Croatia steered its way through an uneven backdrop in the market last week, coming away with an upsized €1.25bn 10-year deal.
The sovereign had announced its trade on Monday but held it back for a day with spreads on its curve heading in the wrong direction, before going ahead on Wednesday by marketing a new benchmark at swaps plus 175bp area.
In a sign of how pricing had moved against Croatia, its 1.125% March 2033s, which were priced last February at 105bp over swaps, were bid at 136bp over swaps, according to Tradeweb. The notes were quoted at 104bp on April 8. In cash price terms, they were bid at 83.
Kasparas Subacius, fund manager at CEE investment manager INVL Asset Management, said the new issue premium as books opened was "hefty" and put it at 45bp. He thought the deal's timing was "unfortunate" given the steeping in euro yield curves.
Others thought the premium was even bigger at IPTs, at 50bp, although one banker away from the deal argued that it was closer to 40bp after adjusting for the cash prices on the sovereign's outstanding bonds.
"The outstanding bonds have low coupons compared to current rates, so are trading in the 80s in terms of price," said the banker away from the deal on Wednesday. "You really should make an adjustment for the low coupons - I would suggest 10bp. So instead of fair value being around 125bp, it takes it to about 135bp.
"One thing for certain is since the announcement [on Monday], the secondary levels have widened around 20bp, some of which is due to the announcement and some due to the overall market conditions."
Croatia (Ba1/BBB–/BBB) was entering the market for the first time in more than a year, with the broader landscape much changed since its last appearance.
"Croatia is the first non-eurozone country to come to the euro primary market since the [Russia-Ukraine] war began and although the situation has partially normalised, there is still some risk component attached to the region in the eyes of investors and so spreads to risk-free bonds are still elevated," said Subacius.
"Moreover, even though Croatia does have investment-grade ratings from S&P and Fitch, it is not a pure investment-grade bond since Moody’s has rated it as Ba1. Therefore, some institutional investors might be restricted and will not be participating in the issue."
One London-based EM investor said he would be passing on the bonds. "It's euros so off benchmark and I can’t say it excites us that much as a credit," he said.
Still, the sovereign was able to get Croatia €2.65bn of final orders – and peak interest of more than €3bn – enabling it to price the deal at 150bp over swaps and raise €250m more than it was expecting at guidance. The coupon was 2.875%.
Fitch upgraded Croatia by one notch in November, with a positive outlook, with the expectation that the country will join the euro in January 2023. This would be ahead of the rating agency's previous estimated start date in 2024, and would provide Croatia with reserve currency status, reduce transaction costs and limit exchange rate risk to corporate and household balance sheets, said Fitch.
Citigroup, Erste, JP Morgan and Morgan Stanley were lead managers for the bond issue.
Other CEE sovereigns are also considering issues, with one source suggesting Hungary and Bulgaria are out with formal RFPs.