Tim Gosling in Prague -
Seizing its chance in the midst of continued risk appetite, the Czech Republic returned to the international debt markets for the first time in 17 months on February 20, raising €2bn of 10-year Eurobonds. The issue came as yields on its benchmark sovereign fell to their lowest level since the start of the year, illustrating that Prague's fiscal prudence can still pay dividends during the crisis.
The Czech bond priced at 160 basis points (bps) more than the benchmark mid-swap rate, down from the original guidance of 170 bps, to yield 3.977%, drawing in €3.5bn in offers, according to newswires. The yield is marginally above the previous benchmark 10-year sovereign, maturing in April 2021, which was yielding 3.7% as the debt was issued. Five-year Czech credit default swaps (CDS) were trading at 130 bps, sharply down from 185 bps six weeks ago, and cheaper than both French (175 bps) and Austrian (165 bps) insurance.
William Jackson of Capital Economics sums up the work that Prague has put in, and the wisdom of making hay whilst the sun shines. "[The Czech Republic] has low debt ratios, conservative fiscal management and has gained investor confidence," he says. "Given the improvement in markets it does make sense to issue now because there is appetite and, given the lingering problems in the Eurozone, if there is a fresh spike in risk aversion, there's the possibility it would get much harder."
Societe Generale, one of the bookrunners, issued an assessment of the bond after the sale: "This bond offers a pick-up of almost +30 bps (mid) over Euribor compared to the Czech April 2021," the bank reiterated. "The Czech Republic's LTFC rating (Moody's 'A1', S&P 'AA-', Fitch 'A+'; all stable outlook) is at the top of the Eastern European ratings. In August 2011 S&P raised its long-term foreign sovereign credit rating by two notches on the Czech Republic to 'AA-' from 'A'."
"The new euro-denominated bond enlarges the group five euro-denominated fixed coupon bonds with a total outstanding volume of €8bn. The new euro-denominated 10-year benchmark bond fits well into the maturity profile of state debt and its pricing looks fair compared with the rating. The Czech bond looks favourably priced compared to EU peers relative to the 10-year CDS spread. The Czech Republic offers an internally and externally well balanced economy with low indebtedness (private and public) and a sound banking sector."
"We detect two major risk factors stemming from abroad because the Czech economy and financial sector are closely integrated into the EU," the bank warned. "However, the strong Czech fundamental backdrop makes us believe that any negative contagion of Czech financial markets and credit spreads should be temporary. Therefore we consider the new Czech EUR-denominated 10Y benchmark as a high-quality and attractive diversification."
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