Greece pulled the trigger and started marketing a seven-year euro benchmark on Thursday, its longest new trade since returning from market exile last July.
The sovereign announced the mandate on Monday, but a savage sell-off in equity markets and a volatile rates backdrop meant that it decided to hold off until conditions had calmed.
“We have a more stable backdrop and while it’s not all green on the screens, rates are stable and we’re not seeing wild gyrations,” said a lead.
“This has given us a platform to go ahead with the trade and investors don’t feel like they’ll be catching a falling knife if they buy the deal.”
Greece, which is due to exit its third bailout program in August, has been eager to prove it can stand on its own two feet and access new money.
The seven-year is not only the longest deal it has sold since returning to the bond market but is also the first time it is raising completely fresh money. Last July’s €3bn five-year came alongside a liability management exercise.
“It’s important to be patient with this type of trade,” the lead said.
“It’s too yieldy to be a pure sovereign play. You can’t have a failed deal for them – it would bring down half of Europe if they did.”
Initial price thoughts for the issue, rated Caa2/B/B-/CCCH (all positive outlook), were 3.75 percent area, offering a starting concession of around 35bp.
“We saw fair value at 3.35 percent, 3.30 percent so we’re marketing 35bp back of that which is a reflection of the improvement of the credit,” the lead said. “They now have a 2023 and 2028 so it’s easy to do the calculation.”
Talk was subsequently tightened to 3.5 percent-3.625 percent with indications of interest over €6bn, including €300m from the leads.
Greece’s 3.75 percent Jan 2028 was bid at a 3.795 percent yield late on Thursday morning and its 3.5 percent Jan 2023 at 3.09 percent, according to Tradeweb prices. Both were around 11bp higher on the day.
Institutional investors, who could consider Greece an off-index trade, had mixed reactions to the sale.
One said Greece’s economic and fiscal improvements had opened up a discussion within his team on potentially buying the debt.
“It does feel like the fundamental story is improving,” he said.
“They’re close to coming off official lenders’ programs, but still need to work out how to reduce the debt burden and how much will be written off.”
A banker away from the deal said emerging markets investors would probably have flexibility to scrutinize the fundamentals associated with the name, rather than being constrained by the credit ratings.
“You’ve also got South Korea to Gulf countries [as part of the emerging markets universe], so it’s entirely possible to compare apples to oranges there,” he said.
Greece has one of the highest debt burdens in the euro area at an estimated 178 percent of GDP in 2017, according to S&P. However, it has ample cash on hand, some €6.5bn, to cover short-term funding needs, according to PGIM Fixed Income.
“Everyone thought Greece was going to default [and it] did not. It could be an interesting bond and will give some yield in the yield-starved euro market,” said a second investor.
A third investor, however, said his firm was not buying bonds given the spread to Bunds, which has shrunk over the past year.
The spread between 10-year Greece and Germany has dropped to around 300bp from 740bp a year ago, Tradeweb figures show.
“We see a spread risk and think there is better value to be found in emerging markets with sovereigns such as Brazil or Turkey,” said Andrew Belshaw, head of investment management at Legg Mason affiliate Western Asset.
“Greece still has structural problems related to economic growth and the banking sector. They’ve made progress, but it will still take five or six years to address these issues. Should we take things at face value [and expect that Greece would be bailed out in a worst-case scenario]?”