(Removes original paragraph 11 erroneously referring to inverted long-end credit curve)
* First EM bond sold at negative yield
* Deal cheap versus euros and US dollars
* Twelve investors buy the bond
By Jon Penner
LONDON, May 1 (IFR) - Europe’s warped credit markets took a new turn on Tuesday when Poland became the first emerging markets borrower to issue a bond at a negative yield.
Until this week, the only sovereigns to have sold new debt at negative rates had been the highest-rated eurozone governments. Those deals had been denominated in euros. Poland issued in Swiss francs instead, taking advantage of a market with the lowest deposit rate in the world, at -0.75%.
Poland’s CHF580m 0% three-year bond is also the biggest ever printed with a negative yield in the Swiss franc market. And it even came a handful of basis points inside Poland’s Swiss franc curve.
But for all the headline-grabbing features, the deal puzzled bankers, who said that in spread terms Poland could have sold a bond at the same tenor in either dollars or euros at much tighter levels.
“It’s cheap as chips versus euros,” said one banker.
A concentrated investor base of 12 accounts, mostly from Poland and Germany, took advantage of the attractive pricing and bought the paper in large clips. However, Swiss investors, averse to negative yields, largely gave the deal a wide berth despite a 54bp pick-up over the deposit rate.
Leads HSBC and PKO Bank soft-sounded at mid-swaps plus 40bp area, before opening books for a minimum CHF200m at plus 38bp area. The bond was swiftly upsized and tightened to a minimum CHF350m at plus 37bp, before final pricing for CHF580m at that level for a yield of -0.213%.
Poland, rated A2/A-/A-, however, could have achieved cheaper all-in funding levels by issuing in US dollars or euros and swapping the proceeds into Swiss francs.
Poland’s euro-denominated June 2018s were quoted at 4bp over mid-swaps, according to Thomson Reuters data, while its dollar-denominated July 2019s were at plus 54bp.
Taking into account the cross-currency swap, in both cases Poland paid over 30bp more for its Swiss franc deal.
However, the lure of a negative yield proved decisive.
“With bond sale Poland joined the elite group of countries issuing bonds with a negative yield,” said Finance Minister Mateusz Szczurek, putting his country in the same club as the likes of Germany, Sweden, Austria, and the Netherlands.
The finance ministry had hinted at its intentions earlier in April when the deputy minister said it was contemplating a negative yield Swiss franc deal.
Leads showed officials options at various maturities with a wider pull for investors, especially Swiss accounts. But the ministry was intent on getting the lowest yield possible.
Geographical distribution was atypical for Swiss franc deals, which frequently go only to domestic accounts. In this case, Polish investors took almost half with 47%, followed by Germany with 34% and Switzerland with only 19%.
By account type, bank treasuries took 49%, public institutions 34%, private banks 10% and asset managers 7%.
With so few accounts taking part, the average ticket was CHF48.3m. That suggests many of the bonds were swapped, as decent sizes help cut the costs of setting up an asset swap transaction.
Leads confirmed that the bond was based on reverse enquiry from outside Switzerland. Another banker said “the deal does not make a lot of sense for traditional Swiss clients”, because of the negative yield.
In the secondary market, bonds were quoted wrapped around reoffer at mid-swaps plus 43bp-33bp, with very little paper changing hands.
The timing of the deal was impeccable, though, as three-year Swiss franc rates rose 6bp in the two days after pricing.
Another more prosaic feature of the deal was the use of the pot structure by the leads, putting it in line with more conventional European bond sales.
This is in contrast to the standard retention structure used in all Swiss issues. In pot deals, client orders go into a single book seen by all the leads, and fees are split equally. In retention deals, the book and fees are split according to orders, and not revealed to other members of the group.
The pot structure was only possible as both leads were domiciled outside Switzerland. Domestic banks are prohibited from sharing customer information under the Swiss Banking Secrecy Laws.
Proceeds will go towards refinancing a CHF1.5bn 10-year bond coming due on May 12. (Reporting by Jon Penner, editing by Sudip Roy, Julian Baker)