Prudent derisking
Well aware that the year ahead would prove volatile and its credit story was being weakened by tensions with the European Union and a greater need to fund in international markets, Hungary seized the first opportunity that presented itself in 2023, raising US$4.25bn through three tranches on January 4.
As a derisking exercise, the deal achieved all the issuer’s goals. The scale of the financing, which marked the Central European sovereign’s largest syndication, was such that in a single day it exceeded its US dollar funding target for the year, having initially signalled it was only looking to raise US$4bn during 2023.
Issuing in such size early on, when the going was good, was deemed necessary, even if doing so incurred new issue premiums across the tranches.
The pricing strategy was important. Hungary was faced with widening credit spreads and its bonds were trading at low cash prices. How to compensate investors for that and arrive at an appropriate landing level required thought.
“We started with a relatively attractive new issue premium and tried to tighten as we went along, But at the same time, you need to be cognisant of the fact that if you want to come back to the market soon, you can’t be very aggressive with pricing at the end,” said Zoltan Kurali, chief executive of Hungary's debt management agency.
Hungary has been locked in a tussle with the EU over the disbursement of certain funds. At the time of the bond issue, the EU was withholding funds because of concerns around the rule of law and human rights, though Kurali said there were also other factors that drove the sovereign’s funding strategy, including current account and fiscal deficits thanks to the lingering impact of Covid-19 and the rise in energy prices.
“The current account position, which was not only EU funds driven but also commodity price driven, required FX to be put into the central bank reserves from 2022 onwards,” Kurali said.
Bookrunners BNP Paribas, Citigroup, Deutsche Bank, Goldman Sachs and JP Morgan priced a US$1.5bn five-year note at 240bp over Treasuries, a US$1.5bn 10-year at plus 280bp, and a US$1.25bn 30-year tranche at plus 325bp. Combined books were over US$12.5bn.
Pricing on the two shorter tranches was tightened by 20bp from initial price thoughts, while on the longest note it came in by 25bp.
To support demand for the new issue, Hungary combined it with a liability management exercise in which it bought back a nominal aggregate amount of US$1bn of its bonds maturing in 2023 and 2024 to ensure its immediate foreign currency debt maturities were kept in check.
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