The Republic of Macedonia launched a pricey, long three year Eu175m bond this week, highlighting investor wariness toward lower rated, euro denominated deals.
On Tuesday, the (BB/BB+) sovereign priced a 3-1/2 year bond with a 9.875% coupon at 99.729 to yield 10% via HSBC.
After completing a roadshow in Austria, Germany and Frankfurt over two weeks ago, the deal was stalled as investors "had to get their credit research done on the rare and esoteric issuer," said a banker on the deal.
He added: "Many portfolio managers had to seek internal approval to gain exposure since the credit was unlikely to have appeared in their country weightings before."
The issuer’s outstanding 2015s rarely trade so feedback from the roadshow and regional liquidity conditions gave guidance for pricing. In recent weeks, rival bankers heard price whispers of 9%-9.5% for the Reg S deal. The issuer has Eu300m of funding needs this fiscal year and near-term budgetary pressures for the EU accession candidate made investors reluctant to buy a five year bond. As a result, this delayed issue is pricier and smaller than expected.
However, bankers say the deal should be compared with Lithuania’s latest foray into international markets, which highlights the divergence between ratings and pricing. The Baltic nation (A3/BBB/BBB) paid a 9.5% yield for a five year Eu500m benchmark on June 18. "You have to look at the Macedonia deal from a relative value basis and a 10% yield given its rating and non-EU status is respectable when compared with the Lithuania deal."
A total of 45 accounts snapped up the deal and there was Eu200m of demand. Traditional buy-and-hold investors at Scandinavian private banks are traditional buyers of high yield emerging European credit. However, a larger-than-expected number of real money investors sought exposure for diversification purposes, said a banker close to the deal. In addition, there was some two-way flow on the break, suggesting demand from under allocated investors. The bond closed on Thursday at 100.25 against its initial 99.729 price.
The UK grabbed 52% of the bond, Switzerland 11%, Germany/Austria 11%, Scandinavia 5%, Greece 4%, Italy 4%, others 6% while offshore US investors located in London bought 8%. By type, real money accounts took 47%, banks 20%, hedge funds 18%, public bodies 11% and others 4%.
Rival bankers say the 10% yield was a realistic pricing for a double-B sovereign in euro markets despite the short tenor. "The pricing was higher than expected and the tenor shorter but this is fair since investors prefer large and liquid trades these days," said an emerging markets debt syndicate head in London.
The bulk of the funds will be parked at the central bank to bolster foreign exchange reserves to stabilize the currency peg to the euro. The economy is set to contract by 1% of GDP this year but the country has not sought emergency cash from the IMF.
The new issue market in emerging Europe has been quiet this week just ahead of the traditional summer lull. Gazprom (Baa1/BBB/BBB) may come to the market with a large, liquid benchmark of up to $1.5bn this summer, said market players. The Russian gas company is looking to raise money to buy a majority stake in Sibir Energy by its oil arm, Gazprom Neft (Baa3/BBB-). Issuance by the parent company would decrease all-in funding costs, but Gazprom is heavily in debt. It faces repayments of $12.04bn this year. Gazprom last tapped the international markets in April with a $2.25bn 10 year bond at 9.25%.
Gazprom has cemented a faithful buyer base in recent years and will be able to capitalize on stronger market conditions due to its ability to issue large, liquid deals, bankers said. "Investors love Gazprom and when markets are hot, it can price whatever it wants," said an emerging market debt origination head in London. "In addition, the outlook for commodities has improved in recent months and Gazprom’s curve has repriced tighter."
But Serge Lioutyi, analyst at Barclays Capital, said the new issue could incur a large concession. "Despite Gazprom’s quasi-sovereign status, the announcements by management highlighting the difficult operating environment in 2009 could see investors demand additional premium on any upcoming issuance," he said in a research note.
Alfa Bank Ukraine is embarking on a series of investor meetings to restructure its $1bn outstanding international bonds through HSBC and UBS. The bank will visit Singapore, London and Zurich next week. The bank is seeking a debt-swap transaction for liability management purposes. The upfront cash payment varies between 15% and 27% of the principal depending on the debt security. In addition to the cash offer, the remaining principal will be exchanged for a newly issued paper with three years maturity and a higher coupon rate at 13%. A banker on the deal said the bank wanted to offer an investor-friendly programme, contrasting with Nadra Bank’s proposed 85% haircut last week.
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