A clutch of central European companies launched debut Eurobonds in June, raising hopes that the long-awaited shift from bank to bond-market funding in the region has begun.
In less than four weeks, five new corporates from the region entered the Eurobond market, more than in the previous 18 months. Polish energy utility PGE started the rush on June 2 with a €500 million five-year deal. Slovakian gas distributor SPP, Slovenian energy firm Petrol, and two more Polish names, oil refiner PKN Orlen and insurer PZU, swiftly followed.
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| If we were to see a sudden flood of supply out of Russia, it might affect demand for other regional names, but at the moment that seems unlikely Simon Ollerenshaw |
Central Europe has traditionally lagged other emerging market regions in corporate bond issuance. Last year, companies accounted for just 21.3% of total Eurobond volumes from the region, according to Dealogic, compared with 56.9% for Russia and the CIS, and 61.2% in Latin America.
This muted activity has been mainly due to the presence across central Europe of well developed and historically very competitive bank markets, says Simon Ollerenshaw, head of CEEMEA debt capital markets at Barclays.
From a peak of 405 basis points over Treasuries at the start of February, the JPMorgan EMBI+ composite index of emerging market bonds spreads had by mid-June fallen by nearly a third to around 280bp on the back of 12 consecutive weeks of inflows into retail and institutional bond funds.In recent months, however, the combination of low interest rates in the US and Europe with a compression in credit spreads across emerging markets has driven bond yields down to levels that are “simply too good for corporates to ignore”, according to Nick Darrant, head of CEEMEA syndicate at BNP Paribas.
A dramatic drop in issuance from Russia has also put pressure on spreads from the supply side, particularly for borrowers from elsewhere in central and eastern Europe. Total Russian Eurobond activity in the first half of 2014 amounted to just $6.63 billion, barely a fifth of the $32.6 billion seen in the same period last year.
Also key for central European corporates has been the wider revival of the euro-denominated bond market as funding levels in euros have once again become comparable with those in dollars, notes William Weaver, EMEA head of EM DCM at Citi.
“The region is predominantly euro driven, so it was disproportionately impacted by the dislocation of the euro markets during the eurozone crisis,” he says. “Now that liquidity has returned to the market and investors are on the hunt for yield, corporates can issue directly in euros with no counterparty risk and no swap costs.”
All the debut corporate bonds from central Europe in June were denominated in euros. Indeed, the only dollar activity from central Europe in the first half of 2014 consisted of three deals from frequent sovereign borrowers Romania, Poland and Hungary.
Not sole driver
Yet while ultra-low all-in euro yields – PGE’s coupon of 1.625% was the lowest ever achieved by a CEE corporate – have been helpful in encouraging companies to enter the Eurobond market, bankers and issuers stress that they have not been the only driver.
Magdalena Bartos, chief financial officer at PGE, says the broad investor base and deep liquidity of the market, along with the large deal size and long maturities on offer, were key to the firm’s decision to make its Eurobond debut. “With the excellent market conditions, we wanted to seize the opportunity and set a benchmark for financing our Z50 billion ($16.4 billion) investment programme,” she says.
Other central European utilities with high capex requirements, such as Poland’s Tauron, are also rumoured to be considering Eurobond debuts. Bankers report that at least three more Polish companies are already preparing for inaugural deals and say more could emerge as momentum builds around the sector.
Darrant at BNP Paribas says the success of June’s deals is likely to encourage other issuers to conquer their “fear of the unknown” and explore bond market options, while Citi’s Weaver notes that increasing volumes will help to attract institutional investors.
“It’s only when there is a critical mass of supply that it makes economic sense for larger funds to dedicate resources to analyse and monitor a sector,” says Weaver. “Investors’ interest in CEE corporates has increased with every new roadshow we’ve undertaken.”
Constrained supply
Market conditions also look set to remain highly favourable for euro issuance, particularly if the European Central Bank adopts quantitative easing measures later in the year. Meanwhile, supply from CEE is expected to remain severely constrained, following a rush by regional sovereigns to fund early to avoid a repeat of last year’s emerging market sell-off.
Martin Hibbert, head of CEEMEA origination at Deutsche Bank, notes that around three-quarters of planned sovereign issuance for the year has already been completed.
Bankers also agreed that the return of Russian names to the Eurobond market – as heralded by successful euro-denominated deals from Sberbank and Gazprombank at the end of June – is unlikely to affect appetite for bonds from elsewhere in CEE.
“If we were to see a sudden flood of supply out of Russia, it might affect demand for other regional names, but at the moment that seems unlikely,” says Barclays’ Ollerenshaw. “The market should have ample capacity to absorb a more gradual return of Russian supply.”
