Hungary took advantage of a broad-based rally to scoop up €1bn through a long four-year green bond on Monday, though controversy continues to plague prime minister Viktor Orban's administration over governance and social issues.
The government has been at loggerheads with the European Union, and its executive arm the European Commission, over a range of policies that has seen funding delayed to the Central European nation – though ahead of the deal Hungary said it had made a "significant step" by accepting EU demands on the independence of the judiciary, an official with the bloc told Reuters.
Still, the rule of law disputes, as well as spats with the EU over LGBT rights and other illiberal policies, raised a red flag for some investors from an ESG standpoint. "[It's] ironic that as Hungary has struggled to get EU sign-off for various EU-related funds due to rule of law issues, it has stepped up ESG-related green bond issues, which obviously fill financing gaps left by the slow disbursement of EU money," said Tim Ash, senior EM sovereign strategist at BlueBay Asset Management.
However, Zoltan Kurali, chief executive of Hungary's debt management agency, AKK, said there was no merit in conflating Hungary's issues with the EU and its international funding exercises.
“We have a green bond framework and we are reporting against that," he told IFR. "With a book of around €4.5bn then clearly we wouldn’t have needed to have stopped at €1bn if it were not for the allocation rules around green bonds. Accusations of ESG-washing are completely baseless and this deal had nothing to do with EU negotiations and so on but about market presence, engaging with investors and issuance strategy.”
Pricing on the February 2027s was widely debated, with Marten Bressel, portfolio manager at FIM Partners, saying IPTs of plus 285bp area looked attractive compared to the likes of Romania. "I think the value driver here is indeed the fact that the new bond is coming very cheap – 70bp NIP if you adjust for cash prices," said Bressel after IPTs were announced. "[Issuing] under the green framework [is] clearly a positive technical, euros [have a] dedicated investor base and it has recently been underperforming in spread terms."
Leads spotted Hungary's April 2026s and October 2027s at Z-spreads of plus 190bp and 188bp, respectively. "It looks optically cheap, but the curve is a little messed up as the comparables show," said a banker away from the deal. "Also they are all trading at a large price discount, so it’s a question of whether you look at the adjusted or unadjusted curve. But either way, it makes sense to start cheap to get the momentum into the trade – it's still a complex situation in Hungary."
The more than four times subscribed book enabled Hungary (Baa2/BBB/BBB) to print the bond at swaps plus 250bp, with demand in general for risk assets boosted by better-than-expected inflation data from the US. That data point encouraged Hungary to pull the trigger. "You have the big guys buying in size, which you've not seen for a long time, and it's encouraging that the CPI print seems to be a bit of a game-changer," said a lead.
Hungary kept the tenor short, dispensing with its standard approach for longer dated funding of five to seven years to keep costs contained. "It was a difficult debate on pricing in the current environment," said Kurali. "Some of the old bonds are super illiquid, most of the bonds trade at a deep discount and then you have to factor in intraday moves on the curve. You are trying to derive fair value from various sources and put a premium on it.”
Hungary last issued in euros in June when it raised €750m from a nine-year note, while also printing US$3bn through seven and 12-year US dollar tranches. It is a busy period in foreign currency markets once more for the sovereign, which is marketing its second offering of green Panda bonds at a coupon range of 3.20%–3.80%. The Panda bond will be Rmb2bn (€273m), have a tenor of three years, and be priced at par.
While the Panda is the result of a long-term project, the euro deal had also been sitting on the shelf for around two months.
"We started work in September on the euro deal but then the market went south. But off the back of better-than-expected inflation data from the US it created a market window and we reacted in two days,” said Kurali. "Forint has always been the destination of travel in green to develop the domestic market but as yields have started to go up, so we have been able to issue less in forint. Plus investors have required us to go back into euros, which is the biggest green market globally."
BNP Paribas, Citigroup, Erste, JP Morgan and OTP Bank were leads.