Austerity plans are rarely good news for capital markets. But one item in the four-year package of public spending cuts and tax measures announced by the Portuguese government in March has helped sugar the pill for the country's investment bankers: a €6bn privatisation programme.
"Privatisations combined with a number of robust companies actively pursuing opportunities to finance themselves could see the beginning of a new cycle for the equity market," says Jorge Freire Cardoso, an executive board member of Caixa-Banco de Investimento, the investment arm of state-owned Caixa Geral de Dépositos (CGD).
Companies earmarked for privatisation include the state's remaining holdings in Energias de Portugal (EDP), the country's dominant power utility Galp Energia, a prominent oil and gas group and Redes Energéticas Nacionais, the national grid operator. Together, the government estimates, these three offerings alone could raise half its €6bn target.
As listed companies, they would also be the easiest operations to put into place, says Mr Cardoso, with EDP, in particular, benefiting from a strong investor base and a liquid stock. One or two of these offerings may be feasible this year, he says, but other firms listed for sale will inevitability take longer to prepare and some will require restructuring.
The list includes Aeroportos de Portugal, the national airports authority, expected to be sold as part of the concession for a new Lisbon airport; TAP-Air Portugal, the state airline; and Caixa Seguros e Saúde, the CGD group's insurer and healthcare provider. State-owned holdings in 32 other companies, from defence software to mineral water and ship repair, are estimated to be worth about €457m. Most are expected to be sold to trade investors.
Best offer
These new offerings will certainly be welcomed by an equity market that, despite a 2009 gain of more than 33% in the PSI-20, Lisbon's main share index, has not seen any primary market operations (apart from rights issues) since the end of 2007 - with the notable exception of the €1.6bn initial public offering (IPO) of EDP Renováveis, EDP's renewable energy arm utility, which was Europe's biggest IPO in 2008. The highly successful flotation, of which CaixaBI was one of six joint global co-ordinators and bookrunners, took place in what Mr Cardoso calls a 15-day "miracle window" shortly before the collapse of Lehman Brothers.
Primary market deals in 2009 were dominated by financial sector rights issues as Portuguese banks raised funds, often at large discounts, to meet their 8% minimum capital requirement under Basel II, the biggest being a €1.2bn capital increase by Banco Espírito Santo (BES). "Portuguese banks have had no difficulties in placing issues and are successfully managing their capital base," says Nuno Teixeira, vice-president and head of capital markets at Banif Investment Bank. "The leading banks are now ahead of their funding needs and comfortable in their cash positions, making it unlikely that we will see any further rights issues this year."
Even when funding markets are effectively closed, Portuguese banks can readily fund themselves from their retail networks for periods of three to six months, says Mr Teixeira. "Portugal has a very sophisticated investor base and banks further improved their networks to fund themselves when the markets were struggling in the first half of 2009," he says. "It's a highly competitive market but banks can rely on retail investors for relatively short periods." This has generally been the case since mid-January and the beginning of the Greek debt crisis.
Banks are also using covered bond issues to fund themselves as spreads for Portuguese institutions are typically only a few basis points (bps) higher than those paid by UK, French or German banks, whereas the differential is much greater for senior debt. The same is true for mortgage-backed securities - although the market is currently closed - given it is the pool of assets themselves rather than the issuing bank that is rated. Most mid-sized Portuguese banks finance themselves from their retail and private banking networks, perhaps tapping the market once a year with a covered bond issue.
A borrower's market
Although volatility and risk aversion remain relatively high, equity capital markets are gradually stabilising, says Mr Cardoso, raising the prospect of primary corporate issues. "A number of interesting industrials and other companies are actively considering flotations," he says. "Some began commissioning IPOs in the summer of 2007 but had to withdraw when the market deteriorated. They now want to expand their capital base to take advantage of opportunities for consolidation or internationalisation."
Internationalisation for Portuguese companies often means moving into the high-growth markets of Brazil, Angola and, at a more incipient level, Mozambique - all Portuguese-speaking countries with strong cultural and historical ties to Portugal. Mr Teixeira believes some Portuguese companies seeking to expand in countries such as Brazil or Poland will opt for primary offerings in the local market. "Selling a Brazilian story is much easier," he says. "There is a huge appetite for them. Not many people want to hear about Iberian equities at the moment."
Global PFI/PPP project finance loans - 2009
Project finance loans mandated arranger (Portugal 2009)
Eyes on Brazil
Brazil, which absorbed R45.75bn ($26.06bn) in new share issues last year, is also proving a strong growth market for Portuguese banks. BES has a 7% shareholding in Brazil's Bradesco bank and operates its own investment bank and brokerage house in Brazil. CGD last year launched Banco Caixa Geral-Brasil. Both banks participated in the R$13.2bn issue of new shares for Banco Santander (Brazil), one of the world's biggest offerings last year. Itaú Unibanco, Brazil's largest bank, is one of Banco Português de Investimento's leading shareholders with 15%.
Portugal is similarly an important platform for Brazilian companies seeking to raise senior and subordinated debt in Europe, says Almir Vignoto, chief executive of Lisbon-based Banco Itaú Europa. "The number of Brazilian issues in Europe has grown substantially this year," he says. "The range of companies in the market is becoming increasingly diversified and most offerings are highly oversubscribed." As a result, Itaú's fee revenue for placing Brazilian corporate paper in Europe and the US was greater in the first three months of this year than for the whole of 2009.
Placing secondary corporate issues has become "very much a borrower's market", according to Mr Vignoto. "Well-reputed borrowers can cherry-pick investors to obtain a desired level of diversification and the banking partners of their choice," he says. "Issues of €500m, which last year would typically attract books of €800m to €1bn, are now five or six times oversubscribed." Institutional investors today account for about two-thirds of corporate debt purchases and banks only a third, he adds - a reversal of pre-crisis market shares.
Companies are also prepaying earlier issues and refinancing themselves at lower spreads, says Mr Vignoto, often at levels of 30bps above US Treasury bonds, compared with 80bps previously. At the same time, he adds, corporate ratings are now only one among several criteria banks and other institutions use to select capital market investments. "Companies with identical ratings issuing similar amounts for the same period may have completely different funding costs," he says. "Credit quality and the prospects for the economy and sector where companies operate are now as important as ratings."
In Portugal, companies tend to opt for investment-grade ratings or none at all. "There are no Portuguese companies with high-yield, speculative ratings below BBB-," says Mr Teixeira. "Most companies in this bracket don't have the size to tap international markets and can fund themselves more cheaply through the domestic financial system. Portuguese banks are willing to finance them at aggressive rates as part of an overall banking relationship." However, Mr Teixeira believes banks will have to begin assigning their own ratings to these companies and allocate the requisite capital as a result of Basel III, which will restrict lending to non-rated companies.
Pioneering spirit
Portugal continues to punch considerably above its weight in project finance, ranking among the 15 most active countries in the sector worldwide. "Portuguese banks are well positioned in the industry, particularly in the area of public-private partnerships [PPPs]," says Sérgio Monteiro, the director of CaixaBI's project finance division. "The Lisbon government is launching a large number of infrastructure deals and the renewable energy sector is also very active."
State-intervention in many of the global banks that previously underwrote big projects has caused them to withdraw from the market, creating opportunities from experienced smaller banks such as CaixaBI. "We have begun underwriting large deals with big tickets when the right risk matrix is in place," says Mr Monteiro. "We have so far concentrated on Portugal, where the market has been very active, but we are also looking for opportunities abroad."
Portugal was an early pioneer of project finance and now benefits from a modern and extensive motorway system as a result. The government has cancelled four road projects as part of its austerity programme and postponed part of a high-speed train project. But a new Lisbon airport and high-speed rail link to Madrid are going ahead as planned. As well as acting as a financial adviser and mandated lead arranger for these projects, CaixaBI is also participating as an equity investor in consortia competing for both contracts. "After working on motorway PPPs for 10 years, we believe we have the expertise to add an important element of innovation to these deals," says Mr Monteiro.
