Bloomberg News

Record Dollar Bond Sales Driven by October Rally: Poland Credit

November 02, 2011

Oct. 31 (Bloomberg) -- Poland’s dollar bonds are set for their biggest rally in 14 months, spurring record government borrowing as costs tumble.

Yields on Polish notes due in 2019 fell 47 basis points in October to 4.37 percent, the biggest monthly drop since August 2010, data compiled by Bloomberg show. The government’s $2 billion offering of 2022 dollar bonds on Oct. 27 brought this year’s total U.S.-currency sales to $4 billion, an all-time high, Finance Ministry data show. The debt was sold to yield 280 basis points over U.S. Treasuries, 30 less than this month’s international sale by Turkey, ranked six grades below Poland.

Investors bid for $8 billion of Poland’s new bonds after European leaders buoyed markets by increasing the euro region’s bailout fund and Prime Minister Donald Tusk’s re-elected government pledged spending cuts to trim the fiscal deficit, Finance Ministry data show. Europe remains on a “bumpy road” to recovery, Finance Minister Jacek Rostowski said a day after the debt sale to help fund the 2012 budget.

“Poland’s external funding needs for next year are not insignificant so pre-funding when market conditions allow makes sense,” Richard House, who helps manage $2.7 billion in emerging-market debt and currencies at Threadneedle Asset Management Ltd. in London, said in a phone interview Oct. 28. “At current spreads, Poland does offer value - especially when compared to Turkey.”

First Offering

Turkey became the first developing nation to sell new bonds in a month, issuing $1 billion of debt on Oct. 17 at 310 basis points over Treasuries after the Europe’s debt crisis spurred investors to shun riskier emerging-market assets in the region. Chile sold $1 billion 10-year bonds on Sept. 7 at a record-low 3.35 percent yield as the Andean nation’s economy grows at its fastest pace in more than a decade.

Turkey is rated B at S&P, the second-highest speculative grade status, while Poland has an A- rating, the fourth-lowest investment ranking, and Chile is rated A+.

The extra yield investors demand to hold Polish dollar bonds over U.S. Treasuries rose 3 basis point to 256 basis point today, according to JPMorgan Chase & Co. EMBI Global Index.

U.S. investors bought 60 percent of Poland’s dollar bond last week, while investors from Britain took 15 percent, Poland nine percent and other European countries 11 percent, according to a Finance Ministry statement on Oct. 27. Asset management companies purchased 76 percent of the issue, while 10 percent was bought by pension funds and insurers, the ministry said.

Foreign Debt

Poland previously sold dollar bonds in April and June, at spreads of 179 basis points and 170 basis points, raising a total of $2 billion of the debt due 2021. The yield on the 10- year bond was little changed at 4.83 percent as of 10:03 a.m. in Warsaw from 5.23 percent at close on the first day of trading April 16.

European leaders agreed last week to expand a rescue fund for indebted nations to 1 trillion euros ($1.4 trillion) and reached an accord with lenders on writedowns for Greek debt. Measures to halt the debt crisis also include recapitalization of European banks, a potentially bigger role for the International Monetary Fund, a commitment from Italy to do more to cut debt and a signal from leaders that the European Central Bank will maintain bond purchases in the secondary market.

“The timing of the sale was good, given the very positive sentiment after the European Union decisions,” said Viktor Szabo, a London-based portfolio manager at Aberdeen Asset Management, who helps manage $7 billion in emerging market debt. “The issue is expensive from the Polish point of view but the markets have been rather bumpy lately, so a premium is paid to be sure about the success of the issue.”

Default Swaps

Polish five-year credit default swaps rose 2 basis points to 222 basis points today. They fell 36 basis points on Oct. 27, the steepest decline in five months, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. Polish default swaps cost 55 basis points less than the average for countries in eastern Europe, the Middle East and Africa included in Markit iTraxx SovX CEEMEA Index, compared with an 84 basis-point discount a year ago.

The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.

“The cost of financing for most European countries has risen recently and Poland is no exception in this context due to its geographic proximity and economic links,” Deputy Finance Minister Dominik Radziwill said in an e-mailed response to questions from Bloomberg News on Oct. 28.

Worst Currency

The zloty weakened 0.2 percent to 4.3431 per euro today, paring its advance in October to 1.8 percent, the third-biggest advance in emerging markets after Brazilian real and Russian ruble. The currency lost 10 percent versus the euro in the third quarter, the most among the 177 currencies tracked by Bloomberg, and weakened 17 percent against the dollar.

Poland is already pre-financing next year’s spending after fulfilling its 2011 financing needs, Piotr Marczak, the head of the Finance Ministry’s public debt department, said in an e-mail on Oct. 28. Poland “took advantage of the significant improvement in market sentiment” after the EU deal to “accelerate the financing” of its budget shortfall, he said.

This year, Poland sold 350 million Swiss francs ($389 million) of bonds in February, 1 billion euros ($1.4 billion) of notes issued in January and a sale of 28 billion yen ($360 million) of debt. The government doesn’t plan further sales of foreign currency-denominated bonds this year, Radziwill said on Oct. 28 in an e-mailed response to questions from Bloomberg.

Hungry for Debt

An equivalent of $4.6 billion of foreign-currency denominated Polish bonds mature in 2012, starting with a 750 million euro ($1.06 billion) bond next March, according to data compiled by Bloomberg.

“In the past the Finance Ministry also took advantage of the weaker zloty to issue more in foreign currencies,” Mateusz Szczurek, chief economist for central and eastern Europe at Warsaw-based unit of ING Groep NV, said on Oct. 28. Last week’s sale was oversubscribed because “the market is hungry for debt issued by governments that remain credible,” he said.

Europe’s second aid package for Greece is a “step in the right direction but this is a step on a very bumpy road,” Finance Minister Rostowski said in an interview with Radio Zet on Oct. 28. “We’re not in the situation that this crisis is totally resolved” and “there are serious threats” remaining.

Tusk’s Budget Pledge

Prime Minister Tusk based his pledge to cut Poland’s budget gap below the 3 percent European Union target from a record 7.9 percent last year on the economy growing 4 percent in 2011. The International Monetary Fund predicts Polish economic expansion will slow to 3 percent because of the turmoil in the euro region, which buys 55 percent of the nation’s exports.

Poland’s government may do more to reduce the budget gap and debt than financial markets anticipate, Barclays Capital said, recommending investors sell its credit-default swaps.

“We remain confident about Poland’s fiscal adjustment path and think there is a chance that the government will surprise the markets by delivering more,” Daniel Hewitt, an analyst at Barclays in London, wrote in an e-mailed note on Oct. 28.

--With assistance from Piotr Skolimowski and Maciej Martewicz in Warsaw. Editors: Wojciech Moskwa, Stephen Kirkland.

To contact the reporters on this story: Pawel Kozlowski in Warsaw pkozlowski@bloomberg.net; Katya Andrusz in Warsaw at kandrusz@bloomberg.net

To contact the editor responsible for this story: Gavin Serkin at gserkin@bloomberg.net


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