LONDON: Portugal is seeking to raise funds through a syndicated sale of bonds just as a persistent banking crisis, reduced support from the European Central Bank and a sluggish economy have pushed its borrowing costs to one-year highs.
Portugal's finance minister Mario Centeno told Reuters in an interview that a syndicated bond issue -- under which banks distribute new bonds to a variety of investors -- is likely to be launched soon. Two primary dealers said Portugal's debt office is monitoring the market and a deal could be launched as early as this week.
But investors have turned wary of Portugal's government bonds as the threat of a credit rating downgrade to junk and reduced ECB purchases have sent borrowing costs spiking to their highest level in years. Ten-year bond yields have risen nearly 50 basis points in the past four weeks to top 4 percent for the first time in nearly a year. On Monday the 10-year benchmark bond hit a high of 4.2 percent.
Apart from a couple of brief spikes in February 2016, the last time the bond yielded more than 4 percent on a sustained basis was back in August 2014. "This means you get additional yield as an investor, but obviously there's a reason why you get that additional yield - and the drivers for the rise in yields are not exhausted yet," said Commerzbank strategist David Schnautz. "There is still a clean-up of the banking sector that needs to be done and the other elephant in the room is the ECB - they are close to the limit of Portuguese government bonds they can buy."
Portugal has struggled to find a buyer for Novo Banco, a bank carved out of the collapsed Banco Espirito Santo, and is in talks with US private equity firm Lone Star. Many expected the ECB to remove a cap on the percentage of government bonds it can own to allow for more purchases of Portuguese government bonds, among others, to alleviate a shortage of assets for its bond-buying scheme.
But the central bank chose to enact other measures, such as buying bonds that yield below the deposit rate, to solve that issue - a change that suggests it would concentrate purchases on higher-rated euro zone governments such as Germany. Indeed, the ECB bought far fewer Portuguese government bonds last month than its rules dictate, as it approaches that ceiling.
Rabobank analysts believe the ECB could hit the ceiling by June this year, factoring in potential new bond issuance by Portugal and changes to the bond-buying scheme. ACCESS THREAT Bluebay Asset Management portfolio manager Mark Dowding said there is even a risk that Portugal could, in the worst case, end up losing market access.
"You can imagine a sequence of events where there's a negative development in the banking sector, or Portugal loses its investment-grade rating, spreads would go from 350 basis points to 450 basis points," he said, referring to the extra yield investors might demand to hold Portuguese rather than German bonds.
"In the meantime, Bund yields will have gone higher and Portugal could have to pay 5 percent on its debt, debt to GDP (gross domestic product) would rise and there is no one to bail them out and it enters a death spiral," he said last month in the aftermath of the ECB's changes to its bond buying programme. January is traditionally a busy month for European government bond issuance, and Portugal has chosen this month to sell syndicated debt for the past four years. Its primary dealers say this year's sale will be more challenging than at any point since the euro zone debt crises of 2010-2012.
In the last two years Portugal has issued new 10-year benchmark bonds in January, but this time "the steepness of the curve represents a challenge," one primary dealer said. "If you look at the (yield) difference between Spain's five-year and 10-year bonds, it is around 120 basis points. For Portugal it is over 200 bps - that's a very, very steep curve," said one.
"From a cost financing perspective it makes sense for them to do something shorter." However, issuing a very short-dated bond may defeat the purpose of syndication, as such bonds are generally sold via auctions.
"They have a difficult decision to make - they generally issue a 10-year at this time of the year, but a five- or a seven-year would make more sense," said a second primary dealer. "It is not a slam dunk by any means."
Comments
Comments are closed for this article.