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Portugal Wins Fans as Lenders Forgo Early Payout: Euro Credit

Pedro Passos Coelho, Portugal's prime minister. Photographer: Michele Tantussi/Bloomberg
Pedro Passos Coelho, Portugal's prime minister. Photographer: Michele Tantussi/Bloomberg

Oct. 5 (Bloomberg) -- Portuguese Prime Minister Pedro Passos Coelho’s repeated assurance since he took power in June that the country is committed to putting its fiscal house in order may be starting to win over some investors at last.

Owners of 50 million euros ($66 million) of seven-year puttable floating-rate notes in March will forgo the right to be repaid early, according to two people with knowledge of the deal. Investors are hanging onto the debt rather than giving notice and asking to get paid tomorrow, said the people, who declined to be identified because submissions to the nation’s debt agency are private. By contrast, the owners of almost half of 110 million euros of a similar security asked for their money back in July, the people said.

“I’m not sure there will be a turnaround in the Portuguese bond market any time soon, but some investors might start seeing value in certain segments of the market,” said David Owen, a managing director at Jefferies International Ltd. in London. “There is no doubt Portugal still has major challenges ahead of it, but at least the country doesn’t have the same debt load as Greece, and it doesn’t have the same banking and housing problems that Ireland has.”

Coelho is cutting spending and raising taxes to meet the terms of a 78 billion-euro aid plan from the European Union and the International Monetary Fund. Rising bond yields forced Portugal in April to follow Greece and Ireland in seeking a bailout from the EU and IMF.

Option to Sell

Portuguese bonds, which are rated junk by Moody’s Investors Service, outperformed the debt of Italy in the three months through September for the first time since the end of last year. They handed investors a 1.5 percent loss, the smallest quarterly decline in three. Italian bonds dropped 4.1 percent in the same period, according to indexes compiled by Bank of America’s Merrill Lynch unit.

Italy’s credit rating was cut by Moody’s Investors Service for the first time in almost two decades on concern that Prime Minister Silvio Berlusconi’s government will struggle to reduce the region’s second-largest debt amid chronically weak growth.

Moody’s lowered Italy’s rating three levels to A2 from Aa2, with a negative outlook, the New York-based company said in a statement late yesterday.

Portugal’s long- and short-term sovereign credit ratings were affirmed at BBB-/A-3 by Standard & Poor’s Ratings Services, which cited the nation’s commitment to the EU/IMF loan program and economic reform. The outlook remains negative, S&P said.

External Aid

“Future returns and the country’s outlook tend to be key factors whether investors exercise these put options,” said John Stopford, head of fixed income at Investec Asset Management Ltd. in London. “If, for example, they think the default risk is high, they are likely to put, or sell, them.”

Credit-default swaps insuring sovereign debt signaled a 62 percent probability that Portugal won’t be able to meet its debt obligations over the next five years, compared with a more than 90 percent chance of a Greek default, according to CMA.

The Iberian nation issued the note due April 2018 through Goldman Sachs Group Inc. in March. The bond, which has its first puttable date tomorrow, offers a rate of six-month Euribor plus 150 basis points for the first six months. The premium steps up to 325 basis points over Euribor from tomorrow, before rising to 350 basis points in April 2013 and 375 basis points in April 2014, according to data compiled by Bloomberg.

The security was the last floating-rate note Portugal sold before the country sought external aid in April as concern the euro-region debt crisis was spreading sent bond yields soaring, effectively shutting the nation out of the capital markets.

Worst Not Over

In July, investors were repaid 50 million euros of the 110 million euros of two-year puttable notes issued through Credit Agricole Investment Bank in January, according to the people familiar with the sale. The security was offered at an initial rate of 170 basis points over three-month Euribor. It rises to 290 basis points over the reference rate in 2012.

Portugal raised 310 million euros from selling five puttable floating-rate notes this year, the first time the securities were used by the country as a financing tool. The two-year note sold through Credit Agricole was the debut offering of such securities.

The extra yields investors demand for holding 10-year Portuguese bonds instead of German bunds fell to 9.45 percentage points today from 9.51 percentage points yesterday. That compared with a euro-era record of 10.8 percentage points on July 12.

Portugal’s recession ended in the second quarter as an increase in exports helped the country avoid a third quarterly contraction. Still, austerity measures, including higher taxes and wage cuts, are curbing growth. The government forecasts the economy will contract 2.2 percent this year and by a similar amount in 2012, before growth returns in 2013.

IMF Forecast

Finance chiefs announced an income-tax surcharge to help cover a budget shortfall this year, as well as an increase in the value-added tax on electricity and natural-gas services. Portugal also plans to sell the state’s stakes in EDP-Energias de Portugal SA, grid operator REN-Redes Energeticas Nacionais SA and oil company Galp Energia SGPS SA this year.

Government officials say the measures being imposed will make the economy more competitive and help reduce the debt that is set to top 100 percent of gross domestic product this year for the first time. The IMF forecast in September that Portugal will achieve a so-called primary budget surplus, or a surplus excluding interest-rate charges, of 3 percent of potential GDP next year.

“It’s a small surplus, but that must be symptomatic of progress on budgetary reforms,” said Richard McGuire, a London-based senior fixed-income strategist at Rabobank International. “There are plenty of reasons to be pessimistic about Portugal given it has a low-growth economy and high debt. That said, at least there are some early indications that its reforms are perhaps starting to pay off, but it’s a long road.”

To contact the reporter on this story: Anchalee Worrachate in London at

To contact the editor responsible for this story: Tim Quinson at

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