Spain's dollar bond paves path for peripheral peers

Fri Feb 22, 2013 9:33am EST

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By John Geddie

LONDON, Feb 22 (IFR) - Spain believes its return to dollar markets after a three-and-a-half year absence will inspire its peripheral eurozone peers to diversify their investor base.

Of the USD2bn bonds allocated in Spain's five-year sale on Wednesday, 95% were sold to investors outside of the eurozone - and nearly half to US accounts.

"This transaction emphasises that we have full market access to a broad base of investors, and it should support our eurozone peers in approaching the dollar market," said Ignacio Fernandez-Palomero Morales, deputy director of the debt division within the Spanish Treasury.

Italy is an obvious candidate to follow Spain's lead, as it has a more extensive dollar curve but has not issued since September 2010. Spain's last dollar trade was in September 2009.

The Italian Tesoro's 2013 outlook stated that it would monitor the market for renewed signs of dollar investor interest. In sight is the redemption of two bonds in June and September 2013, for a combined total USD4bn.

Ireland, which has never issued in dollars, set up a 144A debt issuance programme last year, following a flood of interest from US accounts. Banks say Ireland is focused on issuing a new 10-year benchmark euro bond at the moment, but the establishment of the programme makes Ireland a likely candidate.

Portugal also caught the eye of dollar investors when it toured the States last month. However, with a funding programme of just EUR5bn, the country is likely to remain focused on euros this year, Portuguese debt agency chief João Moreira Rato said on Thursday.

Struggling eurozone member Slovenia issued its first-ever dollar bond, a 10-year, late last year after euro investors shunned the country.

POSITION OF STRENGTH

Access to the dollar market allows countries to tap into the largest community of yield-hungry emerging markets funds.

Spain, whose 10-year yields still top 5%, certainly ticks the right boxes for those accounts, while still having full access to its domestic bond markets.

The morning after the dollar deal priced, in fact, Spain sold more than EUR4bn of bonds via auction.

The investors across these two currencies are very different, however. In Spain's 10-year euro syndication last month, just 3% of bonds were allocated to the Americas.

But its dollar deal was 47% was sold into the US, alongside notable placement in the UK, Asia and the Middle East.

NO COSTS INCURRED

Barclays, Citi, Santander and SG-CIB priced the 4% March 2018 bonds at mid-swaps plus 300bp, equivalent to 6bp through Spain's euro curve after converting the currencies.

"Spain has been able to achieve investor diversification, but crucially not by paying a premium to where it could issue in its own currency," said Alex Barnes, head of SSA syndicate at Citigroup.

Even including swap costs, the deal was no more expensive than issuing the equivalent bond in euros, said Morales at the Spanish Treasury.

Dollar issuance is more than an opportunistic arbitrage play, however.

"Our plan is to go back to the dollar market as soon as market conditions allow, possibly before year end, and build back what was lost during the worst years of the crisis," said Morales.

Traditionally, Spain sold about EUR6-8bn in foreign currency deals per year, mainly in dollars. Its total funding requirement for 2013 is a hefty EUR120bn.

SHAKY PERFORMANCE

However, while countries will have taken a lot of confidence from Spain's deal, their exuberance will be tempered by the fact the bonds have not performed since pricing, said one observing syndicate official.

The morning after the deal priced, leads reported the new bonds were trading 2-3bp tighter. However, over the course of the afternoon some steady widening started to set in.

By Friday morning, the bonds were bid over 2bp wider on a swaps basis at 302.2bp. Versus Treasuries, the bonds priced at 316.6bp, and by Friday morning were bid at 322.6bp. (Reporting by John Geddie; editing by Marc Carnegie)

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