CEE Region Bond Issuers Not Tainted by Ailing Western Europe
By Sarka Halas
The Wall Street Journal
Central and Eastern European international bond issuers are finding favor with investors hunting for yield from the region, one that was once tainted by the emerging-market label but has remained largely unscathed from the euro-zone debt crisis.
Investors are increasingly differentiating between borrowers from the region and their ailing western European neighbors. The recent sovereign bonds launched by Poland, Bulgaria, and earlier in the year, Russia, show that investor appetite for CEE debt is strong, even as interest in peripheral European debt has long waned.
"The countries of central Europe have become almost a safe haven for investors, particularly the Czech Republic and Poland," said Manfred Burdis, managing director, head of debt capital markets origination at Erste Group Bank. "They have their own currencies, they are not tainted by the euro crisis, and they are less indebted than any of the euro zone-sovereigns."
One reason why many central and eastern European countries have weathered the storm stemming from the European debt crisis is that they boast healthy banking systems and sound domestic equity and bond markets.
"In the Czech Republic, there is massive liquidity, substantially promoted by the banking regulations of the Czech central bank, and Poland is a very big market where the regulator has always promoted business within the country, for both Polish equities and bonds," said Mr. Burdis.
The CEE region is expected to continue growing, even as euro-zone growth is projected to slow.
For 2012, the CEE region as a whole is expected to have average growth in gross domestic product of 2.6%--with 3.2% forecast for 2013, while euro-zone GDP is expected to fall to -0.3% in 2012 and return to growth only in 2013 with expansion forecast at 0.8 per cent, said Peter Brezinschek, head of Raiffeisen Research at Raiffeisen Bank International AG, in a note.
"The top performers remain Poland with 2.8% and Russia with 3.7% GDP growth. Slovakia and Ukraine should also be able to add 2.5% growth each," said Brezinschek.
This leaves many CEE sovereign borrowers that are poised to enter the international markets with ample time to choose the right time because much of their pre-funding is already done.
This month, Bulgaria was the latest in a string of central European and emerging-market issuers to tap the bond markets, joining the likes of Russia, Poland, the Czech Republic, Turkey, Latvia and Lithuania, which already tapped markets this year.
In June, Poland showed it could issue in difficult market conditions and at very favorable rates, when it priced a 10-year bond in the amount of 1.5 billion euros (.88 billion) that settled below 200 basis points for the final spread, at 195 basis points.
Russia didn't have a pressing need to come to the international bond market when it offered a billion three-part bond with a book size of billion and maturities spanning across five, 10, and 30 years.
According to Andrey Solovyev, managing director, global head of debt capital markets at VTB Capital, one of the banks that structured the sovereign's deal, the bond was largely launched to set benchmarks that would allow Russian companies and financial institutions to enter the international markets.
Indeed, since Russia's issue, there has been a flood of Russian corporate and financial issuers in the international bond markets and Mr. Solovyev said he expects the momentum to continue.
Elsewhere, the cost of insuring CEE sovereign debt against default has become comparable to that of core euro-zone countries, such as Austria or France.
Spreads on five-year credit default swaps for Austria and France--a measure of the cost of insuring their debt against default--are 164 basis points and 184 basis points respectively. Meanwhile, the five-year CDS on Poland, the Czech Republic and Russia are 210, 134 and 217 basis points respectively.
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