Portugal Offers to Exchange Bonds as It Seeks Market Access

Portuguese debt agency IGCP will offer to exchange bonds due next year for securities maturing in three years as it tries to regain access to long-term debt markets.

The government debt agency will offer to buy 5.45 percent bonds maturing in September 2013 and will sell 3.35 percent bonds maturing in October 2015, the Lisbon-based IGCP said yesterday. It plans to carry out the offer at 10:30 a.m.

The yield on the September 2013 note was little changed at 3.60 percent at 8:24 a.m. London time, while the rate on the October 2015 bond was two basis points higher at 5.39 percent, according to data compiled by Bloomberg.

Portugal has to meet the September 2013 bond redemption of about 10 billion euros ($13 billion) without relying on a European Union-led rescue program, which extends until the middle of 2014. While Portugal has continued selling bills, it hasn’t sold bonds since requesting the bailout in April 2011.

“A successful exchange will reduce the amount needed to cover redemptions and will show better sentiment among investors,” said Alessandro Giansanti, a senior strategist at ING Groep NV. “I see the exchange as attractive. If the size of the exchange will be above 30 percent of the outstanding amount, it will be taken as positive by the market and afterwards spreads will move lower.”

Lower Yields

Yields have dropped at auctions and in the secondary market as the government cuts spending and raises taxes to comply with the terms of the 78 billion-euro aid plan from the EU and the International Monetary Fund. Prime Minister Pedro Passos Coelho has said that if the country can’t tap bond markets by September 2013 because of “external reasons,” it would be able to count on continued support from the IMF and the EU.

Borrowing costs dropped to the lowest since 2010 at a Sept. 19 sale of 1.29 billion euros of 18-month bills, while the difference in yield that investors demand to hold Portugal’s 10- year bonds instead of German bunds has narrowed to 7.5 percentage points from 16 percentage points on Jan. 31.

In January, Standard & Poor’s followed Fitch Ratings and Moody’s Investors Service in cutting Portugal’s credit rating to non-investment grade, or junk.

Portuguese debt has this year returned 44 percent, including reinvested interest, the most of 26 markets tracked by indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Irish debt, the second-best performer in the euro region, has handed investors 25 percent, while German bund gains are 3.2 percent in 2012.

Ireland’s Return

Ireland, which has also received a bailout, in July returned to long-term debt markets for the first time in almost two years by selling 4.19 billion euros of new bonds, while also exchanging some short-maturity notes for longer-term debt.

European Central Bank President Mario Draghi on Sept. 6 said bond purchases may be considered for euro-area countries currently under bailout programs, such as Greece, Portugal and Ireland, when they regain bond-market access.

The Portuguese government plans to carry out debt market operations as it aims to regain access to bond markets by September 2013, Maria Luis Albuquerque, the secretary of state for treasury and finance, said on Sept. 11.

Portugal is “sounding out” the market as it prepares to resume sales of medium-term notes, Joao Moreira Rato, chairman of the country’s debt agency, said in an interview in July. Portugal plans to issue medium-term notes with maturities of one to five years that are designed for specific creditors, the IMF said on July 17.

Downward Path

Portugal’s debt, which will peak below 124 percent of gross domestic product, “remains sustainable and will be on a firm downward trajectory after 2014,” the IMF, the European Commission and the European Central Bank said in a joint statement on Sept. 11. The IMF in July said Portugal’s debt would peak at about 118.5 percent of GDP in 2013.

The country has been given more time to narrow its budget shortfall after tax revenue missed forecasts and the economy heads for a third year of contraction in 2013. Portugal aims to reach a deficit of 5 percent in 2012 instead of the previous goal of 4.5 percent, Finance Minister Vitor Gaspar said on Sept. 11 after EU and IMF officials agreed on the new targets.

The government projects GDP will shrink 1 percent in 2013 after a contraction of 3 percent this year. Economic growth has averaged less than 1 percent a year for the past decade, placing Portugal among Europe’s weakest performers.

To contact the reporter on this story: Joao Lima in Lisbon at jlima1@bloomberg.net

To contact the editor responsible for this story: Stephen Foxwell at sfoxwell@bloomberg.net

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