The summer of 2010 was undoubtedly a challenging period for sovereign debt issuance. So when the Czech Republic launched a €2bn, 10-year bond just days after the country's summer break, it was by no means clear that the deal would be a success.
The Czech Republic's finance minister, Miroslav Kalousek, announced the transaction on Friday, September 3 and books opened officially the following Monday, making the Czech Republic the first issuer from central and eastern Europe to tap the market in September.
The timing was not ideal. Europe's peripheral sovereigns were struggling, and, in the very week the Czechs came to market, spreads widened considerably on Irish and Portuguese debt.
But the Czech transaction highlighted a major development in the euromarket: investors are doing their own credit analysis and forming their own judgements like never before.
A change of sentiment
"It was apparent that the market took into account the creditworthiness of our country on a fundamental basis. In the past, before the financial crisis, sentiment was driven by our credit rating and the fact that we were not part of the eurozone," says Dr Petr Pavelek, director at the country's Ministry of Finance.
"We could not achieve better pricing than countries in the eurozone, even if our fiscal position was more robust than theirs. Now, the situation is very different," he adds.
So different that the Czech deal attracted more than €5bn of demand and the spread was reduced to 105 basis points over mid-swaps, compared to initial guidance of mid-swaps plus 115 to 120 basis points. The eventual coupon was 3.625%, the lowest coupon in the history of the Czech Republic.
Some bankers criticised the pricing, suggesting the extent of demand proved lead managers Barclays Capital, Deutsche and Erste Group should have been more aggressive. But Mr Pavelek disagrees.
"We were extremely pleased with the level of demand, as well as the final spread and yields on the bonds," he says. "In the week after the transaction, the spread came in but it was not significantly tighter, so I do not believe we have over-paid. This is confirmed by the fact that the bond is currently trading close to the new issue level."
The Czech Republic had been pondering a Eurobond transaction for months. Book-runners were appointed in January but volatile market conditions during the first few months of the year kept the borrower at home. In July, however, a new government was elected, including Mr Kalousek, a finance minister with a reformist agenda and a desire to keep in closer touch with the markets than his predecessor.
By mid-August, the Czech Republic had decided to launch a €2bn transaction after the summer break, to complement the domestic funding programme.
"Our borrowing needs are fairly low compared to other European countries but we like to maintain a presence in the euromarket for strategic reasons," says Mr Pavelek.
Books Oversubscribed
Investors were clearly delighted by the Czech decision. The books were open for just two hours - from 9.30am to 11.30am - pricing guidance was revised down twice and the deal was still more than twice oversubscribed. Fewer than 10% of the bonds ended up in the hands of domestic institutions.
"Investor demand was well diversified across geographies, including many new investors as well as many familiar names. In particular, we were glad to see French, Italian, UK and Asian investors come in to this transaction in meaningful amounts by comparison with past deals," says Mr Pavelek.
Geographical diversity was achieved despite intense demand from within the Czech Republic. "We had to manage the issue very carefully, because there was significant demand from Czech investors. But one of our main objectives was to broaden our investor profile, particularly with overseas institutions, so we made the decision to cut back domestic allocations substantially," says Mr Pavelek.
The profile-raising exercise worked even better than the Czech Ministry of Finance could have hoped. Two days after the bond deal, on September 8, the Czech Republic held a three-year domestic auction. A week later, a 10-year auction was conducted. The three-year auction was almost entirely snapped up by foreign banks, while the 10-year funding was split evenly between Czech and non-Czech institutions.
The Czech Republic boasts a strong economy, a robust banking system, a credible monetary policy and a new coalition government determined to stabilise public finances through structural reforms and deliver a debt-to-gross domestic product ratio of less than 3% by 2013. For many European countries today, such metrics would be enviable, and for many investors, the Czech fundamentals put the country on a firmer footing than a host of eurozone nations. In December 2010, Mr Kalousek will be putting together a funding programme for 2011. It will almost unquestionably include at least one large, international transaction.
