Despite anxieties in the market over events in Ukraine, a Romanian bond issue was so successful it helped reprice the sovereign yield curve and prompted ratings upgrades.

In 2013, Romania was the best-performing economy in Europe, with economic growth of 3.5%. Momentum continued in 2014 and the economy of this small central European state expanded a further 3.8% year on year during the first three months of the year.

Against this backdrop, the government was keen to front-load its 2014 financing needs and test the market with new, longer dated issuance. In January, the sovereign thrust into the dollar market, raising $2bn, divided equally between a 10-year issue and a 30-year transaction.

“This was the first time Romania had ever tapped the 30-year market but the deal was very successful. It was over-subscribed six times so lots of US investors were left unsatisfied and we saw considerable demand from European investors too,” says Stefan Nanu, general director at Romania's Ministry of Finance.

“The next logical step was to issue in euros,” he adds.

Romania’s last euro benchmark – in 2013 – had a seven-year term. This time, the country was keen to secure 10-year money. But the sovereign was rated Baa3 with a negative outlook by Moody’s and BB+ – below investment grade – by Standard & Poor’s. Political risk was also in the air, as the temperature rose in Ukraine and Russian intervention escalated. In some respects, however, this worked in Romania’s favour.

“Our total trade with Ukraine is less than 5% and we import less than 20% of our gas from Russia. In fact, even though the market was nervous about Ukraine, there was some re-allocation within central and eastern Europe to countries with good fundamentals and limited exposure to Ukraine and Russia,” says Mr Nanu.

Primary dealer preference

Nonetheless, back in early 2014, there was no knowing if the situation would deteriorate. Romania was keen to progress and in March chose four lead managers to run its euro transaction – Citi, ING, Société Générale and UniCredit.

“We had a particular strategy for choosing our lead managers, which we have discussed internally with our minister for budget and externally with our primary dealers and other financial institutions for some time. We are keen to develop our domestic market so we deliberately chose four of our top-performing primary dealers to lead this deal,” says Mr Nanu.

Romania has nine primary dealers altogether, and he says the finance ministry was determined to select its bookrunners from this group, “rather than pick banks which only come to us a couple of times a year to bid for international transactions”.

“Our strategy is to create a good requirements/reward balance for our primary dealership system in order to support us in achieving one of our most important debt management objectives: developing the government securities market. We hope we'll attract other big foreign names in this group soon,” says Mr Nanu.

Once the lead managers had been chosen, it was relatively straightforward to complete the necessary documentation using information from the US prospectus issued just a few months previously. Then Mr Nanu and the bankers began monitoring the market intensely.

“We thought there would be a good window after the IMF/World Bank spring meeting and before Easter,” says Mr Nanu.

Good timing

In the days leading up to Good Friday on April 18, market sentiment was strong and the swap curve was moving in Romania’s favour. The country decided to act and at 11.30 on April 15, it announced a 10-year euro transaction with initial price thoughts of 225 basis points (bps) over mid-swaps.

“On that day, swap rates fell 4bps to 5bps and conditions were good so we decided we had to do the deal there and then. We wanted to get the funding done rather than remain exposed to market movement, particularly as the Ukraine situation was so unstable,” says Mr Nanu.

The decision was spot-on. The order book reached almost €4bn within two hours, allowing the lead banks to give pricing guidance of 200bps to 220bps. Demand continued to build and at 14.30, Romania was able to announce a €1.25bn transaction with a coupon of 3.625%, equivalent to a spread of just 200bps.

“We actually achieved a negative new issue premium, which is highly unusual. We were very happy with the process. In fact, the deal was so successful that our whole yield curve was repriced on the back of it,” says Mr Nanu.

Positive sentiment towards Romania continued even after the deal was priced. In the days after the issue, the spread narrowed to about 170bps; in early May, Moody’s removed its negative outlook and a week later, Standard & Poor’s upgraded the sovereign to BBB-, investment grade. “This will allow us to be bought by a larger group of institutional investors so it is very good news,” says Mr Nanu.

The euro transaction completed Romania’s funding needs for 2014 but the borrower may decide to pre-fund 2015 if conditions continue to be favourable. Mr Nanu acknowledges that the treasury is open to a potential tap if terms are good and it makes financial sense.

In the meantime, he is keen to expand Romania’s investor universe. Armed with the recent credit rating upgrades, the sovereign is taking its lead managers on a non-deal roadshow to Asia and the Middle East. “We like to go on roadshows after doing a deal and use them to reach new regions and investors,” says Mr Nanu.

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