‘Big success’ for Portugal in bond swap as it seeks to exit bailout

Portugal exchanged €6.64bn of bonds to reduce debt repayments due in the next two years as it tries to exit its €78bn international bailout without needing another rescue.

The swap will push back repayments on €837m of bonds maturing in June 2014, as well as €1.64bn of debt due in October 2014 and €4.16bn of October 2015 securities Lisbon- based debt agency IGCP said yesterday.

In their place, investors will receive about €2.68bn of notes due in October 2017 and €3.97bn of June 2018 bonds.

“We view the result of the exchange transaction as a big success for Portugal as it is heading out of its existing bailout program,” David Schnautz, a fixed-income strategist at Commerzbank in New York, wrote in an email.

The debt exchange “limits the near-term rollover risk,” he said.

Portugal’s government is trying to regain full access to debt markets with the end of its rescue program from the EU and IMF approaching in June.

It forecasts that debt will peak at 127.8% of gross domestic product this year. The country’s 10-year yield is still higher than in May, when the rate reached the lowest since 2010 and the country last sold bonds.

“Portugal has been on the right track under its adjustment program, but the initial three-year time frame was not long enough,” Commerzbank’s Schnautz said. “Portugal should still opt for asking for a precautionary conditional credit line” from its international creditors, he said.

Portugal’s two-year note yield fell three basis points, or 0.03 percentage point, to 3.26% at 1:39pm, after earlier touching a six-month low of 3.18%. The five-year yield dropped 17 basis points to 4.80%.

Before today’s swap, there were €13.6bn of the 2014 notes outstanding and €13.4bn of the 2015 bonds, according to IGCP’s website.

The debt agency in October 2012 exchanged €3.76bn of notes maturing in September 2013 for the same value of those due in October 2015, reducing its 2013 repayment burden.

Portugal pays an interest rate of 3.2% on its bailout loans and its debt is ranked below investment grade by Fitch Ratings, Moody’s Investors Service and Standard & Poor’s.

“It was a good operation,” Filipe Silva, who manages €100m at Banco Carregosa in Oporto, northern Portugal, said in an emailed note.

“To accept the exchange for 2017 and 2018 is, above all, a good sign, for the risk perception of Portuguese debt.”



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