Greece returned to the European bond market after a three-year absence on Tuesday and is set to sell a €3bn five-year issue at 4.625 per cent, laying the foundations for future trades as it weans itself off external aid.
The sovereign, rated Caa2/B-/CCC/CCCH, attracted over €6.5bn of orders for the deal, which was launched together with a tender giving holders of its 4.75 per cent April 2019s the chance to extend along the curve. The new issue should be broadly split between new money and those switching from the 2019s.
It is a milestone trade for a country that has made clear progress in recent years since the height of its debt crisis.
“The lead managers and the Greek treasury officials should be applauded for taking the opportunity to tap the markets successfully, as being able to fund independently of external aid is an absolute priority for recovering nations,” said Mark Holman, CEO at Twenty Four Asset Management.
But one banker off the deal, speaking this morning after the first update, felt investor interest was perhaps less than expected for such a well-flagged outing.
The lead managers – BNP Paribas, Bank of America Merrill Lynch, Citigroup, Deutsche Bank, Goldman Sachs and HSBC – announced indications of interest of €5.5bn, having earlier begun marketing at 4.875 per cent area initial price thoughts.
This was whittled down to guidance of 4.75 per cent area.
“I think the job is really to build a foundation for the future and to diversify the investor base,” the banker said. “July 25 is a bit of a surprising date to try and do that.”
On the other hand, the 2019 bonds had been trading at a record low yield inside 3.5 per cent, according to Thomson Reuters data.
And the country’s officials have been keen to return to the market well in advance of the conclusion of its latest bailout programme in August 2018.
It hired Rothschild earlier this year and agreed to pay the sovereign restructuring advisory firm a success fee of €1.5m if it issued a new bond with at least a two-year maturity, and another €1.5m after a second bond, according to the government’s gazette.
According to the bond documentation the six managers of today’s deal will receive commission of €1.5m and an additional discretionary fee of €150k each.
Greece received an added boost on Friday when S&P lifted its rating outlook to positive.
“I think the market is pretty strong right now,” a lead manager said. “As soon as they were ready to go, we advised them to go.”
“This will be a well-sized, well-supported trade that hopefully sets them up for future deals down the track as they become more of a regular capital markets issuer, rather than focused on the support measures,” the lead added.
At 4.625 per cent the deal will price inside the reoffer level of Greece’s last five-year outing in 2014, the April 2019s. They came at a 4.95 per cent yield in a €3bn size but drew over €20bn in orders from 600 investors.
Greece invited holders of the 2019s to tender their notes at 102.60 plus accrued interest. That approach allowed the issuer to limit the increase in its €325bn debt pile – subject to a cap from the International Monetary Fund – while extending its maturity profile.
Greek banks held around €1bn of the 2019s and would switch large chunks, the treasurer from one of the four big domestic banks told Reuters. He expected at least €1.5bn of domestic demand overall.
“It’s a win-win in terms of timing and pricing,” he said. “If it didn’t take place now, the window would be tighter in September, October. It also opens the way for banks to issue paper.”
The country’s debt-to-GDP ratio remains high at around 179 per cent and it is likely that further measures will be needed to improve its debt sustainability – potentially with unseen consequences for holders of the new five-year.
“Apparently investors judge that the current yield is attractive enough to bear this risk, at least for now,” ABN AMRO senior fixed income analyst Kim Liu told IFR.
TwentyFour’s Holman underlined the risk of significant downside volatility as Greece continues to battle with its creditors over the coming years.
“The very nature of the assistance means that from time to time there will be contentious discussions between the providers of the aid (the EU, ECB and the IMF) that will deliberate on debt relief and haircuts; words which are not consistent with stable fixed income investing,” he said.