On the 17th of May, 2014, Portugal officially exited the Troika’s financial assistance program without any form of credit lines or other financial support from foreign institutions. This date marked the country’s full return to the international capital markets, a process made of decisive steps that had begun three years before with the arrival of the Troika of international lenders, the International Monetary Fund (“IMF”), the European Commission (“EC”) and the European Central Bank (“ECB”), and that is now complete.
The global economic crisis that is now abating, with progressive recoveries projected for Europe and the United States, had its first symptoms in America in the second half of 2007 with the subprime lending and securitisation debacle, which gained momentum when Lehman Brothers went bankrupt in October of 2008. By May of 2010, a new chapter of the crisis, affecting European Sovereign Debt, could no longer be ignored when Greece asked for financial assistance from the Troika after being shunned from market funding. A similar request came from Ireland in November of 2010 and, by April 2011, Portugal followed suit.
Even after the Irish had requested financial assistance, Portuguese issuers continued to benefit from access to international funding markets. As late as February 2011, the Republic of Portugal came out with a €3.5bn 5-year Obrigações do Tesouro (“OT”), joint-led by Caixa – Banco de Investimento (“CaixaBI”). This was the last Portuguese institutional issue before intensifying investor aversion to peripheral debt forced Portugal to request its own financial assistance program from the Troika, shutting international capital markets for Portuguese issuers, a hiatus that end-up lasting nearly two years.
At that time and as part of the Troika involvement, Portugal would begin an economic adjustment program aimed at restoring external competitiveness and financial stability and placing public finances on a sustainable path through internal devaluation, institutional and markets reform and severe austerity measures.
Portuguese issuers return to capital markets after the summer of 2012
It was only in September of 2012, 18 months into the country’s adjustment program, that a dramatic improvement in investors’ sentiment towards the periphery, coupled with progress made in the program, allowed for a Portuguese corporate, the utility EDP, to return to the wholesale debt capital markets, with a €750mln 5.75% 5-year transaction, attracting an order book 10x oversubscribed. Within one month, two other Portuguese corporates, BCR, the toll-road concessionaire, and Portugal Telecom, had also made their way into the capital markets, with a €300mln 6.875% senior secured deal and a €750mln 5.875% senior transaction respectively, both with a 5.5-year tenor and brought jointly by CaixaBI. In the months that followed, two of the top banks in the country, BES and CGD, had also made their return to international debt markets with four benchmark issues in the three to five year maturity range, of which two were assisted by CaixaBI as joint bookrunner, before the Republic succeeded in breaking its almost two year absence from syndicate issuance in January 2013 with a €2.5bn tap of the Oct 2017 OT.
Late 2012 thus saw the beginning of Portuguese issuers progressively returning to international debt capital markets, a remarkable development given the then still uncertain fallout of the Portuguese rescue program. Save for a brief blip in the summer of 2013 due to short lived political tensions at home, this process would only intensify.
Regular debt issuance is restored during 2013
Positive investor sentiment towards peripheral countries gained thrust during the remaining of 2013, a trend aligned in Portugal with solid program implementation and continuous fiscal discipline together with growing signs of economic turnaround. Driven by an exceptional exports performance, the country posted the first quarterly GDP growth in the second quarter, the highest in the Eurozone at 1.1%, ending a slump that lasted ten quarters.
Capitalising on swelling investor participation in Portuguese debt deals, traditional issuers would step up their comeback to international debt markets in 2013, some at ever low yields. REN, the electricity & gas transmission grids operator, made two appearances in the international debt markets in 2013, with a €300mln 4.125% 5-year transaction in January and, in October, with a €400mln 4.75% 7-year issue. CaixaBI was instrumental as joint-bookrunner in both deals, as well as in Portugal Telecom’s €1bn 4.625% 7-year issue in April. Another utility taking advantage of the favourable conditions twice in 2013 was EDP, deciding for two 7-year benchmarks in September and November. In the financial institutions spectrum, unusual issuer ESFG also decided to tap the market in April, while BES captured investors’ appetite for yield pick-up to issue a tier 2 €750mln 7.125% 10NC5 transaction in November.
The strong momentum seen in Portuguese risk combined with a solid performance evidenced by Portuguese credit spreads in the secondary market enabled first issuers Portucel, the pulp & paper producer, and Galp, the flagship Oil & Gas company, to inaugurate their Eurobond issuance in 2013. The first came to market with a €350mln 5.375% 7NC3 high yield bond in May while Galp launched a milestone €500mln 4.125% 5-year deal in November, the first unrated public institutional bond issued by a Portuguese corporate and one of the largest unrated bonds to come from Southern Europe in the year, a bond jointly led by CaixaBI. During this period of economic adjustment in Portugal, CaixaBI cemented its continuous leadership in debt capital markets in the country with a particular emphasis on the corporate & SSA sectors where it was bookrunner in 2/3 of the issues in the period.
Issuance uninterrupted in 2014 on the back of tightening spreads
Entering 2014, Portugal was mostly seen by investors as a successful case of economic adjustment, much in comparison with Ireland that had cleanly exited its Troika programme in December 2013, and credit spreads reflected those views by continuing their relentless tightening. Some of the main Portuguese financial institutions, in the names of CGD, BES, BCP and Santander Totta, took particular advantage of this favourable backdrop by gaining back some issuance ground after a timid 2013. Collectively they issued six new benchmarks in the first half of 2014 for a total of €4.5bn, evenly split between covered bonds and senior unsecured issues.
On the corporate sector front, EDP, the most frequent Portuguese issuer, kept its issuance drive by opening the year with a $750mln 5.25% 7-year print in January and following up with a €650mln 2.625% 5-year bond in April, jointly led by CaixaBI, that also brought BCR back to the debt markets in March 2014 with a €300mln 3.875% 7-year deal, the only two corporates opting to issue in the first semester.
Besides the increment in the number of investors drawn to Portuguese assets in 2014, also their quality and diversity has been on the rise, with Portuguese issuers attracting a growing number of buy&hold investors and of more diverse places of origin.
Sovereign Issuance and debt management steps prepare Portugal for life after the adjustment program
Portuguese credit spreads showed a notable tightening trend during the period 2012- 2014 across all asset classes, rewarding committed investors with solid returns and luring a growing number to increase their exposure. Representatively, the bund spread in 10-year sovereign bonds touched 326bps (yield of 5.16%) in May 2013 form a peak of 1322 bps (yield of 15.84%) in January 2012 at the zenith of the crisis. This trend gained further momentum into 2014, with 10-year OT bund spreads reaching minimums of 214bps (yield of 3.32%) in June.
Portugal used these constructive market conditions to bring out a number of successful issuances. After the comeback OT tap issue of January 2013, high investor support allowed the Republic to launch a succession of new syndicate issues, in a €3bn 5.65% 10-year OT in May 2013 and a €3bn tap of this issue in February 2014 following a second 5-year tap in January 2014 of €3.25bn of the Jun 2019 OT.
Additionally, IGCP, the Portuguese Debt Agency, took a number of decisive steps to regain full market access. Between December 2013 and May 2014, it conducted liability management exercises and bond repurchases in the secondary market, managing to buyback €2.8bn and extending €6.6bn of the 2014 and 2015 maturities (35% of the amount outstanding), smoothing the profile for future debt payments. It has also re-launched the OT auction programme in April 2014, complementing its sources of funding, and, crucially, it has built a substantial cash buffer of over €15bn that allows it to cover funding needs for about one year. These steps, together with successful benchmark issuance resumed in January 2013, have evidently contributed to putting Portugal back in the debt capital markets in a conclusive fashion.
Portuguese economy adjusts and the country exits the Troika’s program
This debt management process prepared the country to successfully exit the Troika’s financial assistance programme, which with the benefit of an outstanding tightening of sovereign spreads, enabled Portugal to officially opt for a clean exit in May 2014.
According to the Troika’s official statement after its twelfth review mission in May 2014, “the programme has put the Portuguese economy on a path towards sound public finances, financial stability and competitiveness. During the past three years, the external current account has moved from a substantial deficit into surplus, the budget deficit has been more than halved, and public debt sustainability has been maintained. There have been ambitious reforms across all the main sectors of the economy.”
The economy has significantly rebalanced both externally and internally, growth was reignited and aggregate debt is back on a sustainable path. Portugal’s return to the international capital markets is hence now complete.