Czechs, Poles cast off emerging market tag

By John Geddie

LONDON, Oct 5 (IFR) - Tightly priced bond issues from the Czech Republic and Poland this week signal that they are casting off their emerging market label, leaving further behind other indebted Central and Eastern sovereigns.

The Czech Republic achieved the lowest ever yield in euros for a CEE sovereign at 10-years when it tapped its May 2022 transaction on Monday, while Poland followed swiftly behind with a 12-year benchmark offering investors one of the slimmest new issue premiums for any sovereign issuer in 2012.

This is in sharp contrast to Slovenia that has been shut out of the syndicated market since March 2011, and the region's most indebted EU member state, Hungary, that has outstanding 2019 and 2020 issuers with yields hovering near the 6% mark and is still in the process of negotiating a second IMF loan.

"Issuers in the emerging markets space were historically viewed as riskier names, but with the likes of the Czech Republic and Poland now in a sort of middle ground, the dividing line between the asset-classes has blurred," said Emmanuel Smiecench, managing director of SSA syndicate at SG CIB, which worked on both the deals.

The Czech Republic's tap priced at swaps plus 116bp, which Smiecench says is in the same ballpark as the eurozone's soft core. Belgium's 10-year bonds are trading at around swaps plus 70bp on the bid, according to Tradeweb.

Poland's 12-year priced on Tuesday at swaps plus 143bp, and was bid at just under 139bp on Friday morning.

Manfred Burdis, head of DCM origination at Erste Bank, one of the houses managing the Czech tap, says that there has been a clear reversal in attitude towards certain CEE sovereigns over the last few years.

"It may have sounded absurd in the past that these names would rally during a risk-off mode, but now investors do really consider them safe haven credits," he said.

In the aftermath of the ECB's OMT announcement there was a widespread rally across Europe's second-tier names. The Czech Republic and Poland had been tightening all through the summer but actually started to give some of that back during the OMT-inspired rally.

The fact that these countries are outside the eurozone and have control over their own currency is undoubtedly a plus point for investors, bolstered by strong economic performance on an otherwise recession-hit continent.

"Eurozone growth revisions only seem to be one way, but in Poland you have an economy that will outgrow the eurozone by around 2% next year," said Erste's Burdis.

The divide emerging in Eastern Europe is, however, not simply determined by those in and out of the currency bloc.

Eurozone member states Slovenia and Slovakia are a fine example. Slovenia, crippled by its indebted banks, has been left with no access to debt markets, while Slovakia has outperformed the likes of Poland and the Czech Republic in recent months.

The Slovak Republic debuted in the dollar markets with a USD1.5bn 10-year issue back in May, and then over the summer offloaded EUR500m of 20-year paper in a private placement.

From mid-summer the Slovak Republic has outperformed the Czech Republic by around 30bp at the long end in euros, said Burdis, and is now trading just 45bp wide in the 10-year maturity.

Slovakia has a nine-year euro deal outstanding bid at a yield of 2.750%, according to Tradeweb data.

(Reporting By John Geddie; Editing by Helene Durand and Julian Baker)

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