September 22, 2017 / 7:18 AM / 10 months ago

Portugal ponders return to syndication after upgrade

* Portuguese government debt rallies on back of S&P upgrade

* Upgrade well timed ahead of QE tapering

* Santander Totta covered sees rampant demand

By Melissa Song Loong

LONDON, Sept 22 (IFR) - Portugal’s debt was on a tear this week after S&P became the first of the three main ratings agencies since the eurozone crisis to move the sovereign back into investment-grade, and some say the market is now ripe for a syndication.

The one-notch upgrade to BBB- led to a rally in Portugal’s yields, with the 10-year dropping to a 2.36% weekly low on Wednesday, and the gap between itself and other peripheral sovereigns, such as Italy, narrowing to a low for the year.

“We did not yet define [whether we will issue a bond],” Mario Centeno, the country’s minister of finance, told IFR.

“It will certainly depend on market conditions, but we always have the possibility in mind. For 2017, it may not be necessary and we may choose a different strategy to diversify, but we have not ruled it out yet.”

The issuer is already planning to issue a Rmb3bn (€380m) Panda bond by the end of the year, having mandated Bank of China, Caixa Geral de Depositos and HSBC for an up to five-year deal.

If successful, it could become the first eurozone country to borrow in the US$9.5trn Chinese bond market, potentially opening the way for other European governments.

The positive momentum marks a turnaround for the sovereign, which has seen its public finances and growth prospects improve strongly compared with last year, when its sole investment-grade rating from DBRS hung by a thread.

“With Portugal’s pace of growth becoming sustainable due to the mounting strength of exports and an increase in internal demand, we had anticipated an upgrade to the sovereign rating to investment-grade,” said Patrick Barbe, head of European sovereign bonds at BNP Paribas Asset Management.

“As a result, Portuguese bonds have become more attractive to institutional investors, including ourselves, and we are fully weighted.”

Portugal has been conspicuous by its absence from the syndicated market in 2017, its sole visit coming from the €3bn 10-year trade done in January. This compares with €6bn issued through syndication in 2016 and €11bn in 2015, according to the Portuguese DMO.

“They have a lot of cash on board already, but [issuing a new bond] is always an option,” said a DCM banker.

“The demand certainly is there. It looks like what’s driving the growth is fairly resilient, and they’re funding at a lower rate despite the fact that [the ECB] is tapering.”

However, a banker said that Portugal may not necessarily be tempted to opportunistically issue a bond.

“There have been times throughout the year when bankers have been begging for supply, but remained very disciplined sticking to their predetermined issuance schedule. The curve has reacted very well to that,” he said.

Portugal’s debt management office announced that it would raise between €14bn and €16bn through syndications and auctions in 2017. It had raised €12bn between January and July, according to a September investor presentation.


With the upgrade, Portugal joins the club of sovereigns that have clawed their way out of the eurozone crisis.

A similar shift occurred with Ireland in 2014, when it regained investment-grade status with S&P, Moody’s and Fitch.

The timing of the upgrade could not be better, given that the European Central Bank is expected to start tapering its QE programme in 2018.

An upgrade from another ratings agency would enable it to access an even broader investor base. It is rated Ba1/BB+ by Moody’s and Fitch.

In June, the European Council closed excessive deficit procedures for Croatia and Portugal, confirming their deficits have dropped below the EU’s 3% of GDP reference value.

The sovereign has also made strong progress in repaying the loans it received from the IMF during the sovereign crisis, with around 63% of its €26.3bn loan repaid.

S&P took into account improvements in Portugal’s still-troubled banking sector and progress in the reduction of its budget deficit for the upgrade.

The ratings agency expects this year’s budget deficit target of 1.5% of GDP to be met, putting the government debt-to-GDP ratio on a firmly declining path.

It projects that Portugal’s net general government debt will be about 117% of GDP in 2017, before slowly declining to about 110% in 2020. The agency also forecasts economic growth in real terms to average about 2.2% annually.


And if the reception for Banco Santander Totta’s €1bn covered bond, the first Portuguese 10-year trade in the format since 2010, is anything to go by, a syndication would be a complete riot.

The transaction attracted over €3.25bn of demand, and bookrunners Barclays, Credit Suisse, Natixis, Santander and Societe Generale ratcheted the spread in from initial high 50s talk to plus 48bp, just wide of fair value in the mid-40s.

“This seems to reflect that investors were starving for some paper out of the periphery,” ABN AMRO analysts wrote in a note.

“Although it was already this year’s second deal of Banco Santander Totta (and the third from Portugal), supply from other peripheral countries, and Spain in particular, has been minimal.” (Reporting by Melissa Song Loong, Additional Reporting by Alice Gledhill, Editing by Helene Durand, Philip Wright)

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