Now here’s a twist in this year’s tale of eurozone sovereigns trying to refinance their large burdens of debt.
Belgium and Spain have been busy with syndicated sales of government debt (in both cases, 10-year benchmarks) this week. Syndication should be seen as a strong positive for both sovereigns right now, and it largely is, given that they get cheaper rates. Except, markets really seem to be really resenting ‘em for using it.
Syndication is different to a normal bond auction in that banks are employed to underwrite the issue and rustle up investor demand in advance around a guided price. Thanks to this pricing, it’s possible to lock-in low borrowing costs, which is especially jammy if you’re selling a benchmark bond. Moreover, the underwriting of the issuance offers not just cheap but stable funding (auctions won’t fail).
However, syndication can annoy those investors ramrodded into the novel process — or into lower pricing than they’d normally accept for credit risks embedded in the asset.
Really annoy them.
Belgium’s debt manager said that its syndication had gone well apart from some investors being spooked by fears over the EFSF, Reuters reports.
That’s a slight understatement, we think. According to IFR Markets, Belgium’s sale didn’t go down too well throughout pricing on Tuesday:
Market participants are starting to express disappointment with the progress of Belgium’s 10-year syndicated deal, where final terms have been set at Eur3bn to price at +93 bps over mid-swaps.
For reference this contrasts earlier talk of shooting to raise EUR4bn or more likely Eur5 bln, from original (and still cheap) guidance of +90/93 bps.
More worrying is how the deal reportedly neared Eur7 bln of orders, and now is talked for a book of only Eur6 bln. With peripheral markets, followed by OLOs [Belgian bonds], backing up through the afternoon, it appears bidders have been quick to pull away.
Dealers cite customer uncertainty over the domestic political situation, but it seems clear the general uncertainty with respect to the eurozone and the EFSF have more to do with the sudden hesitancy to step into risk.
Additionally, the backing up of OLOs in the secondary market is changing in terms of switching into the new bonds (or at least complicating efforts to accommodate switching), and likewise complicating hedging efforts too…
Interesting set of trade-offs. Belgium did get cheap funding, but not as much as it wanted, and at the risk of shredding demand from long-term real money investors. Where have we heard that problem before?
Spain’s syndication (placed on Monday) attracted similar complaints even despite attracting more investment than it originally wanted, interestingly enough. Here’s Nick Firoozye and Artis Frankovics of Nomura:
One of the key innovations the Spanish Treasury introduced for 2011 is its monthly publication of the list of references to be auctioned, rather than its previous quarterly updates. This was done with an aim “to provide the Treasury with greater flexibility when it comes to adapting its issuance to market preferences in a very volatile environment”…
Yesterday’s decision to cancel the Oct 20 and Jan 24 taps, which were announced last Friday in favour of syndication of a new 10yr benchmark perhaps brings into question the transparency. The syndication proceeded well, with the Treasury able to place a larger than expected €6bn. However, pricing terms were very cheap (taking the market lower) and if the experience of issuers in 2010 is any guide, this is not necessarily a great set-up for digestion. Meanwhile, such a rapid about-face suggests either an element of desperation or a communication policy gone badly wrong.
(Note that Nomura don’t think Spain will need a bailout — more that funding will be pressured.)
It’s an interesting stand-off — syndicated deals make a lot of sense for sovereigns at the moment, but there might come a point when the benefits clash with investors staying away from the deals altogether, which is a long-term problem worth considering. Or, in other words, the risks really could be about the actual asset, not the issuance, in the end.
After all, why be so surprised at Spain’s (or Belgium’s) haste?
Spain’s Treasury said in its 2011 funding strategy that it planned to syndicate during January and July, even if it didn’t say exactly when it would roll out the deals, or over whose bodies.
Locking in cheap funding ASAP is a no-brainer, given that peripheral debt has a grim longer-term future as an asset class (consider those provisions for haircut clauses on sales after 2013, for instance). This current friction over syndication is a good sign that big contagion-threatened governments are determined to get liquidity and longer maturity profiles under their belts as possible, as early as possible, in order to avoid rollover risk later on.
Clearly, OLO investors aren’t the only ones that are declining to put their bets on a broad solution to the eurozone’s troubles.
Related links:
A guide to eurozone bond auction styles – FT Alphaville
Smouldering in Belgium – FT Alphaville