Retail investors lead Portugal back to market

When Standard & Poor’s (S&P) raised Portugal’s credit rating outlook from negative to stable in March 2013, the decision – which in happier times would be have been confined to the business news – made front-page headlines in the country. Prime minister Pedro Passos Coelho described it as a “gesture of reward for the enormous sacrifices” his government’s austerity measures have forced the Portuguese people to make.

Although S&P maintained Portugal’s long-term sovereign debt rating at BB, two notches below investment grade, the fuss was understandable. According to the headlines, it was the first time a credit rating agency had changed its assessment of Portugal in a positive direction for 14 years.

Change in sentiment

S&P’s upgrade confirmed a change in sentiment that has been making an impact on capital markets since mid-2012. Over that period, investor perceptions of the diminishing risk of peripheral eurozone countries defaulting on their sovereign debt has seen the spread between benchmark Portuguese 10-year government bonds and the German bund fall by some 500 basis points. After S&P changed its outlook, Portugal’s 10-year bond yields enjoyed their biggest weekly drop in two months to just more than 6%. The announcement even helped lift the euro slightly.

“There has been a notable improvement in sentiment since the second half of 2012,” says Jorge Cardoso, chief executive of Caixa-Banco de Investimento (CaixaBI), the investment banking arm of state-owned Caixa Geral de Depósitos (CGD), Portugal’s largest financial group by assets. “The banking sector has begun healing its wounds and is now supplying credit to the economy in a way [that was not seen] in 2012. This has introduced an element of hope that has opened the way for good, medium-sized companies, as well the big corporate groups, to raise funds through structured financial operations.”

Back to market

Fernando Ulrich, chief executive of Banco BPI, Portugal’s third largest listed bank, notes that it was the domestic market for senior corporate debt that led the way, with eight companies raising more than €2bn from Portuguese retail investors last year. In the first issue of 2012, Semapa, a leading Portuguese industrial group, raised €300m in March, offering three-year bonds at a yield of 6.85%. Similar domestic issues followed, building up to September when Energias de Portugal (EDP), the country’s dominant power utility, made an international breakthrough, issuing €750m in five-year Eurobonds at a yield of 5.88%.

The deal not only broke a 20-month deadlock as Portugal’s first benchmark corporate issue since Portugal Telecom (PT) raised €600m in January 2011 – five months before the government requested a bailout – but also attracted orders worth €7.5bn. Within two weeks of EDP’s success, Brisa, Portugal’s leading motorway toll operator, and PT had made similar issues of €300m and €750m, respectively.

A month later, Banco Espírito Santo (BES), Portugal’s largest listed bank by market capitalisation, became the first Portuguese financial group to make a senior bond issue in more than two years, raising €750m from a three-year bond in what it described as a “landmark transaction”. The bank initially offered a yield of 6.25%, which was revised to 5.875% as the order book swelled to more than €2.7bn, with international investors predominant.

BES acknowledged the pricing was high. But Isabel Almeida, the bank’s head of finance and markets, says the issue “not only proves that BES has access to the capital markets, but also sends a signal to the rating agencies and the Troika [Portugal’s international official lenders] that investors have faith in Portuguese banks”.

In November, CGD followed with a €500m three-year senior bond issue priced at 5.75%, which attracted orders worth more than €1.75bn. BES has followed up this year with another senior unsecured debt issue of €500m and CGD with a €750m covered bond, priced at yields of 4.9% and 3.835%, respectively. Redes Energéticas Nacionais (REN), the national grid operator, also tapped the international market with a five-year bond issue in January.

Some banks, however, say the cost of tapping capital markets is still too high. “BPI has received proposals from international investment banks to raise senior debt,” says Mr Ulrich of BPI. “But the bank's liquidity situation is quite strong, and at present yields we think it is too expensive to raise funds in this way.”

The European Central Bank’s policy of supplying cheap three-year long-term refinancing operations (LTRO) to restore confidence in the eurozone’s financial system has effectively resolved the liquidity problems of Portuguese lenders for the medium term. However, Mr Cardoso of CaixaBI says a reduction in the sector’s exposure to LTRO funds from a peak of €60.5bn in June 2012 to €49.7bn in January this year reflects an improvement in banks’ funding positions, which has been achieved partly through bond issues and the deleveraging of their balance sheets.

Sovereign return

The Eurobond issues by BES, CGD and Portuguese utilities helped pave the way for the return of the Portuguese Republic to the market in January for the first time since the country’s bailout in May 2011, in what was seen as a landmark deal for the eurozone’s struggling periphery. Ricardo Espírito Santo Salgado, chief executive of BES, said the issues in late 2012 helped create “the necessary conditions for Portugal to return to the market”.

Following a similar path to Ireland, Portugal raised €2.5bn through a 'syndicated tap', increasing the size of an existing €6bn bond maturing in 2017 in an offer managed by Barclays, BES, Deutsche Bank and Morgan Stanley. The bond deal, which attracted demand in excess of €4.4bn, has increased confidence that Portugal will be able to meet its commitment to resume issuance of long-term government debt by September this year, ahead of a €5.8bn bond repayment that is due in that month.

Sell-off programme

Portugal’s financial rescue programme has also kept investment banks busy with a series of large-scale privatisations. Sales of state-owned assets since December 2011, including important stakes in EDP and REN to Chinese groups, have already lifted revenue to more than the €5.5bn Portugal is required to raise from privatisations during its three-year adjustment programme, which is scheduled to end in mid-2014. The latest large transaction was the sale in December of ANA-Aeroportos de Portugal, the national airports operator, to French construction company Vinci for €3.1bn.

Plans to privatise TAP-Air Portugal, the national airline, were postponed last year after several potential buyers dropped out, leaving a single bidder that did not satisfy the government’s requirements. However, several other state-owned companies are lined up for sale this year, including the post office Correios de Portugal and a rail cargo company, CP Carga.

A strategic plan for the water sector, which envisages the sale or concession of the state’s waste management business, is in preparation and consideration is being given to the sale or concession of one of two state-owned television channels. A process is also under way to sell CGD’s insurance arm, Caixa Seguros.

The accumulated expertise of Portuguese investment banks in project finance, public-private partnerships and privatisations – which began in Portugal as early as the late 1980s – is standing them in good stead in fast-growing overseas markets. BPI has specialised teams working in Mozambique and Angola and has set up a brokerage in Johannesburg that provides research on companies in sub-Saharan Africa.

CaixaBI, which hopes to open a branch in Mozambique soon, is focusing on infrastructure financing in Brazil. “There is a great need for ports, roads, sewage plants and other infrastructure where there are good returns to be made,” says Mr Cardoso. “Given our ties of history, language and culture, Portuguese banks are particularly well positioned to win important mandates in rapidly developing economies such as Brazil, Angola and Mozambique.”