Spot the odd one out, Portuguese government medium-term note sales edition — click chart to enlarge:
We’ll get to the answer in a bit, but first — a trip to the sovereign debt funding twilight zone.
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Quick reminder on terms: medium-term notes differ from bonds in that they’re much more flexible in terms of issuance, and their characteristics.
Let’s unpack why distressed European governments — such as Portugal, currently on the cusp of the eurozone’s third bailout in twelve months — might like them.
Issuers can tailor coupons, rates and maturities, as well as embed options like calls or puts on that maturity — either according to their own requirements, or those of investors. Thanks to this customisation they’re big in corporate debt, and were big in those structured investment vehicles that blew up during the crisis, which underlines one drawback of MTNs: flexibility is bought at the cost of fragmenting the market for your debt. If you’re not careful and end up going overboard on customisation, refinancing MTNs might well become rather difficult. Banks became desperate to replace MTNs with longer-term wholesale debt following the crisis.
We aren’t incredibly familiar with sovereign issuance of MTNs, but you might see why some of those features would appeal to Portuguese debt managers at the moment. They include access to specialised investors if your usual customers have abandoned you; coupon/maturity flexibility, which allows closer management of your debt refinancing profile, should this come under pressure in the market; and in general, you’re offered steadier, quicker cashflow from a diverse universe of investors.
Italy cranks out MTNs like there’s no tomorrow, for example — and in general, countries with a lot of debt outstanding aim for flexibility on that debt, obviously. It’s less clear what countries with relatively small stocks of debt, but incredibly poor sustainability of that debt (such as Portugal!) have to gain from MTNs. Or, more to the point — what investors get out of the notes, either.
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So, with that technical aside out of the way, did you spot the odd one out? As may have been pretty obvious — it’s the MTN sitting right at the top of Portugal’s list. It’s made headlines lately.
It’s a strange bird, not just for what the list does tell you about this MTN — it’s been issued just recently, and, unlike any other Portuguese sovereign MTN here, without a coupon, or regular interest rate payment – but what the list doesn’t tell you. Portugal also privately placed this one, which is pretty rare. (The MTNs with embedded put options are also recent and quite exceptional — but that’s perhaps another post, for another time.)
How rare are we talking?
Greece did consider privately placing some of its 2010 debt issuance almost a year ago, but seems to have feared the stigma of being seen to avoid the market. (Although a private placement to Greek banks was carried out in December 2009. In turn, National Bank of Greece did its own private placing in 2010 once interbank lending had collapsed after Greece’s bailout.)
By contrast, Portugal’s usual MTN sales are pretty open — for instance, $1.25bn of USD-denominated issuance of five-year MTNs in 2010. (The Portuguese debt office does say that non-euro medium-term debt sales are ‘exceptional and last resort’, by the way. Heh.)
So why Portugal organised a private placement — and to whom — are good questions.
Of course, the Portuguese finance ministry won’t answer them. In fact, they wouldn’t even tell CNBC how much was sold, at what maturity, or at what rate — which is kind of odd given that it’s all there on the list: €1bn, July 2012, zero coupon. (Incidentally, €1bn is nothing to sniff at, compared to Portugal’s €20bn of planned government bond issuance in 2011. This is a big outlay.) Why the coyness?
For our part, we’d note that there’s only one investor who’d specifically want euro-denominated paper (for FX reserve management purposes) and who’d be happy with a zero coupon (given interest-rate risk), and who’s been recently reported to be rather chummy with Portugal over buying its debt even as other investors run for the hills screaming. One who, above all, would connive with a cash-strapped Portuguese state in ensuring sufficient discretion over its funding requirements — but also enough dark mystery to beguile markets into believing, just for another moment, that Portugal still has some powerful friends out there.
That investor would, of course, be China.
Makes you wonder why the Portuguese are even bothering to keep the identity of the buyer under wraps. Actually, maybe it’s not such an idle wonder. If traditional investor demand for peripheral sovereign debt is dying off, never to come back, there are plenty of discreet investors out there who’d like bespoke flexibility in return for political support.
As for whatever prospects for Portugal’s debt sustainability can be read off from deals like this — we’re not sure. On the one hand, Greece’s fears were probably right: private placing signals something about a country’s assessment of its own standing in the market, for all the stability that a placement offers. On the other, it shows resourcefulness on the part of Portuguese debt managers.
And then we think of the dangers of exotic short-term financing, and wonder.
Related links:
Japan vows to buy eurozone bonds - FT
Portugal bond-buying estimates du jour – FT Alphaville
Rollover is all, Moody’s fears for Portugal edition – FT Alphaville
The self-denying sovereign wealth fund - FT Alphaville
