the tune of €1.4bn by the end of April.

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