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Czech sovereign deal shows appetite for peripheral Europe

The Czech Republic has proved that the Euromarket is not exclusive to core eurozone sovereigns by pricing the tightest deal in central and eastern Europe in February 2012.
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Czech sovereign deal shows appetite for peripheral Europe

The first quarter of 2012 saw a distinct improvement in sentiment towards European sovereign borrowers. But, even though conditions were easier than they had been, the market remained volatile and success could not be guaranteed for anyone but the highest-quality sovereigns.

The Czech Republic, rated A1/AA-/A+, is certainly well-regarded, but it still ranks well below Eurozone favourites such as Germany, the Netherlands or Finland. Added to which, it sits outside the eurozone and had not tapped the Euromarket since September 2010. “We did not issue any foreign-denominated paper in 2011. We were ready to issue in euros but potential pricing did not develop in the way that we wanted.” says Jan Gregor, the country’s deputy minister of finance.

In 2012, however, as the environment became more benign, the Czechs began to seriously consider a euro-denominated deal. “In the first quarter of 2012, the market seemed quite positive. As interest was focused on five-year transactions at the beginning of the year, we were happy to have printed a 10-year deal,” says Mr Gregor.

With this in mind, as well as the fragile environment and the country’s 17-month absence from the market, the Czechs decided to undertake a week-long roadshow from February 13 to February 17. The roadshow focused exclusively on European investors and almost 50 institutions were seen, through both one-on-one meetings and group sessions.

“I was really taken aback by the positive response that we received. I was appointed deputy minister of finance just a few days before our last issue in September 2010, and we did not have a roadshow at that time, so this was my first one and I expected lots of tough questions but pretty much all the feedback we got was positive,” says Mr Gregor.

Good fiscal story

Investor reactions were almost certainly influenced by the Czech government’s tough fiscal stance and consequent stable credit rating. “We have a strong fiscal consolidation programme. The government is very strict – we are trying to bring the public deficit to below 3% of gross domestic product by 2013 and [we are] planning to achieve a balanced budget by 2016, depending on macroeconomic conditions,” says Mr Gregor.

Investor questions focused on the economic outlook for the Czech Republic, its external debt position, the stability of its banking sector and the country’s main trading partners. “These were natural questions but the entire roadshow was a reassuring experience for us and confirmed that demand was there,” he says.

The country benefits from a strong domestic market, including a burgeoning retail investment sector, so it was not relying solely on the Euromarket for funds. Nonetheless, the sovereign was keen to issue foreign debt. “You never know if domestic demand will persist so we want to build a long-term and continuous presence in the Euromarket and develop long-term relationships with investors. If we only tap the market on an occasional basis, we will have to pay a higher new-issue premium each time we come so it is our intention to be regular borrowers,” says Mr Gregor.

But the Czech Republic was not prepared to launch a transaction unless it could obtain the funding maturity it required. “We were very keen to secure 10-year money. Our domestic investors had shown a preference for shorter-dated paper, so we wanted to achieve a balance of maturities. If the Euromarket had been unreceptive to 10-year paper, we would have just stayed away,” says Mr Gregor.

Right time, right investors

The market showed no such reluctance and on February 20, the launch process started, just hours ahead of a key meeting of European leaders to debate the Greek financial crisis. “We wanted to complete the deal before the outcome of the meeting was known. We knew that if no agreement was reached on the Greek crisis, it could have a very negative effect on market sentiment,” says Mr Gregor.

Bookrunners were Barclays Capital, Česká spořitelna (the local subsidiary of Erste Group), Société Générale and UniCredit, chosen largely for their performance as primary dealers. At 10.15 Central European Time (CET) on February 20, they started sounding out investors for a deal of between €1bn and €2bn with a spread over mid-swaps of about 170 basis points (bps). Interest was substantial and at 13.10 CET, the books officially opened, by which time pricing guidance had already tightened to a spread of between 160bps and 165bps.

The investor response was extremely supportive. Within 35 minutes, orders amounting to €3.5bn had been received from more than 190 accounts. The books closed on a €2bn transaction with a coupon of 3.875% or 160bps over mid-swaps, the lowest in the central and eastern European region. The issue premium – 5bps to 7bps – was also the lowest seen in the euro market for a sovereign borrower this year. The Czechs were also pleased with the breadth of demand.

“We had strong demand not just from our traditional investors in Germany and Austria but also from France, the Benelux region, Switzerland, the UK and Asia. We benefited from a good window of opportunity to get a yield of below 4%. We want to return to the market in 2013,” says Mr Gregor.

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