Portugal to Sell Bonds in Dollars to Fund Budget Gap (Update3)
March 18, 2010, 11:48 AM EDT(Adds increased size in second paragraph.)
By Sonja Cheung and Caroline Hyde
March 18 (Bloomberg) -- Portugal is selling bonds in dollars for the first time since November as part of a plan to issue 25 percent more debt this year to fund its budget deficit.
The nation is selling $1.25 billion of five-year bonds, up from an initial $1 billion, that will yield 97 basis points over the benchmark swap rate, according to a banker involved in the deal who declined to be identified. The debt was first offered at a spread of 100 basis points, or 1 percentage point.
Portugal plans to sell about 20 billion euros ($27 billion) of debt in 2010, the government said last month, up from 16 billion euros in 2009. The government, whose bonds tumbled as Greece’s fiscal crisis increased scrutiny of European economies, has pledged to reduce its budget gap of 9.3 percent of gross domestic product by more than half in three years.
“It’s not surprising that Portugal is coming to the market now as many European sovereigns tend to borrow more in the first half of the year,” said Ciaran O’Hagan, a fixed-income strategist at Societe Generale SA in Paris. “Portugal will likely achieve a better rate of funding in dollars so both the government and taxpayers are getting a better deal.”
The spread on the new bonds gives an overall yield of 3.61 percent, according to data compiled by Bloomberg. That compares with the 3.33 percent yield offered by Portugal’s benchmark five-year issue in euros.
Cheap for Portugal
The pricing of the new bonds is attractive for Portugal, which should be paying about 125 basis points over swaps for five-year money, according to an estimate by London-based UniCredit SpA analyst Chiara Cremonesi.
By issuing in dollars, European governments can reduce the cost of euro-denominated interest payments, as measured by the five-year euro basis swap. The basis swap is at 20 basis points less than the euro interbank offered rate, compared with 15 basis points less than Euribor in January, according to Bloomberg data.
Relative funding costs compared with a euro-denominated bond sale were “favorable,” said Alberto Soares, chairman of Portugal’s government debt agency in Lisbon.
“It’s been our plan to issue foreign-currency bonds, and it’s just a matter of identifying the window of opportunity,” Soares said. “We may consider issuing bonds in other currencies, but there’s no concrete plan on that for now.”
Crisis in Europe
Portugal is one of the southern European countries whose markets were roiled by concern Greece would fail to finance a budget gap of 12.7 percent of GDP, the region’s largest. A European Union bailout for Greece was said to be in jeopardy today as Prime Minister George Papandreou called on his peers to set up an emergency financial-aid mechanism, and after German officials raised the prospect the country may have to turn to the International Monetary Fund.
Portugal’s benchmark 10-year bond dropped during the worst of the Greek debt crisis, pushing the yield to as high as 4.69 percent on Feb. 16, against 4.25 percent now.
Portugal last sold dollar debt in November when it raised $100 million from floating-rate notes due in 2014, Bloomberg data show. The country has $453 million of dollar-denominated securities outstanding.
“The sale of dollar bonds offers Portugal some cost saving benefit and a new investor base,” said David Keeble, head of fixed-income strategy at Credit Agricole CIB.
The cost of insuring Portugal’s debt from default rose as the country sought to issue more bonds. Credit-default swaps on the nation climbed 3 basis points to a two-week high of 118, according to CMA DataVision prices.
Credit-default swaps are derivatives used to hedge against or speculate on countries’ or companies’ creditworthiness. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent if a borrower fails to adhere to its debt commitments.
Deutsche Bank AG, Goldman Sachs Group Inc., HSBC Holdings Plc and Morgan Stanley are managing the sale of bonds, the banker familiar with the terms said.
--With assistance by Anchalee Worrachate in London and Esteban Duarte in Madrid. Editors: Paul Armstrong, Andrew Reierson
To contact the reporter on this story: Sonja Cheung in London at scheung58@bloomberg.net
To contact the editor responsible for this story: Paul Armstrong at Parmstrong10@bloomberg.net
