Portugal says debt auctions the near-term future

Mon May 5, 2014 3:08pm EDT

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NEW YORK, May 5 (IFR) - Portugal is more likely to increase the size of its outstanding bonds at auction than to come to market with a new benchmark issue, the country's debt office (IGCP) said on Monday.

The Ba3/BB/BB+ rated sovereign confirmed Sunday that it will exit its three-year 78bn bailout this month, drawing a line under its rocky path in the wake of the global financial crisis.

IGCP's head of issuance, Paulo Ribeiro, said that with 7bn already raised towards its 2014 issuance target of 11-13bn, Portugal had shown its ability to raise fresh debt.

"We have already sent a clear message that we can access the debt capital markets," he told IFR.

"What we will consider more is where the demand is, and what tenors we can issue."

Issuance so far this year has included some pre-funding for 2015 from the sale of two syndicated bond taps of five-year and 10-year bonds in January and February.

Its 5.65% February 2024s were increased by 3bn in February and by a further 750m via an auction in April, but is still just 6.75bn in size.

"We still have relatively small outstanding bonds that we could tap going forward," said Ribeiro.

BALANCED APPROACH

Tapping bonds with 10-year maturities would be preferable to increasing outstanding five-year issues, but there could be scope to sell even longer dated debt further ahead.

Portugal's bond yields have rallied sharply, bringing its funding costs close to eight-year lows from near 17% at the height of the debt crisis in 2012.

One banker saw the 2024s bid at 116.545 to yield 3.609% on Monday, 10bp tighter on the day, but flat in spread terms over German bunds due to a quiet day with London on holiday.

"We could move towards longer bonds if market access continues to improve the maturity fits our funding plan and redemption profile," said Ribeiro.

While auctions are preferred for now, syndicated issues would allow Portugal to better diversify its maturity profile, avoiding heavy redemptions around specific points in the curve.

"Ideally, I think 7.5bn would be a good size to stop," said a banker close to the sovereign, referring to the size of single bond tranches.

"It would make the notes quite liquid - and would represent on average half of their annual funding program. Ireland has tapped the same 2024 maturity three times. But is it an optimal strategy? I think a mix [of different funding tools] would be a better balance."

Syndication would also give the issuer more control over how the bonds are placed among investors.

"I would have thought that the country would want to move quickly with a syndicated deal while there is a positive tone about its story," said Sandra Holdsworth, an investment manager at Kames Capital.

"The banks leading the deal would also have a strong incentive to make sure it goes well."

Portugal could also tap pockets of demand, including from retail investors and use of its MTN programme, Ribeiro said.

In February, one investor swapped an existing short-term position for a new 4.6% EUR1.25bn October 2022.

Although Portugal's yields have made a remarkable recovery, Holdsworth said, there is likely to be a limit to how much more they can rally.

"The major impediment for Portugal is its credit rating," she said.

"It is still sub-investment grade, so some funds will not be able to buy its bonds. So although it has had tremendous success with both syndicated deals and auctions, there is a limit to how much lower its yields go until it is rated investment grade."

That said, Greece, rated Caa3/B-/B-, staged a 3bn 4.75% April 2019 bond at a yield of 4.95% - its first deal since the EU and the IMF rescued it four years ago. That deal attracted more than 20bn of interest. (Reporting by Natalie Harrison and Davide Scigliuzzo; Editing by Marc Carnegie)

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