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Portugal knocks syndication plans on head, DBRS looms closer
October 6, 2016 / 2:12 PM / a year ago

Portugal knocks syndication plans on head, DBRS looms closer

* Syndication not mentioned in Q4 plans

* Investment-grade rating hangs by thread

By Helene Durand and Laura Benitez

LONDON, Oct 6 (IFR) - Portugal has quietly ditched plans to raise funding via a syndication as concerns around the sovereign’s eligibility for the ECB QE programme continue to pressure the country’s bonds.

The sovereign in its third quarter guidelines had announced its intention to issue bonds using a combination of syndications and auctions.

However, the mention of a possible syndication was dropped on Monday when the sovereign released guidelines for Q4.

Unlike auctions, which tend to be run-of-the-mill affairs, syndications can leave sovereigns more exposed to execution risk as banks need to find enough demand to cover a transaction.

While Portugal’s Q4 statement said it would continuously monitor market conditions and that this may result in a change of the guidelines, the sovereign has little chance to access the market until October 21 at the earliest.

That is when DBRS will say whether it has kept Portugal’s rating in investment-grade territory - the last thread keeping the country’s debt eligible for the ECB purchase programme.

“If there is a way for Portugal to remain in the QE programme, then their funding programme can go on as planned,” said John Taylor, portfolio manager, fixed income at Alliance Bernstein.

“If that isn’t the case, there would be a negative reaction in the market and it’s difficult to say exactly what sort of impact that would have on their yield and spread.”

Ten-year Portuguese government yields have risen since the beginning of the year as concerns around the health of the country’s economy and banking sector have escalated.

They were quoted at 3.52% on Thursday afternoon, having started the year at 2.56%, according to Thomson Reuters data.

“Portugal is already trading around 250bp wide of Spain so the market is acknowledging this risk to some extent,” said Taylor.

“Greece is yielding 8.5% versus 3.5% for Portugal and is much lower rated but does indicate that Portuguese yields could move quite a long way in this scenario.”

Things have not been helped by comments made by DBRS’s head of sovereign ratings. He told Reuters in the middle of August that while the outlook on the sovereign’s BBB (low) rating remained stable, pressures appeared to be mounting.

He told the FT on Thursday that Portugal was in a “vicious circle” and had “large structural problems.”

Moody’s and Fitch downgraded the sovereign to junk at the end of 2015, to Ba1 and BB+, joining S&P, which already rated it at BB+.


The failure to conduct a syndication in the third quarter has also meant Portugal could now fall short of the 18bn-20bn gross issuance target it had outlined for 2016.

According to a presentation dated September 22, the IGCP said it had raised 13bn of medium and long-term debt between January and July this year. Since then, it has raised 1.75bn in two auctions. Even if Portugal manages to print the upper end of the auction amounts it has outlined for Q4, it will still fall short of its yearly target, potentially by as much as 3.25bn.

Portugal’s IGCP was not immediately available for comment. (Reporting By Laura Benitez, Editing by Julian Baker)

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