February 8, 2018 / 1:46 PM / 10 days ago

UPDATE 2-Greece delay vindicated as seven-year crosses finish line

(Updates to add reactions to pricing, book size)

By Melissa Song Loong

LONDON, Feb 8 (IFR) - Greece’s decision to wait for calmer markets was vindicated on Thursday after the issuer managed to keep funding costs down for what was its longest bond since its return from market exile, a €3bn seven-year that printed at a 3.5% yield.

The new issue, which came with a 3.375% coupon, will give the country a new anchor. That coupon is lower than on the country’s outstanding 3.5% Jan 2023 bond, despite being two years longer.

“From a yield point of view you could argue that it isn’t expensive [for Greece],” said a banker away from the deal.

The final print was at the tight end of the 3.5%-3.625% guidance range and the 3.75% area initial price thoughts.

A lead banker saw fair value at around 3.30%, suggesting a concession of some 20bp at the reoffer level.

That would be half the premium bankers reckoned Greece paid last July for the €3bn five-year.

Greece’s 3.75% Jan 2028 was bid at 3.78% early Thursday afternoon and its 3.5% Jan 2023 at 3.11%, according to Tradeweb prices, higher by 10bp and 13bp respectively on the day.

The lead said Greece was never in any rush to come to market.

The sovereign announced the mandate on Monday, but a savage equity sell-off and volatile rates backdrop meant it held off until conditions had calmed.

“This has given us a platform to go ahead with the trade, and investors don’t feel like they’ll be catching a falling knife if they buy the deal,” said a second lead.

Greece is due to exit its third bailout programme in August.

The seven-year, which is rated Caa2/B/B-/CCCH (all positive outlook), was the first time it was raising completely fresh money since last summer. Last July’s five-year came alongside a liability management exercise.

STRONG SIGNAL

The transaction sends a strong signal to the international community that Greece is able to raise funding on its own, although market participants said that the quality of the book will be of importance in determining how successful the trade has been.

“I’d like to see how much hedge funds took,” said the first banker. “If it’s below 25%, that’s fair enough.”

Orders for the trade came from a mixture of SSA and emerging markets buyers, according to the first lead.

Institutional investors, who could consider Greece an off-index trade, had mixed reactions to the sale.

“It looks like the deal went fine,” said one investor. “I did try to float the idea of buying the debt, because the economic story has improved. But others thought it was a bit too racy - it’s still facing structural headwinds and it’s a different spot on the spectrum, not a safe government bond and also not a high-yield name.”

A second banker away from the deal said emerging markets investors would probably have flexibility to scrutinise the fundamentals associated with the name, rather than being constrained by the credit ratings.

“You’ve also got South Korea to Gulf countries [as part of the emerging markets universe], so it’s entirely possible to compare apples to oranges there,” he said.

SPREAD NARROWING

A second investor, however, said his firm was not buying bonds given the spread to Bunds, which has shrunk over the past year.

The spread between 10-year Greece and Germany has dropped to around 300bp from 740bp a year ago, Tradeweb figures show. The new transaction priced at 311.2bp over the German benchmark.

“We see a spread risk and think there is better value to be found in emerging markets with sovereigns such as Brazil or Turkey,” said Andrew Belshaw, head of investment management at Legg Mason affiliate Western Asset.

Barclays, BNP Paribas, Citigroup (B&D), JP Morgan and Nomura were lead managers. (Reporting by Melissa Song Loong, Helene Durand, editing by Alice Gledhill)

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