Portugal Sees Possible Bond Auctions

Portugal’s Secretary of State for Treasury Isabel Castelo Branco said she “estimates” it will be possible for the country to sell bonds through auctions before its bailout program ends in the middle of May.

“It’s above all a sign that we have access with some regularity,” Castelo Branco, 46, said in an interview at the Finance Ministry in Lisbon late on Jan. 10. “Being able to again sell through auctions is a goal, and it means we will be in a more regular program of debt issuance.”

Portugal is trying to regain full access to debt markets with the end of its 78 billion-euro ($107 billion) rescue program from the European Union and International Monetary Fund approaching. The country has been relying on banks to sell bonds, including last week’s sale of 3.25 billion euros of five-year notes and two other deals in May and January 2013.

European nations frequently hire banks when they offer new securities to boost demand for the debt. After requesting a bailout in April 2011, Portugal stopped selling bonds until January 2013, although it continued holding bill auctions. Debt agency IGCP plans to auction as much as 1.25 billion euros of bills on Jan. 15.

Castelo Branco, who was treasurer at Portuguese lender Banco BPI SA before joining the government in September, said there is no decision yet on the bond maturity Portugal may sell next.

Comfortable Liquidity

“We don’t have a very fixed idea about any specific maturity,” she said. “We are not under pressure because of liquidity. There is a relatively comfortable liquidity margin. That allows us to assess very carefully the opportunities we’ll have. Obviously we are interested in issuing, we are interested in resuming a regular issuance program.”

Portugal last sold 10-year (GSPT10YR) bonds in May at a yield of 5.669 percent. The yield on 10-year securities in the secondary market declined to 5.19 percent that month, the lowest since 2010, after reaching more than 18 percent in January 2012. The country pays interest of 3.2 percent on its bailout loans.

The 10-year bond yield was at 5.37 on Jan. 10. The extra yield investors demand to hold Portugal’s 10-year bonds instead of German bunds last week narrowed to the lowest in three years. Ireland and Spain also sold bonds last week.

“Investors assimilated all of the supply very well,” Castelo Branco said.

Ireland last month became the first nation to exit a rescue program since the euro area’s debt crisis began in 2009. That country entered its 67.5 billion-euro bailout in November 2010, six months before Portugal got its package.

Junk Rating

While Portugal’s securities are rated below investment grade by Standard & Poor’s, Fitch Ratings and Moody’s Investors Service, Ireland only has a junk rating at Moody’s.

Some investors can’t buy junk-rated debt because there are “fixed guidelines” they have to observe, Castelo Branco said. “For some types of investors, the rating is no longer so important in itself, but more the trend that they foresee for the rating. Some can invest in debt that is below investment grade with the conviction that the rating will be upgraded at some point in time.”

Castelo Branco said she sees credit rating companies “more convinced lately about what’s been the convergence path of the Portuguese economy, and the effects of the measures that have been implemented and of all the economic adjustment.”

Debt in Dollars

Last week’s sale attracted about 11 billion euros of orders. Asset managers bought 62 percent of the notes sold, while insurers or pension funds purchased 16 percent and central banks about 3 percent, according to debt agency IGCP. Investors located in Portugal were allocated 12 percent of the sale.

There may be interest in considering selling debt in dollars, Castelo Branco said. “It’s an element of additional diversification. It’s an opportunistic matter. We’ll have to see.” Lisbon-based utility EDP-Energias de Portugal SA last week sold $750 million of seven-year notes.

The amount raised in the Jan. 9 sale represents almost half of the nation’s estimated 2014 funding needs of about 7 billion euros. Portugal is seeking to exit its bailout without needing another rescue and held a 6.64 billion-euro debt exchange on Dec. 3 to push back repayments on securities maturing in 2014 and 2015 to 2017 and 2018.

Debt Peak

Castelo Branco said she doesn’t see a need to do another debt exchange this year. The secretary of state reiterated a government projection that the ratio of debt-to-GDP peaked last year.

While Portugal emerged from its longest recession in at least 25 years in the second quarter, Prime Minister Pedro Passos Coelho still has to trim spending by 3.2 billion euros this year to meet targets in the bailout plan after relying mostly on tax increases in 2013.

“Investors are believing in the convergence process of the Portuguese economy,” Castelo Branco said. “We’re aware we still have challenges.”

(Source: Bloomberg)