By Sebastian Tong
LONDON, July 14 (Reuters) - The success of Poland's recent
dollar bond could prompt more emerging European sovereign
borrowers to look beyond their regional investor base by issuing
debt in greenbacks instead of euros.
But higher borrowing costs remain a significant obstacle for
issuers that seek to borrow in dollars despite having most of
their external liabilities in euros.
Debt issuance is showing little sign of abating despite the
traditional summer market lull and the sovereign market in
eastern Europe -- the region hardest hit by the global financial
crisis -- has revived.
Poland sold $2 billion in bonds last week with over half of
the order book of $8 billion from U.S.-based investors, rousing
market speculation fellow euro zone aspirants could also seek to
tap investors further afield.
Hungary and Romania -- recipients of emergency financing
from the International Monetary Fund (IMF) -- have indicated
they may launch Eurobonds this year. Lithuania, which in June
sold 500 million euros of a five-year bond, has said it is
considering raising a further 500 million euros.
"Eastern European sovereigns...have actively borrowed from
domestic and external markets and it makes sense to take the
pressure off those markets by accessing the U.S. markets," said
Fabianna del Canto, a member of Barclays Capital's emerging
market syndicate that helped arrange the Polish deal.
Poland, rated 'A-' by Standard & Poor's, has proved itself
especially adept at raising foreign-currency debt, having sold
bonds denominated in Swiss francs and Japanese yen.
"Poland was able to market their name and story to investors
that may not have held their debt before," said del Canto.
COST VERSUS LIQUIDITY
It remains to be seen whether Hungary, likely to be the next
regional issuer out to the market, will issue a bond in dollars.
Hungary, which said it may launch a bond sale by the end of
September, met investors last week. But the meetings took place
in Germany, the Netherlands and Britain, reinforcing
expectations that the issue would be in denominated in euros.
Some investors say Budapest should consider a dollar deal to
appeal to a broader market.
"If Hungary is aiming the bond at the global investor base
they may get more interest," said Thomas Kirschmaier at Deka
Investment in Frankfurt.
The market for euro-denominated instruments is dwarfed by
that for dollar assets and the global credit crisis, which has
hit overall capital flows, has further accentuated the dominance
of investment funds benchmarked in dollars.
"Liquidity has fallen altogether and become concentrated.
These things are self-reinforcing," notes Kaspar Bartholdy,
managing director emerging markets at Credit Suisse.
"There is a liquidity argument to diversify the creditor
base but if you want to be a euro zone member eventually, it's
much easier to manage external debt in euros."
The bigger investor pool and the relative rarity of dollar
debt issued by eastern European governments could allow
borrowers to get longer maturities and offer tighter spreads.
But the impetus for issuing dollar debt won't purely be
about borrowing costs.
In fact, any savings in offered yields could be eroded by
the higher legal fees incurred for accessing the U.S. market and
the cost of swapping dollar proceeds into euros.
While sovereign borrowers would likely get preferential
rates from bond arrangers for converting the proceeds, the
absolute cost of currency swapping has gone up with the onset of
the financial crisis, notes one London-based arranger.
According to one estimate, Poland's dollar deal comes in
about 10 basis points cheaper than a comparable 10-year
euro-denominated bond maturing in 2018 <PL037150061=RRPS> after
taking into account the 10-year dollar/euro swap rate <ICAB1>.
"This was not such a huge discount. In volatile markets such
as this, this alone won't necessary signal more dollar funding,"
said an arranger with an originations desk in Munich.
(Additional reporting by Sujata Rao and Cecilia Valente;
editing by Chris Pizzey)
