Finland's comeback to primary syndicated markets went without a glitch on Wednesday, the €3bn long 10-year deal ending up more than four times covered as investors showed conviction in the sovereign despite the geopolitical noise that has shaken the region in recent weeks.
As one of the best rated European sovereigns at Aa1/AA+/AA+, Finland's syndicated deals are typically smooth exercises, with the focus generally being on how tight it can price to its secondary curve. However, with its neighbour's war with Ukraine driving the country's decision to join Nato after decades of neutrality, the stakes were higher.
"There is the potential tension around them joining Nato but that’s been allayed by the fact that Russia has not come out all guns blazing, strictly and figuratively speaking," a senior syndicate banker away from the trade said.
"[Russia's] response has been muted. There’s no doubt that the spread versus Germany has widened. Before we had the response to the pandemic, it was around 50bp and then got to 18bp–20bp. We’re now back to 45bp. So, we’ve definitely seen some spread differential come into the price. But, given their ratings, they remain a core investment for many eurozone buyers, not just the SWF or official institutions.
"Having said that, the current situation will have an impact on people’s willingness to take on Finnish risk. Yes, a lot is baked into the price and it’s very attractive versus Germany, but some accounts can’t ignore the geopolitical risk and might get a tap on the shoulder saying they can’t add more risk. ... While some buyers might be sidelined, I don’t see them having any issues selling their debt.”
That much was clear in the final books for the transaction via Barclays, BNP Paribas, Citigroup, Credit Agricole and Nomura, which closed at over €12.75bn, including €2.2bn of lead manager interest.
"It looked like a very smooth trade," another senior syndicate banker said. "Compared to other European countries, Finland has very little energy dependency on Russia, they just happen to be positioned near them. A lot of other countries have a lot more dependency, and unless Russia goes across the border, it's not really a big issue."
Still, for an issuer typically focused on razor-sharp pricing, it was happy to start with a decent concession built in, with bankers away from the deal putting the starting premium at around 5bp.
"I thought it was probably a 5bp–6bp concession, which is probably a reflection of what we're seeing in the market right now but also things being different for them as an issuer given the geopolitical context," a DCM banker away said.
"We can really sense the withdrawal from the ECB right now. If you think about it, we had constant negative supply since 2018 and that's turning completely. We're seeing rates adjust as a result, which means that we get a different set of investors engaging, but it's clear that we've lost a significant market-stabilising element in secondary in terms of absorption of paper. We've seen that in order book sizes, which are significantly smaller than they were six, 12, 18 months ago."
Leads, though, had some room for manoeuvre and pricing was revised by 2bp from the less 13bp area guidance to be set at less 15bp. That pricing revision by Finland was in contrast to Lithuania, the other sovereign from the region that was also in the market on Wednesday, which failed to move the dial from its initial level.
Lithuania fails to budge pricing
To be sure, the Baltic state has a very different investor base from the likes of Finland – and France, Italy and Austria, which have all been in the market over the past 24 hours or so.
The two leads on Lithuania, Barclays and BNP Paribas, opened books for a benchmark-sized 10-year deal at guidance of 60bp area over swaps, which bankers put 15bp–25bp back of fair value. However, an initial book update of just €800m, including €75m from the leads, meant the sovereign was unable to tighten pricing, which came at plus 60bp.
Lithuania (A2/A+/A) then set the size at €650m, even though the book rose only marginally to €820m (including €50m from leads). Some sources said the sovereign had been hoping to raise €750m–€1bn, though one banker close to the deal said the target was €500m minimum.
The deal was the second in a row from the CEEMEA region in which leads have been unable to push pricing from initial levels, after Polish development bank BGK printed a €500m seven-year note at 155bp over swaps on Tuesday.
Kasparas Subacius, fund manager at CEE investment firm INVL Asset Management, said after initial pricing was announced the new Lithuania bonds "are quite fairly priced" but expected some tightening.
He even thought that the new note could price around the 40bp level that Lithuania's domestic 2032 bond was trading – which, although not very liquid, is still eligible for central bank purchases. He thought the benchmark size and greater liquidity of an international issue would support the trade.
One of the challenges facing issuers such as Lithuania – and BGK – is that in difficult markets they do not have broad appeal. They fall between the cracks. Lithuania, for example, is too rich or no longer relevant for EM funds, but equally it is not a compelling or liquid enough name for investors in government bonds.