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Portugal considers debt exchange to ease funding burden
October 14, 2013 / 12:44 PM / 4 years ago

Portugal considers debt exchange to ease funding burden

* Bailed-out country looks to get head start on 2014 funding

* Return to regular auctions unlikely in volatile markets

* Debt cliff approaches in 2015 after Troika programme ends

By John Geddie

LONDON, Oct 14 (IFR) - Portugal is considering a debt exchange later this year in order to capitalise on improved investor demand for its paper and start tackling its EUR8.2bn of financing needs for 2014, a Portuguese government source close to the discussions said on Monday.

Following comments over the weekend from new finance minister Maria Luis Albuquerque that the country may now look to issue more bonds later this year to meet demand, the source said a debt exchange may be the most viable option.

“Exchanges are something that is on Portugal’s agenda of next steps.”

The country could replicate a manoeuvre it made 12 months ago, when it took securities close to maturity from investors and offered bonds that are due in 2015.

Yields on Portuguese bonds have rallied considerably since its Troika of lenders revised its growth forecasts upwards at the conclusion of the latest review earlier this month. 10-year bonds yielded over 7.3% when the EC, ECB and IMF arrived in Lisbon in mid-September, and are now over one percentage point tighter at 6.26%.

“After the recent Troika review, the market is improving, demand is coming back and the PGB curve is normalising,” said the source.

Portugal’s last debt exchange back in October 2012 also capitalised on investor demand and paved the way for its return to syndicated markets in January.

In that debt exchange, Portugal managed to swap around EUR4bn of a bond maturing in September 2013 for a deal due in October 2015, markedly reducing its refinancing needs this year.

Portugal has a EUR6bn 4.375% June 2014 bond which could be a candidate for similar debt management exercise later this year.


Portugal voiced its ambition earlier in the year to return to regular bond auctions, something it has not done since April 2011. However, a sell-off across the PGB curve inspired by the prospect of the US tapering its quantitative easing programme appears to have put these plans on ice.

“You need a more stable backdrop to offer debt in this kind of regularity,” said the source, adding that further syndications in euros are also unlikely until next year given it has already offered two such sales in 2013.

This does not, however, rule out a US dollar-denominated transaction, something Portugal has publicly stated it has been looking at for some time.

However, one bank syndicate official said this could mean “dancing with the devil”, in reference to the US hedge funds that could be lured into such a deal, and would be unlikely to support the country over the long-term.

Hedge funds that tend to focus on distressed debt in emerging markets have circled Portugal’s debt in recent years, and were blamed for the poor secondary performance of a EUR2.5bn syndicated five-year tap it issued back in January.

The IGCP, Portugal’s debt agency, said those funds had been replaced by traditional European rates buyers when it issued a new 10-year benchmark in May, and prompted it to start forming a plan for a return to regular auctions.


Being able to regularly raise money in debt markets is crucial for Portugal as it approaches the end of its EU-IMF bailout in the middle of next year.

In 2013, EU-IMF funds amounted to EUR10.1bn of its financing needs, while its issuance of bonds and treasury bills amounted to EUR5.4bn and EUR2.4bn respectively, according to its investor presentation updated this month.

Next year, Portugal is scheduled to receive EUR8bn in EU-IMF financing, leaving it with EUR8.2bn to raise on its own.

In 2015 and 2016, it will need to raise EUR18.6bn and EUR14.2bn, respectively, a feat many analysts think may be a tall task without further official sector help. (Reporting by John Geddie, editing by Alex Chambers, Julian Baker)

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