May 9, 2013 / 12:11 PM / in 4 years

REFILE-Portugal targets auctions as focus turns to 2014 funding

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* Portuguese debt back in favour with rates buyers

* Debt agency hopes to normalise funding schedule

By John Geddie

LONDON, May 9 (IFR) - Portugal is plotting a return to regular bond auctions after winning back its traditional European investor base in a sell-out EUR3bn 10-year bond syndication this week, its first new benchmark issue since its bailout in 2011.

Hedge funds that have circled Portugal’s debt in recent years, and which were blamed for the poor secondary performance of a EUR2.5bn syndicated five-year tap in January, were replaced with European rates buyers that were prevalent in Portugal deals pre crisis.

That has ratcheted up confidence that these investors are back on board, and means Portugal is now keen to service them with regular issuance in the form of auctions, something it hasn’t done since April 2011.

“Now that we been active in the curve at two points, we will present a plan to the Ministry of Finance to try and return to the market in a more regular fashion in the next few months,” said Joao Moreira Rato, the chief of IGCP, Portugal’s debt agency.

Rato said Portugal hopes to return to a normalised funding strategy that would see it issue around two auctions every quarter to tackle its EUR14bn in medium-to-long term funding needs in 2014, and possible additional syndicated taps.


Portugal’s new 10-year, maturing in February 2024, priced at a reoffer yield of 5.67%, with EUR10.2bn orders placed via joint leads CaixaBI, Citi, Credit Agricole, Goldman Sachs, HSBC and Societe Generale.

Crucially, hedge funds were allocated just 7% of the bonds, with 69% going to asset managers, insurance companies, pension funds and central banks.

The aftermarket performance reflected the strength of the allocations with the bonds tightening 8bp, closing at a bid yield of 5.59% on Wednesday.

“This is a milestone for us because we are welcoming back our traditional investor base that used to support us before the crisis,” said Rato at IGCP.

“The cornerstone of investors that participated in this issue were rates investors from Europe.”


That stands in sharp contrast to the January tap, which was Portugal’s first debt capital markets transaction in 18 months. Although it attracted a EUR12bn order book, 24% of the bonds were allocated to opportunistic hedge funds.

Their short-term investment strategy was blamed for the deal’s poor secondary market performance. Having priced at a reoffer yield of around 4.9%, it blew out to 5.4% by the middle of February, leaving a sour taste in the mouths of some investors that participated.

By the time Portugal decided to get down to business with a new bond issue this week, however, the five-year was back trading around 4% following a sustained rally across the sovereign’s curve that started in the middle of last month.

The challenge for Portugal now is to keep these investors involved by offering them regular new supply, and auctions are perceived as the best way to do that.

“Between the January transaction and this deal, liquidity in the market has been decreasing. From now on we shouldn’t allow this to happen, we should be satisfying that demand,” said Rato.

Having been granted seven-year extensions on its bailout loans by the EU, and now surpassing its EUR5bn medium-to-long term funding plans for 2013, the country has stayed on track to exit its programme by the middle of next year despite mass unemployment and an elevated budget deficit.

Any further issuance from Portugal this year will count as pre-funding for 2014 when the country is required to roll over around EUR14bn of medium- to long-term debt.

“The large spike in Portugal’s funding needs in the coming years was one of the major concerns going into 2013, but with its successes in primary markets and the loan extensions, its funding outlook has substantially improved,” said Michael Leister, senior rates strategist at Commerzbank. (Reporting by John Geddie, editing by Natalie Harrison and Julian Baker)

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