Up and down: CEE sovereigns spark busy 1Q23 primary market, but quiet since then
9th June 2023
International bond placements in Central and Eastern Europe (CEE) reached a record USD 30.5bn in 1Q23, surpassing the previous high of USD 29.3bn set in 2Q20 in the midst of the coronavirus (COVID‑19) pandemic. Sovereigns had been seizing the opportunity when US Treasuries declined at the start of the year, as the Federal Reserve slowed on interest-rate hikes. However, 2Q23 opened at a snail’s pace, as the European Central Bank raised three key interest rates by 50 basis points (bps) in mid-March against a backdrop of instability in the global financial sector caused by the collapse of Silicon Valley Bank, First Republic Bank and Signature Bank, as well as the controversial rescue of Credit Suisse by UBS. Turbulent events in the global banking sector hit volumes, with only two EUR- and USD-denominated bonds totalling shy of USD 200m priced between April and May vs 11 hard-currency bonds for around USD 7bn priced in April and May 2022.
When to expect new deals
Between 2017 and 2019, Russia and Ukraine accounted for around 30% of Eurobonds placed in the region. Sanctions imposed on Russia and financial strain on Ukraine arising from the war manifest in zero issuances from these countries in 2022 and 2023 year-to-date (YTD). While we do not expect any primary activity from Russia on international markets for the foreseeable future, Ukraine is also unlikely to tap the market for new debt. The country’s distressed debt was restructured last year, and Ukraine is more likely to go through another round of restructuring as soon as the war is over.
Romania and Poland drove the slew of placements in 1Q23, with Poland printing around USD 8.8bn-worth of EUR- and USD-denominated bonds in the first three months, and Romania placing around USD 6.5bn of Eurobonds since the start of the year. Poland budgeted a PLN 68bn (around USD 16bn) deficit for 2023, therefore we do not expect the sovereign to tap the market before 3Q23. Romania’s government deficit was forecast to decrease year-on-year in 2023, but the disbursement of European funds totalling RON 9.35bn (around USD 2bn) was less than half of the budgeted amount, which heightened the strain on the economy. Given that 80% of budget expenses already go towards pensions, government salaries and debt servicing, we anticipated considerable strain on the pricing for new debt if the sovereign were to tap the market again before the end of the year.
Is there any demand?
Sovereign Eurobonds issued in 1Q23 saw strong demand from investors because of scarce supply in the CEE corporate space. Average coupons on USD-denominated bonds placed in the first quarter were around 6.61%, with yield to maturity averaging 6.72%, while EUR-denominated bonds had an average coupon of 3.56%, with yields averaging 3.91%. Spreads widened to an average of 310 basis points (bps) on USD-denominated bonds, reaching 385bps for Romania’s USD 1.25bn 7.625% 30-year bond placed in January. Spreads averaged 207bps on EUR-denominated bonds, reaching 375.3bps for Romania’s EUR 1.4bn tap on its EUR 850m 6.625% 2029s priced at the end of January.
Demand for sovereign bonds is consistent, and the abundance of offerings in the first quarter of the year suggests that CEE countries are likely to come to the market next in the third quarter to finance the remainder of their budgets for the year.
All data as of 29 May, 2023