The Republic of Lithuania
cheered beleaguered Baltic issuers this week by launching a
yieldy Eu500m bond thanks to strong demand from offshore US
investors. The deals success, despite historically wide
credit default swaps for Baltic sovereigns, one of the weakest
links in emerging market debt in recent weeks, further
demonstrates the market hospitality for credits willing to pay
On Monday, the A3/BBB/BBB issuer attracted Eu750m of demand for
a five year Reg-S bond to yield 9.50%, 650bp over mid-swaps. In
the morning, leads Citigroup, Credit Suisse and Royal Bank of
Scotland released official pricing guidance of 9.50% area and
attracted Eu750m of orders by the afternoon. Lithuanias
2013s and 2016s were referenced for pricing.
When the new benchmark was announced the 2013s yielded 8.3% and
the less liquid 2016s traded at 9.375%. On the interpolated
curve, the new issue concession is therefore around 55bp-60bp,
said a banker on the deal.
The deal has been in the offing since the sovereign embarked on
an international roadshow for a euro-denominated benchmark
three weeks ago. However, the timing proved unlucky as it
coincided with market rumours of a devaluation of the Latvian
lat. This fuelled fears the whole Baltic region was on the
brink of an economic meltdown given its close financial and
trading links. Lithuanias CDS then widened from around
350bp in mid-May to 470bp last Friday (June 12).
However, the deal gained momentum after leads dropped soft
pricing whispers to investors the week before the transaction.
"Despite various comments on Latvia during the roadshow, the
investor call held on June 8 ensured the investors remained
fully engaged in a bond transaction," said Alan Roch, director
of emerging markets syndicate at Royal Bank of Scotland.
The rare international issuer decided to seize the day and pay
up to cement a relationship with global investors. "We are
unsure how markets will develop so it is difficult to forecast
that there is a better to time to issue a bond so we saw this
Monday as window of opportunity," Mykolas Majauskas, adviser to
the Lithuanian prime minister Andrius Kubilius, told EuroWeek
in an interview.
Lithuania, which has not ruled out going to the IMF for a
bailout package, will use the cash to shore up the public
finances in the grip of a severe recession that has eroded
government revenues. Underscoring the radical repricing of risk
after the global bull run, the sovereign in October 2007
printed a Eu600m 4.85% 2018 bond.
Money on the
"Clearly the price is expensive but the reason we made the
decision to go to the market is to demonstrate that we can do
it and prove investors have faith in Lithuanias economy,"
"We also left money on the table on this transaction to keep
investors hungry," he said and suggested the 2014s may be
tapped for a further Eu500m depending on financing needs and
market conditions over the next year. A five year tenor is the
sweet spot for central eastern European-focused investors who
are wary of longer dated paper compared with Latin American and
Gulf investors, said market players.
A banker close to the deal said: "You can price high-grade
names and single-A blue chip corporates tighter but for assets
that are less liquid you still require a new issue premium of
In addition, Croatias (Baa3/BBB/BBB-) Eu750m long five
year bond at the end of May, which dropped full two points on
the break, weighed on the leads. "I did not see anything wrong
with the execution of the Croatia deal," said a lead on the
Lithuania deal. "So we wanted to price an investor-friendly
deal to attract enough orders from buy-and-hold accounts." But
he cited the stable aftermarket performance of the bond as
proof the deal did not offer too much juice. On the break, the
2014s 9.50% traded at 100.30100.55 versus the 99.52
reoffer price. The 100.50 price represents 9.24% yield and
625bp over mid-swaps.
Offshore US asset management funds based in the UK offset the
decline in demand from cash-strapped EU convergence funds,
traditional buyers of CEE paper, said a banker on the deal. By
geography, offshore US accounts bought 28% of the paper, UK
investors 21%, Germany 19%, Nordic region 12%, Greece 4%,
Switzerland 4%, and others 12%. By type, funds grabbed 62%,
banks 31%, corporates 5%, insurance funds 1% and others
Underscoring the divergence between ratings and pricing levels,
traditional real money emerging market investors flocked to the
investment grade paper while high grade buyers snapped up a
lower proportion of the deal compared with previous CEE
sovereign transactions. "In recent years, the spread
compression in the CEE drove many EM dedicated investors to
focus on other regions, however, the change in market dynamics
has re-invited EM investors back to a region they have
historically been very engaged with," said Roch.
The Republic of Poland has mandated Barclays Capital, Citigroup
and HSBC for a possible Eu1bn benchmark, said bankers on the
deal. On Monday, the issuer will embark on a roadshow in
Germany, taking in London on Tuesday and Wednesday, Los Angeles
on Thursday, and San Francisco on Friday. The roadshow will
continue the following week in Boston on Monday (29 June) and
conclude in New York the next day. The Polish finance ministry
has previously indicated its intention to issue a $1bn five or
10 year bond this year.