Launching the first eurozone sovereign benchmark bond of 2015 with a record low yield confirmed that Belgium has overcome the anxious investor perceptions at the height of the 2011 crisis.

January is traditionally a busy time of year for the sovereign debt market and so it has proved in 2015. But that does not make it any easier for the first country to take the plunge. This year, Belgium took that risk, hitting the market with a 10-year benchmark on January 7.

The €5bn transaction was greeted with remarkable enthusiasm. With a coupon of just 0.8% and a yield of 0.88%, it obtained the tightest spread for a Belgian 10-year deal since 2008 and carried the lowest ever coupon for a 10-year European government benchmark deal.

That record has subsequently been broken by other sovereigns but even so, the issue is testament to Belgium’s recovery since the dark post-crisis days of 2010 and 2011.

“The perception with regard to our credit has really come a long way since 2011. Back then we were considered a semi-peripheral. Then we moved to semi-core and now, to many investors Belgium is a core Eurozone sovereign,” says Anne Leclercq, director of treasury and capital markets at the Belgian Debt Agency.

“In early 2011, our bonds were trading at a spread of 360 basis points [bps] over the 10-year German benchmark Bund. Even last year, the spread was 82bps. But today we are just 28bps over the 10-year Bund,” she adds.

Not only has the spread reduced dramatically but the absolute coupon paid has fallen significantly too, as European interest rates have reached all-time lows. “In 2011, our bonds were yielding near 6%. Now the 10-year yield is at 0.73%,” says Ms Leclercq.

Domestic reforms

Belgium has benefited from a general improvement in sentiment towards European sovereigns but the country has also taken several specific steps to gain investor confidence and support. First, it now has a government, having spent more than a year forming one, following a difficult election in 2010. Once the government was in place, it began to adopt a number of measures to improve the public finances and reduce its budget deficit. The Treasury team also takes its capital markets responsibilities extremely seriously.

“We have 14 primary dealers and we evaluate them on a daily basis on their performance in the primary and secondary markets, as well as their market-making and the quality of the advice they give,” says Ms Leclercq.

“We also make sure that we are kept informed about investor sentiment towards our credit and we see about 250 investors every year around the world. We put a lot of effort into investor relations and communications.”

As part of this commitment, Ms Leclercq and her team have expanded into new markets and maturities in recent years. In 2011, the sovereign moved into the German Schuldshein sector, where bilateral loans are arranged with local insurers and pension funds.

“As a medium-sized issuer you have to be innovative and introduce the credit with appropriate instruments. These offer investors the chance to become acquainted with the credit and increase their interest in the standard product. However this does not distract from our main objective with regard to our financing strategy: offering the market highly liquid benchmark bonds. In a world of super-low yields and increased volatility, liquidity is the distinctive feature of sovereign debt,” says Ms Leclercq.

Allaying fears

With that in mind, the Belgian Debt Agency was keen to issue a large, liquid transaction early in the new year. Markets had ended 2014 on a high note so there was some concern that the mood could change when investors returned after the Christmas break. Equity markets were choppy too, which could also have adversely affected sentiment.

However, fixed-income investors appeared to shrug off such worries, conditions were strong from the beginning of the year and the Belgians decided to act. Barclays, BNP Paribas Fortis, ING and Natixis were selected as bookrunners and on Tuesday, January 6, the market was informed that Belgium intended to issue a benchmark deal the following day, the first such transaction of 2015.

“That kind of news can often lead to spreads widening in the secondary market but they actually tightened slightly, which we felt boded well for us,” says Ms Leclercq.

Initial pricing thoughts were released early on the morning of January 7. Investors were told this would be a benchmark transaction and a price range of 10bps to 13bps over mid-swaps was indicated. Interest was keen and more than €4.5bn of orders had been received by 10:15 CET. Within two hours, the book had reached more than €10bn and the spread was set at 11bps. The books closed at 12:30 CET, with total orders of more than €11bn and orders from over 160 investors.

“We were very happy with such a large order book and with the quality of the investors, which included a number of central banks. We were considering a deal of between €3bn and €5bn so we were really pleased to be able to issue a €5bn deal – and at an extremely keen price,” says Ms Leclercq.

Looking ahead, Belgium expects to issue two more benchmarks this year. Having worked hard to extend the average maturity of its long-term issuance, Ms Leclercq expects both the forthcoming transactions to be above 10 years.

“One will definitely be above 10 years: in the 15- to 20-year sector. For the third benchmark, we will be investigating and monitoring the feasibility of an ultra-long benchmark,” she says.


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