Hungary strikes though doubts grow over reform policies
* Sovereign sells first international bond since May 2011
* Demand hits more than USD12bn
* Analysts worry about "off-piste" policies
By Sudip Roy
LONDON, Feb 14 (IFR) - Hungary returned to the international bond markets on Tuesday after a near two-year absence with the biggest emerging markets bond deal of the year, though some analysts questioned what the successful outcome means for government policy especially as the economy remains mired in a deep recession.
The Ba1/BB/BB+ rated sovereign priced a USD3.25bn dual-tranche SEC-registered Global that was nearly four-times subscribed as investors sought to boost their portfolios with a credit that used to be a core holding for many.
Demand continued through to the secondary market with both tranches, a USD1.25bn 4.125% February 2018 note and a USD2bn 5.375% February 2023 bond, trading above their re-offer prices.
The deal, led by BNP Paribas, Citigroup, Deutsche Bank and Goldman Sachs, came after months of speculation, especially as yields compressed during the fourth quarter.
Hungary first hinted at a possible transaction in mid-January when it announced its intention to go on an extensive roadshow. At that stage there was no mention of a specific deal as the AKK, the country's debt management agency, decided to keep its options open.
"To do the investor marketing without addressing the speculation around the name meant officials could focus on the story. They didn't need to discuss a specific transaction. They wanted to concentrate purely on the credit. Then having told the story, Hungary could choose the best window. The timing was very well thought out," said Nick Darrant, head of CEEMEA syndicate at BNP Paribas.
After filing with the SEC last Monday officials moved quickly, taking advantage of the better backdrop. Initial guidance on the five-year was released at 345bp area over US Treasuries while for the 10-year it was 355bp area over.
Some bankers argued that at those levels the new issue premium was 25bp on the five-year and 30bp on the 10-year, although others thought the concessions were smaller.
Fund managers were equally unsure. "It looks attractive from secondary levels, in particular the five-year guidance," said one investor. Another, who agreed with the leads' estimate of a 20bp concession, said it looked fair.
From the leads' perspective the important thing was to demonstrate that Hungary had clear market access. "It was key we got initial price guidance right with a view to tighten during execution," said Neil Slee, executive director at Goldman Sachs. "If we started too wide and then tightened aggressively we would have lost high-quality accounts, compromising the deal. Also we couldn't start too tight and not generate momentum."
Both tranches finally priced 10bp tighter than initial guidance. The combined order book was USD12.2bn.
Although size wasn't the main aim, Hungary was able to take out a considerable chunk of its USD4bn-4.5bn borrowing needs for this year at no extra cost compared to selling a smaller deal. Fund managers dominated both tranches, taking more than 80% of each. Buyers were mostly from the US and Europe.
One banker not involved questioned the wisdom of investors buying the transaction with Hungary's political backdrop still volatile and the economy in decline. While saying "job done" as far as the mechanics of the deal was concerned, he added it illustrated how far investors had changed, though not Hungary.
"It's quite extraordinary," he said. "Look at where people were in their views on Hungary last year and what's changed? But investors just look at the headline numbers."
Certainly, the deal is a great result for Hungary's government, which appeared to be priced out of the market for most of last year after investors took fright as the government pursued an unorthodox set of policies under Prime Minister Viktor Orban. These include new taxes on banks, energy companies and retailers to reduce the budget deficit.
At one point it seemed a deal with the IMF, with which the government is at loggerheads because of its policies, would be needed before Hungary could issue bonds in the international market again. The stand-off with the IMF continues and some analysts worry that without a deal, the government will continue to push populist policies, especially with an election due next year.
"With such issuance, the government has significantly assured its financing needs for a great part of the year. The concern more generally is that the liquidity of markets puts little pressure on governments to pursue orthodox, reform policies, and there is a concern that even in Hungary the temptation pre-election will be for the government to go off-piste to try and secure majority backing," wrote Timothy Ash, head of EM research at Standard Bank, in a note.
With the fourth quarter GDP data showing a 2.7% contraction year-on-year, Ash added the "dreadful numbers" were likely to encourage the government to "further reach for unorthodox policy levers as they head into election season." (Reporting by Sudip Roy; editing by Julian Baker)
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