* 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
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
"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)