Guy Norton in Moscow -

As Greece's financial troubles have continued into the second quarter, heavy Eurobond issuance by emerging European sovereigns in the first quarter has paid off handsomely. By issuing early and in size, a number of countries have now effectively achieved their 2010 overseas bond funding targets, enabling them to pick and choose whether they venture back into the markets later in the year or indulge in the luxury of pre-funding part of their 2011 liabilities.

"The fundamental credit story across Central and Eastern Europe has always stacked up well against some of the ClubMed countries in Southern Europe and this year has just borne that out," says Andrew Dell, head of debt capital markets for Central and Eastern Europe, Middle East and Africa (CEEMEA) at HSBC.

The global economic crisis has also had the effect of differentiating the countries of the region. "At the start of 2009, CEE was viewed as one homogenous region that nobody wanted to touch. But as time has passed there's now much more differentiation between individual countries and the market is now once again very supportive of the better CEE sovereigns," says Clemens Popp, head of financial and public sector entities origination at UniCredit Group.

Furthermore, the positive reception for their overseas borrowing has buoyed investor sentiment at home, enabling several governments to launch record-breaking issues in their domestic markets. "Issuing early and in size was absolutely the right issuance strategy for CEE sovereigns at the start of the year," says Mike Eliff, managing director, CEEMEA debt capital markets at RBS in London. "The issuers that decided to come to market at the start of the year will definitely be pleased with their choice."

Turkish delight

Turkey started the ball rolling in January with a $2bn, 30-year bond via HSBC, JP Morgan and UBS, which attracted more than $7bn worth of orders from investors flush with cash at the start of the year. Notably, the deal attracted stronger-than-usual overseas demand, with Turkish buyers accounting for just 25% of the initial book. Investor appetite was helped by a double-notch upgrade by Fitch from 'BB-' to 'BB+' in December and hopes - since dashed - of an imminent deal with the International Monetary Fund (IMF). The deal covered around third of Turkey's overseas borrowing needs for 2010.

Stefan Weiler, executive director, debt capital markets at JP Morgan in London, says that with market indicators for Turkey such as credit default swaps - the cost of insuring against default - spread levels at or near record lows, it made perfect sense for the sovereign to lock-in attractive funding levels early in the year. "Turkey acted swiftly and decisively to be the first emerging market sovereign to issue in 2010. Not only that, but they targeted the 30-year maturity that is not always open to EM borrowers. Both factors were very important to ensure success, as it gave Turkey massive investor focus and exposure as well as access to the strong market liquidity at the start of the year," says Dell at HSBC.

The positive reception for Turkey's international bond issue also had domestic benefits, with Turkey auctioning a 10-year, fixed-rate Turkish lira issue for the first time, thanks to lower domestic interest rates and strong buyer interest. The ability to switch between markets should help Turkey to lower its overall borrowing costs and further boost its fiscal credibility.

Polish

Emerging Europe's economic star turn in 2009, Poland, continues to impress investors in 2010, with its €3bn, 15-year deal more than 2-1/2 times oversubscribed. It was priced at 148 basis points (bps) over swaps, well inside initial price talk of 155-160 bps over. HSBC, ING, Société Générale and UniCredit lead managed the transaction, its largest since 2006, which represented around half of Poland's €5.5bn international bond funding target for 2010. "Poland issued a super benchmark size at a long tenor, which sent out a very strong message to the market and reflected the strong investor perception of Poland compared to peers," says HSBC's Dell.

Poland also benefited domestically from the positive reception for its first Eurobond of 2010, raising a record PLN6.6bn ($2.2bn) through a of two-year notes note auction on the back of over PLN16.19bn worth of orders.

Next up from the region was Slovenia whose €1.5bn, 4.125% 2020 bond via Calyon, Deutsche Bank, JPMorgan and Nova Ljubljanska Banka attracted €2bn of demand from across Europe from 150 investors and was priced at the tight end of the 68-70 bps over swaps guidance. Slovenia only needed to raise a total of €2.2bn this year from the Eurobond markets and so its successful issue meant it had no need to fret about the problems posed faced by Greece and other highly cash-strapped EU countries such as Portugal, Spain and Ireland - the so-called Pigs.

Another country to raise its entire external funding requirement for 2010 in one fell swoop was Hungary, whose $2bn, 10-year issue via Citigroup and Deutsche Bank attracted $7bn of orders, enabling pricing at the tight end of its 265-275 bps over US Treasuries marketing range. Laszlo Buzas, deputy chief executive of the AKK government debt management agency said the country's first dollar issue for five years enabled it to diversify its funding base and to avoid a packed euro arena, dominated by a potentially make-or-break issue by Greece, which issued on the same day. According to Nigel Cree, head of debt syndicate for Deutsche Bank in New York, the deal marked a notable achievement for Hungary with around 65% of the paper was placed in the US, mainly with money managers, insurance companies and hedge funds. In contrast, the bulk of the Hungary's previous dollar transaction went to buyers in Europe and Asia.

Baltic barnstorms

It's testament to the dramatic upsurge in investor sentiment to emerging Europe that Lithuania, whose economy shrunk 15% in 2009, was also able to make barnstorming entry to the Euromarkets with a $2bn, 10-year issue led by Barclays Capital, HSBC and Royal Bank of Scotland. "We got some fantastic anchor orders from the US, and because of that Lithuania was able to issue in both size and at a tight level versus secondaries," says Elliff at RBS.

The deal was the biggest-ever international bond from the Baltics and was easily covered on the back of $7bn worth of orders from over 300 accounts. "Given where we were a year ago this was a real achievement for Lithuania," says Eliff.

After a dire 2009, the economic outlook for 2010 is looking brighter, with Lithuanian Finance Minister Ingrida Simonyte predicting ahead of the bond launch that rising exports mean that GDP will rise by 1.6% versus earlier predictions of a 4.3% contraction. "Based on a detailed analysis of export data, we see clear signs of a vigorous and rapid recovery of exports and if this trend continues we will see double-digit export growth in 2010," says Simonyte.

With GDP set for a recovery in 2010, Simonyte says that public finances in Lithuania should improve as well. "Thanks to the improved GDP forecasts, we have revised the general government deficit target down to 8.1% of GDP in 2010, which is much lower than the previous 9.5% figure," says Simonyte, adding that as a result Lithuania should meet the 3%-of-GDP deficit cap set out in the Maastricht criteria in 2012. "Lithuania will continue its drive to consolidate public sector finances, thus maintaining a high level of investor confidence." Having secured $2bn the country can now pick and choose between the domestic and international bond markets to fund itself through the rest of 2010.

With Greece proving that it had market access in late February with a well supported €5bn bond issue, sovereigns from emerging Europe were once again keen to tap into the more upbeat market tone in March. Slovenia completed its overseas funding needs for 2010 with a €1bn, five-year deal via Abanka Vipa, Commerzbank, RBS and Société Générale, which was priced at the tight end of its pricing guidance. Bostjan Plesec, acting head of the treasury department at the Slovenian finance ministry, says that the deal was primed and ready in advance so as to take advantage of the positive market conditions after Greece soothed investors' nerves with its transaction.

Turkey also exploited the more positive market tone to make further inroads into its 2010 funding target with a $1bn, 11-year deal via Bank of America Merrill Lynch, Barclays Capital and RBS. On the back of $5bn of orders from over a 100 accounts, the issue was priced at a launch spread of 202.7 bps over US Treasuries, the lowest overall cost for a dollar-denominated Eurobond from Turkey. With its latest transaction, Turkey has raised around 55% of its 2010 overseas borrowing programme. "Those issuers that went for duration extension trades created a win-win situation for all concerned by offering investors value for money by giving them long-term exposure to improving credit stories, while at the same time allowing issuers to term out the maturity of their debt portfolios and lock in low absolute yields," says HSBC's Dell.

While Turkey has been a near ever-present borrower in the international bond markets of late, Romania broke a near two-year Euromarket duck with the launch of a €1bn, five-year deal via Deutsche Bank, EFG Eurobank and HSBC, which priced at 268 bps over mid-swaps. Romania had originally hoped to a launch the deal last year, but pulled it in the wake of the government's collapse. "There's a binary contrast between the first quarter of 2009 and the first quarter of 2010, with the result that delayed transactions from last year have been able to come to market. That's a clear signal that the market is extremely receptive to sovereign issuance from CEE right now," says Popp at UniCredit.

As a result of nearly €5bn worth of orders from over 300 accounts, Romania's comeback issue was priced much tighter than initial price talk of 275 bps, benefiting from the fact that S&P raised its outlook on its 'BB+' rating the country to stable, from negative, in the run-up to launch. The rating agency cited expectations that the country would reduce its deficit to 6.4% of GDP this year and comply with the terms of a €20bn IMF/EU standby agreement. "Romania printed a good, strong trade achieving simultaneously the lowest yield and largest size ever issued by the country," says Dell at HSBC.

Given the warm reception for the issue, Finance Minister Sebastian Vladescu says that the country is mulling a further transaction later in the year. "Depending on market conditions, we would be ready to issue again, but we don't have a precise date at the moment."

Meanwhile, Poland rang the changes with CHF475m ($441m) of four-year bonds priced to yield 88 bps over swaps. Lead managed by RBS and UBS, the issue was more than doubled from an initially planned target size of CHF200m and was priced considerably tighter than a CHF750m, five-year deal from August 2009, which was pitched at 138 bps over swaps. "There's a lot of investor demand for the perceived safer sovereign names from the CEE region, such as Poland, which are outperforming a number of Western European countries on the economic front," says Elliff at RBS.

Poland then went on to score a remarkable hat trick of Eurobonds in the first quarter, selling a €1.25bn, seven-year issue at 100 bps over swaps via Barclays Capital, Citigroup and HSBC. As the only EU economy to avoid a slipping into recession in 2009, Poland clearly maxed its high economic standing to the hilt in the first quarter, selling international bonds at record low yields and also attracting foreign investors into the Polish government bond market, where overseas holdings of are at their highest level since 2004. Deputy Finance Minister Dominik Radziwill said Poland is also looking to target investors in Asia with $1bn bond sale. "The key message for sovereign issuers from the first quarter is not to be too cautious or defensive, but rather be decisive and seize the opportunities that are available. In short, be bold and go big and go long," says HSBC's Dell.

No April fools

By the end of the first quarter, there was still plenty of sovereign issuance to come from emerging Europe, whether from more established names such as the Czech Republic, Slovakia and Ukraine, or potential Euromarket debutants such as Albania and Belarus.

In April, Albania began its roadshow for its debut three- or five-year Eurobond via Deutsche Bank and JPMorgan, worth about €400m. Belarus Finance Minister Andrei Kharkovets said the country might try to raise $500m over a similar tenor. BNP Paribas, Deutsche Bank, RBS and Russia's Sberbank will lead manage that deal. And Mongolia shortlisted Deutsche Bank, Goldman Sachs, HSBC, ING and Morgan Stanley as potential lead underwriters for an inaugural global bond issuance, but the country has yet to give an indication when it will proceed with the sale. "There is demand for new sovereign credits, but there's a lot of intensive investor work required, involving roadshows and one-one meetings in order to establish a capital markets track record," says Popp at UniCredit. But he adds that Eurobonds from debut sovereign issuers will help ease the path to market for other types of credits. "It's always useful to have a sovereign benchmark to price issuance from other types of borrowers against."

But the most eagerly awaited sovereign issue of the second quarter was the return of Russia to the international bond markets in April with its first issue since the government defaulted on its debt back in 1998. Rather than shun the sale, investors were so keen that Russia ended up paying the lowest ever yield.

On April 22, Russia sold $2bn worth of five-year bonds and $3.5bn in 10-year bonds. In terms of pricing, the five-year portion pays a coupon of 3.625% and spread of 125 basis points over US Treasuries, while the 10-year tranche pays a 5% coupon and spread of 135 basis points over Treasuries. The Eurobond was more than twice oversubscribed with more than 500 investors participating in the deal, syndicate bankers working on the deal said.

Russia observers said the price of the bond made a mockery of Russia's rating by the three big international rating agencies. The country's credit rating is way too low, as it boasts some of the strongest fundamentals in the world, but it's still tarred by its increasingly irrelevant "emerging market" moniker, they argue.

Consider that on the day Iceland defaulted on its debt at the start of this crisis, it enjoyed higher ratings than Russia. Today, Russia's 'Baa1' rating from Moody's Investors Service is still the same as bailout-dependent Iceland's, but Fitch Ratings and Standard & Poor's currently class Russian debt as 'BBB' - even lower than Moody's. "These ratings seriously understate Russia's ability to service and repay its debts. Some say they reflect the risk that Russia might 'choose to default'. Yet Russia's political elite was traumatized by 1998. [Finance Minister Alexei] Kudrin, with the blessing of successive premiers, has spent the last 10 years trying to rebuild his country's fiscal reputation. The idea of a deliberate default is absurd," says Liam Halligan, chief economist with Prosperity Capital Management.

Although there's the continued threat of market contagion from the Greek tragi-farce, bankers say that most sovereign issuers from CEE will enjoy market access. "There's a very benign market for sovereign issuers from CEE right now, on the back of the fact that the debt dynamics of many sovereigns from the region are seen as relatively attractive versus some of their Western European peers," says Elliff at RBS.

Weiler at JPMorgan believes that most sovereigns will look to issue whenever there is window of opportunity in the second quarter and he also expects that there may be a pick-up in euro-denominated issuance as market jitters over the state of Greece's finances subside.