Lithuania became the first triple-B rated sovereign to issue in Swiss francs since 2005 last month. This demonstrates both the readiness of investors in Switzerland to look further down the credit curve in search of yield and their enthusiasm for emerging Europe risk.
The Baltic republic priced a SFr175 million ($187 million) 5.5 year bond at 165 basis points over mid-swaps on September 19, with BNP Paribas and Credit Suisse acting as bookrunners. The borrower had initially been targeting a five-year note but switched to the April 2018 maturity to satisfy buyers’ requirement for a 2% coupon.
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| Gediminas Norkunas, deputy director of Lithuania’s state treasury department |
Gediminas Norkunas, deputy director of Lithuania’s state treasury department, says the deal’s success reflects the country’s remarkable recovery from deep recession in 2009 to GDP growth of 5.9% last year. "I’m not surprised that the demand was there, given Lithuania’s outstanding performance over the past three years," he says. "I’m happy with the pricing that we were able to achieve. It just proved that investors really appreciate Lithuania’s achievements." Second debut
The issue was the second debut in the Swiss currency by a CEE sovereign this year, following Slovakia’s SFr425 million dual-tranche offering at the end of March. Lithuania’s deal also came shortly after an inaugural SFr200 million four-year bond from the Black Sea Trade and Development Bank (BSTDB).
The latter raised eyebrows in Switzerland, given the inclusion of Greece among the supranational borrower’s member states. Bankers at sole lead Credit Suisse, however, said the combination of a single-A rating, a 2.5% coupon and a rare chance to buy into a name with links to countries such as Turkey, Georgia and Azerbaijan proved compelling.
"Investors saw the Black Sea Trade and Development Bank deal as a way to get indirect exposure to that region via a credit with a higher rating than the sovereign member states," says Dominique Kunz, head of Swiss debt capital markets at Credit Suisse.
His opposite number at UBS, Manuel Gadient, confirms that part of emerging Europe’s appeal for Swiss buyers is the opportunity for diversification. "The CEE SSA space is very attractive because, with the exception of Poland, it’s poorly represented in the portfolio of investors," says Gadient. "So any new issuer is highly welcome because it allows investors to increase their exposure to the sector in a diversified way."
Marketing on the BSTDB deal also stressed the borrower’s improving credit story. The supranational has been upgraded twice by Moody’s since 2006 from Baa2 to A3 – something bankers agree is almost more important for Swiss investors than a credit’s outright rating.
"Most of the issuers that have successfully accessed the market are on an upward trajectory in rating terms," says Kunz. "It’s going to be a struggle to sell a sovereign or indeed a corporate from a country where the rating trajectory has been negative. But where it’s positive, Swiss investors will look at double-B and crossover names as well."
Whether or not other triple-B sovereigns from the region follow Lithuania into the Swiss market will depend on how the latter’s deal fares over the next few months, according to Gadient. "It will be of the utmost importance to see how this transaction performs in the secondary market because this will be the data point for any comparable issuer out of the CEE space," he says. "It is clear, however, that sovereigns in this region have turned an eye to the Swiss franc market and are assessing the pros and cons quite carefully."
Key to Switzerland’s appeal for borrowers, he adds, is the access it offers to a discrete investor base that has proved resilient to external market shocks. "The Swiss franc investor base is more heterogeneous and broader, so it doesn’t turn risk-on risk-off as quickly as the ultra-professional euro investor base, which increases the chance that you can access the Swiss market when the euro market might not be as receptive."
Other benefits of Swiss francs include more flexibility on size and maturities than in larger markets, as well as the opportunity to achieve benchmark status with smaller-sized deals – a feature that chimes well with the relatively low funding requirements of many CEE issuers.
As Norkunas at the Lithuanian state treasury says: "Euros are obviously the natural funding currency for Lithuania, so Swiss francs will not be the main market for us, but it’s a market that’s proved to be very stable. It’s good to have it as an alternative that offers smaller sizes and at the same time some arbitrage in terms of pricing."
With most CEE sovereigns fully funded for 2012 – the proceeds of Lithuania’s Swiss franc outing will go towards the repayment of a €1 billion note due next March – Swiss DCM bankers are not expecting a rush of issuance from the region before the end of the year.
Looking ahead, however, the list of potential CEE issuers in the currency – in both single-A and triple-B – is getting longer. A spokesperson for Slovenia’s finance ministry confirmed that the sovereign is looking at Swiss francs, although Kunz warns that investors will want more clarity on the country’s fiscal situation first.
Bankers added that the success of Polish lender PKO BP in raising SFr500 million from the market on only its second visit in August has inspired interest among financials and corporates from the region. BRE Bank was reported to be looking at Swiss francs in tandem with its marketing of a debut euro deal last month. Polish energy firms with high capex requirements such as PGNiG, PGE and Tauron are also said to be monitoring the market.
