Barbados underlined the strength of appetite for emerging markets exposures this week, attracting $900m of orders for its latest Eurodollar bond issue a $200m 12 year 144a private placement on Tuesday. Strong demand from real money investors in the UK and US was especially notable.
The island nation paid a premium for its high indebtedness, the illiquidity of its outstanding bonds and the deals small size. However, a 7.2% launch yield and a spread of 416bp over US Treasuries met its pricing expectations.
The deal has been poised for launch since May when the Greek debt crisis stalled issue plans. Barbados kicked off a roadshow last week in the US and the UK via Deutsche Bank to market the deal and assuage investor concerns over its government debt to GDP ratio of 97%. Collapsing revenues from exports and tourism in the global crisis have triggered a fall in the nations creditworthiness in recent years from single A to Baa3/BBB.
Divergent credit metrics and economic prospects for Caribbean nations make regional pricing comparisons difficult, according to bankers. For example, Bermudas higher Aa3 rating and the $500m benchmark size of its debt offerings, which are included in bond market indices (unlike Barbadoss), account for the competitive 5.603% yield on the 10 year deal it launched earlier this month.
The bookrunner cited a new issue premium of 35bp for the 2022 bond, quoting the outstanding 2021 notes at 6.85% at the time of launch. Before the roadshow these were trading at around 6.2%, which then widened to around 6.75%, a banker away from the deal said. On this basis, the 2022s offered a 45bp concession over its existing 2021s, but were effectively flat to its outstanding 2035 paper.
Tuesdays deal was cheaper for the issuer than the 10 year 7.8% bond it launched last August. Previous Barbados deals have been twice oversubscribed, driven principally by life insurance companies and Caribbean corporate treasurers. By contrast, the new issue was four-and-a-half times covered and allocated to 80 accounts.
"This large demand sharply increased the investor base with 76% of allocated investors having no previous exposure to the sovereign and marketed Barbadoss credit story to a broad profile of investors," said a banker on the deal. Some 57% of investors were in the US, 20% UK, with the rest mainly in the Caribbean and Switzerland. Some 56% of the paper was allocated to real money emerging market fund managers, 23% hedge funds, followed by banks and insurance companies.
"During the first five months of 2010, the fiscal deficit reached 8.6% of GDP and the government has responded to the weaker budgetary environment by slashing subsidies and other spending categories," wrote Richard Segal, Knight Libertass emerging market strategist, in a report this week. "On balance, therefore, we think the credit is partly on the mend, but there remain too many risks on the horizon to give it a resounding recommendation." In particular, he cited the 33% jump in the government debt stock over the past five years.
However, external debt to GDP is a "healthy" 30%, according to a banker on the deal, while pension funds and other institutional investors are "stable" holders of the bulk of domestic debt. The island nation will split proceeds equally between paying down existing debt and boosting foreign exchange reserves.