On May 17, 2014, Portugal officially exited the Troika’s financial assistance programme without any credit lines or financial support from foreign institutions. The date also marks the country’s full return to the international capital markets, a process made of decisive steps that had begun three years before with the arrival of the Troika of international lenders: the International Monetary Fund (IMF), the European Commission (EC) and the European Central Bank (ECB).
The global economic crisis that is now abating, with progressive recoveries projected for Europe and the US, had its first symptoms in America in the second half of 2007, with the subprime lending and securitisation debacle, which gained momentum when Lehman Brothers went bankrupt in September 2008. By May of 2010, a new chapter of the crisis affecting European sovereign debt could no longer be ignored when Greece asked for financial assistance from the Troika after being shunned from market funding. A similar request came from Ireland in November 2010 and, by April 2011, Portugal followed suit.
Even after the Irish requested financial assistance, Portuguese issuers continued to benefit from access to international funding markets. As late as February 2011, the Republic of Portugal came out with a €3.5bn, five-year Obrigações do Tesouro (OT), joint-led by Caixa – Banco de Investimento (CaixaBI). This was the last Portuguese institutional issue before intensifying investor aversion to peripheral debt forced Portugal to request its own financial assistance programme from the Troika, shutting international capital markets for Portuguese issuers, a hiatus that lasted nearly two years.
Notable Portuguese corporate Issuances interest rate behaviour (percentage growth)
Portugal Telecom, €750m
Portugal Telecom, €1bn
PORTUceL, € 350M
At that time and as part of the Troika’s involvement, Portugal would begin an economic adjustment programme aimed at restoring external competitiveness and financial stability, placing public finances on a sustainable path through internal devaluation, institutional and market reforms and severe austerity measures.
Corporates open the order book
It was only in September of 2012, 18 months into the country’s adjustment programme, that a dramatic improvement in investors’ sentiment towards the periphery, coupled with progress made in the programme, allowed for a Portuguese corporate, the utility EDP, to return to the wholesale debt capital markets with a €750m, 5.75 percent five-year transaction, attracting an order book oversubscribed by 10 times.
Within one month, two other Portuguese corporates – BCR, the toll-road concessionaire and Portugal Telecom – had also made their way into the capital markets, with a €300m, 6.875 percent senior secured deal and a €750m, 5.875 percent senior transaction respectively, both with a 5.5-year tenor and brought jointly by CaixaBI. In the months that followed, two of the top banks in the country, BES and CGD, had also made their return to international debt markets with four benchmark issues in the three-to-five-year maturity range, of which two were assisted by CaixaBI as joint bookrunner, before the Republic succeeded in breaking its almost two-year absence from syndicate issuance in January 2013, with a €2.5bn tap of the Oct 2017 OT.
Late 2012 thus saw the beginning of Portuguese issuers progressively returning to international debt capital markets, a remarkable development given the then still uncertain fallout of the Portuguese rescue programme. Save for a brief blip in the summer of 2013 due to short-lived political tensions at home, this process would only continue.
Regular debt issuance is restored
Positive investor sentiment towards peripheral countries increased during the remainder of 2013, a trend reflected in Portugal which experienced solid programme implementation and continuous fiscal discipline, together with growing signs of economic turnaround. Driven by an exceptional exports performance, the country posted the first quarterly GDP growth in the second quarter, the highest in the eurozone – at 1.1 percent – ending a slump that lasted 10 quarters.
Capitalising on swelling investor participation in Portuguese debt deals, traditional issuers would intensify their comeback to international debt markets in 2013, some at ever-low yields. REN, the electricity and gas transmission grids operator, made two appearances in the international debt markets in 2013, with a €300m, 4.125 percent five-year transaction in January, and, in October, with a €400m, 4.75 percent seven-year issue.
CaixaBI was instrumental as joint-bookrunner in both deals, as well as in Portugal Telecom’s €1bn, 4.625 percent seven-year issue in April. Another utility taking advantage of the favourable conditions twice in 2013 was EDP, making the decision for two seven-year benchmarks in September and November. In the financial institutions spectrum, unusual issuer ESFG also decided to tap the market in April, while BES captured investors’ appetite for yield pick-up by issuing a tier two, €750m, 7.125 percent 10NC5 transaction in November.
The strong momentum seen in Portuguese risk, combined with a solid performance evidenced by Portuguese credit spreads in the secondary market, enabled first issuers Portucel, the pulp and paper producer, and Galp, the flagship oil and gas company, to inaugurate their eurobond issuance in 2013. The first came to market with a €350m, 5.375 percent 7NC3 bond in May, while Galp launched a milestone €500m, 4.125 percent five-year deal in November, the first unrated public institutional bond issued by a Portuguese corporate and one of the largest unrated bonds to come from Southern Europe in the year – a bond jointly led by CaixaBI.
During this period of economic adjustment in Portugal, CaixaBI cemented its leadership position in the debt capital markets with a particular emphasis on the corporate and SSA sectors where it was bookrunner in two thirds of the issues in the period.
Uninterrupted issuances in 2014
Entering 2014, Portugal was mostly seen by investors as a success case, much in comparison with Ireland which had cleanly exited its Troika programme in December 2013, and credit spreads reflected those views by continuing their relentless tightening. Some of the main Portuguese financial institutions, in the names of CGD, BES, BCP and Santander Totta, took particular advantage of this favourable setting and gained back some issuance ground after a timid 2013. Collectively they issued six new benchmarks in the first half of 2014 for a total of €4.5bn, evenly split between covered bonds and senior unsecured issues.
On the corporate sector front, EDP, the most frequent Portuguese issuer, maintained its issuance drive by opening the year with a $750m, 5.25 percent seven-year print in January and followed up with a €650m, 2.625 percent five-year bond in April, jointly led by CaixaBI, that also brought BCR back to the debt markets in March 2014 with a €300m, 3.875 percent seven-year deal. In July, Galp decided to follow up on its successful inaugural issue by placing a new €500m unrated benchmark, this time for a longer 6.5-year maturity and still lowering its cost by more than one percentage point to a yield of 3.125 percent.
In the SSA space, where CaixaBI has led in market share, Parpública, the state equity holding company, was the first agency to venture back into the debt capital markets with a €600m 3.75 percent seven-year eurobond in late June, a transaction jointly run by CaixaBI. Besides the increment in the number of investors drawn to Portuguese assets in 2014, their quality and diversity has also been on the rise, with Portuguese issuers attracting a growing number of buy and hold investors and of more diverse origins.
Sovereign issuance and debt management
Portuguese credit spreads showed a notable tightening during the period 2012-2014 across all asset classes, rewarding committed investors with solid returns and luring a growing number to increase their exposure. Representatively, the bund spread in 10-year sovereign bonds touched 326bps (yield of 5.16 percent) in May 2013 from a peak of 1,322 bps (yield of 15.84 percent) in January 2012 at the zenith of the crisis. This trend gained further momentum into 2014, with 10-year OT bund spreads reaching minimums of 214bps (yield of 3.32 percent) in June.
Portugal used these constructive market conditions to bring out a number of successful issuances. After the comeback OT tap issue of January 2013, high investor support allowed the Republic to launch a succession of new syndicate issues in a €3bn, 5.65 percent 10-year OT in May 2013, jointly-led by CaixaBI and a €3bn tap of this issue in February 2014 following a second five-year tap in January 2014 of €3.25bn of the June 2019 OT, also brought jointly by CaixaBI.
Additionally, IGCP, the Portuguese debt agency, took a number of decisive steps to regain full market access. Between December 2013 and May 2014, it conducted liability management exercises and bond repurchases in the secondary market, managing to buyback €2.8bn and extending €6.6bn of the 2014 and 2015 maturities (35 percent of the amount outstanding), smoothing the profile for future debt payments.
It also re-launched the OT auction programme in April 2014, complementing its sources of funding, and, crucially, it has built a substantial cash buffer of over €15bn that allows it to cover funding needs for about one year. These steps, together with successful benchmark issuance since January 2013, have evidently contributed to putting Portugal back in the debt capital markets in a conclusive fashion.
Exiting the Troika’s programme
This debt management process prepared the country to successfully exit the Troika’s financial assistance programme, which with the benefit of an outstanding tightening of sovereign spreads, enabled Portugal to officially opt for a clean exit in May 2014. According to the Troika’s official statement, after its 12th review mission in May 2014: “The programme has put the Portuguese economy on a path towards sound public finances, financial stability and competitiveness.
“During the past three years, the external current account has moved from a substantial deficit into surplus, the budget deficit has been more than halved, and public debt sustainability has been maintained. There have been ambitious reforms across all the main sectors of the economy.” The economy has significantly rebalanced both externally and internally, growth was reignited and aggregate debt is back on a sustainable path. Portugal’s return to the international capital markets is hence now complete.
Equity capital markets in Portugal
As a result of the global economic crisis and the instability related to the public deficit and sovereign debt in Portugal, which culminated with the request for financial assistance in April 2011, the Portuguese Equity Capital Markets (ECM) during 2011 and 2012 saw limited activity, as international investors showed significant levels of aversion towards Portuguese equities. During this period, only a few number of transactions were concluded successfully, being mainly related with rights offerings of Portuguese financial institutions that had to comply with the new capital requirements imposed by the Bank of Portugal and the European Banking Authority.
Simultaneously, the index PSI20 in 2011 presented high volatility levels and a significant negative performance, with an annual decrease of 27 percent, maintaining this markedly negative trend until the summer of 2012. Only from this point onwards was there an inversion in this trend, as the ECB announced a series of actions to support the economies of the eurozone.
Since then, the PSI20 has been able to maintain a positive performance – except for brief periods in February, March and June 2013 – reaching an annual growth of 16 percent last year, and 8.4 percent from the beginning of 2014 to the end of May.
For this positive behaviour there were two additional instrumental factors, namely the strong signs of macroeconomic recovery in Portugal, with GDP projections evolving towards a more solid growth, and the greater stability at a political level, since Portugal has been able to fulfil the targets set by the Troika and exit the assistance programme successfully in May 2014.
The Portuguese ECM market also benefited from these positive factors and moreover from the gradual change in investors’ perception towards domestic assets that began in 2013, allowing it to reopen to new primary issues with the IPO of CTT in December 2013, the first in Portugal since 2008. This offer was considered a great success as it was able to generate high interest among international institutional investors, causing the total demand to exceed significantly the offer’s shares and the final price to be set at the maximum point of the range.
CaixaBI was joint global coordinator and bookrunner in this transaction, and, by exploiting its significant experience and leading role in ECM, it was able to take a crucial part in the reopening of the Portuguese ECM market and on the attraction of international investors’ interest towards Portuguese domestic assets.
Working with the government
CTT’s IPO was a significant landmark in the Portuguese ECM market as, once again, a Portuguese company was able to attract the generalised interest of international investors through a primary transaction, paving the way for further equity offerings in Portugal.
Furthermore, by capitalising on the significant improvement in market conditions in Portugal, several companies have sought to finance themselves or to monetise non-strategic stakes through ECM transactions. Since the beginning of 2013, there has been an upsurge in the number of Accelerated Bookbuildings (ABBs) with Portuguese equities, including companies such as EDP, Portugal Telecom, Galp and Mota-Engil, among others.
CaixaBI has acted as advisor and joint bookrunner in several of these ABBs and has proven itself a privileged partner of private companies by helping them finance their activity and strategic plans and giving them access to international institutional investors.
These transactions benefited from the growing interest of international investors and from very favourable market windows, with share prices reaching maximum values of several months/years. This positive context has allowed the offers to be concluded with great success, reaching levels of demand that have exceeded significantly the number of shares offered in each transaction and discount values below the average of similar transactions in Iberia and Europe since the beginning of 2013.
The Portuguese government has also taken advantage of the improvement in the domestic market conditions by fulfilling the privatisation plan of the assistance programme. Through ECM transactions, it was able to conclude the full privatisation of companies such as EDP and REN and the privatisation of 70 percent of CTT’s share capital.
CaixaBI has once again been an essential partner of the Portuguese government in the execution of this privatisation plan, acting as joint global coordinator and bookrunner in these transactions.