Published: February 1, 2017
Slovenia targets curve liquidity with dual tranche trade
Slovenia printed €1.3bn of paper on January 17, with the country’s ministry of finance telling EMEA Finance that the deal was part of a year-long focus to ensure secondary market liquidity in its bonds.
The sovereign raised €1bn through a fresh March 2027 bond at mid-swaps plus 63bp and tapped its outstanding August 2045s for €300mn to bring the total up to €1bn.
“We expect that this [deal] will have positive implications for secondary market liquidity of the whole yield curve which will be our main priority in 2017,” a ministry of finance spokesperson informed EMEA Finance via email. “The long 10-year euro bond was a natural choice based on the redemption profile of the Republic, ie 2027 empty maturity bucket.”
The spokesperson added: “Additional rationale behind [the deal] is to support the liquidity maturity point in the belly of the curve, which is important underlying transition maturity point to longer maturities.”
The European Central Bank’s bond buying programme has seen yields plummet, pushing Eurozone investors last year to print record long maturity bonds in the shared currency to lock in record low costs while also offering yield starved investors a positive return.
Slovenia has been no exception. “By issuing bonds of 10, 16, 20, 24 and 30-year maturities in 2015 and 2016, issuance was largely skewed to long end of the curve,” explained the spokesperson.
Many bankers thought that the ultra-long deals had come to an end after the ECB said in December 2016 that it would reduce its monthly bond purchases by €20bn to €60bn from March this year – potentially heralding a tapering of the programme and pushing yields up along the curve, meaning investors wouldn’t have to take the extra duration risk to see a return.
Slovenia’s deal suggests there is still plenty of demand for long duration debt, with demand for the 2045s coming in at €700mn.
“They wanted to push the 45s up to benchmark size,” a banker who led the trade but could not be named because the person is unauthorized to speak to the press told EMEA Finance. “This was a hugely successful trade for them, especially when you consider their last tap of these bonds was only for €150mn – which was the target for this trade too.”
It could prove to be a shrewd move by Slovenia to lock in long term funding now as there is a slew of headline risk coming up, with elections across Europe amid a rising wave of populist politics in the West.
“The political development in the core European countries and interpretations of possible implications, mixed signals coming from ECB, development in the USA together with other possible geopolitical development are expected to increase market volatility this year,” said the Slovenian ministry of finance’s spokesperson.
“We have decided to start with the funding [early] to avoid much of the market reaction to worldwide political uncertainties which might come later in the year. The choice of timing is indeed to gain on time flexibility for possible transactions later in the year.”
Blurred fair value
Lead bankers on the trade had a tough time finding fair value on the deal, as the ECB’s largess has pushed the cash price on Slovenia’s neighbouring bond on its curve well above par, making them useless for comparison.
“It’s become a common story now,” said the banker. “The secondary markets are a mess.”
Instead of using Slovenia’s 2026s, leads turned to the outstanding 2025s and 2032s an interpolated fair value at MS+55bp, giving a new issue premium on the new debt if 8bp.
Meanwhile, the 2045s were trading at 90bp before the reopening was announced, though the spread swung out by around 15-20bp once the deal hit screens, according to the banker.
“Looking at the spread they pay and the sort of demand they get, Slovenia clearly comes somewhere between Italy and semi-core sovereign issuers like Belgium,” said the lead. “It’s closer to Ireland.”
The spread on Slovenia’s 10-year bond equated to a yield of 1.326% on pricing. Italy printed a €6bn September 2033 bond at a yield of 2.53% a day after Slovenia’s deal, while Belgium printed a €6bn 10-year trade at 0.8125% a day before Italy.
Abanka, Barclays, Credit Agricole CIB, HSBC and UniCredit ran Slovenia’s transaction. Leads are mainly chosen by how active they are in Slovenia’s secondary market, the ministry spokesperson told EMEA Finance.
Slovenia is rated Baa3 (positive) by Moody’s, A (positive) by S&P and A- (stable) by Fitch.