UK bets on Portuguese bonds
Financial entities based in the United Kingdom have been investing considerably in Portuguese syndicated pubic debt since the UK referendum in June 2016.
Syndicated debt is issued by the Portuguese treasury and then auctioned by the banks in Portugal among others.
The UK has also been investing in Portugal’s national debt ever since Portugal’s rating was no longer rated as ‘junk status’ (highly speculative investment rating) from September 2017, when the agency Standard & Poor’s (the first of the big three ratings agencies to do so) aligned with the Canadian agency DBRS.
According to Dinheiro Vivo, and based on the syndicated debt issues from Portugal’s treasury and public debt institute IGCP (Agência de Gestão da Tesouraria e da Dívida Pública ) from 2016 to the start of this year, almost a quarter (24%) of the amount of treasury bonds sold went to buyers in the UK.
That was double the amount of bonds purchased by entities based in Portugal (12.3%) of the total) and almost as much as the 28.4% of purchases bu three countries (France, Italy, Spain).
According to the IGCP, the bank syndicate is a group chosen fro banks to broaden new debt issue.
The syndicate is a “way normally used in first placing new series of Treasury Bonds, based on direct negotiation with Specialist Treasury Securities Traders (STSTs), during a specific period.
“This way of putting public debt up for sale enables the issuer (the Portuguese State) to achieve the double objective of placing a higher amount of bonds on the market in one go at market price and in terms of ensuring more and good quality investors over a broader geographical area.
A syndicated loan is offered by a group of lenders (i.e., banks) who work together to provide credit to a large borrower, in this case the government. Each lender in the syndicate contributes part of the loan amount, and they all share in the lending risk. One of the lenders act as the manager (arranging bank), which administers the loan on behalf of the other lenders in the syndicate. The syndicate may be a combination of various types of loans, each with different repayment terms that are agreed upon during negotiations between the lenders and the borrower.
In terms of the amount of new syndicated debt issued by the Portuguese government, 2020 was a record year given government finance needs because of the Covid-19 pandemic with €13Bn sold, while this year the government as so far sold €3Bn of bonds.
Financial market experts say that interest from the United Kingdom has to do with the fact that Portuguese public debt has had much higher prospects of gaining in value since 2016 because of the monetary help programmes such as quantitative easing and financial assistance from the European Central Bank.
These have guaranteed and continue to guarantee very high levels of bond purchases, which is driven by the value of the bond assets at the same time as the low interest rates lowers the yield.
A source at the insurer Ocidental, part of the Ageas Group, states that the “Federal Reserve has indicated that it will not raise benchmark interest rates at leat until the end of 2023” and that the European Central Bank boosted it quantitative easing programme in December.”
And with Portugal’s borrowing capacity and debt backed by the EU, it continues to be a reliable refuge, although the low yields on them right now means poor returns for investors in absolute terms.