Just recently the Ministry of Finance issued 5-year external debt in euro, with annual coupon of 4,25% and annual yield of 4,436%. The total value of the issue was EUR 950 million, while the submitted bids stood at over EUR 6 billion. The issue was oversubscribed in just 30 minutes from hitting the screens and the investors’ interest was sizable.

The debt issue was successful by all indicators – attracted investors’ interest, easily oversubscribed and comparatively low yield was achieved. To boast the success of the emission strange comparisons arose with the parameters of the debt issue, that happened a decade ago (2002) with maturity of 10 years and 8 months. It is supposed that with the money from the new emission the debt from 2002 should be paid off (due January 2013). It was stressed that the coupon of the old emission was a whole 7,5%, while now we managed to get the far better 4,25%.

picture: Alan Cleaver

Yes, it that’s true, but such a simple comparison between those two deals can be misleading. From one side, we speak of different maturities of the emissions: 10 years and 8 months before and 5 years now. The credit rating of our country is now different as well. On the S&P scale we had BB- back then with a stable perspective, i.e. junk rating, but now we enjoy an investment rating of BBB with the same perspective. This difference of getting four steps better rating and the transformation from junk to investment rating is not to be underestimated. On the Moody’s scale the situation is similar – the rating during 2002 was B1, i.e. junk, and now he have Baa2 investment rating, which is 5 steps up the ladder. The economic conditions are not the same as well – now there is a debt crisis and stagnation in the Eurozone and a corresponding record low interest rate of ECB of 1% (from 5th of July even below 1%), while back then – the ECB’s interest was 3,25% and the economies were growing. The government and the government guaranteed debt in the end of 2001 was 73,6% of GDP, and in the end of 2011 – below 16% of GDP.

Much clever comparison would be if the new emission was compared to recent emission of government debt in the EU countries with parameters similar to our rating and maturity date. On the S&P scale there is no other country in the EU, which has our BBB rating. Closest to us are Ireland, Spain and Italy with rating one step higher than our rating BBB+ (we won’t comment on the fairness of these ratings compared to our…). Their 5-year debt issues from the last days had highly bigger yield – this is not a surprise, considering the fiscal wellbeing of Bulgaria and their financial condition. The yield of the issues of the three countries reached 5-5,6%, which is obviously above what Bulgaria managed to get.

Another question is whether we could have managed to get even better results. If we compare the yield of the new issue with 5-year government securities in euro, sold in February this year on the internal market, an observation is being made of 1% difference (i.e. the external emission was more expensive to the government), which is not insignificant. At the same time the coupons are similar – 4% for the internal emission in comparison to the 4,25% for the external. The yield difference comes from the fact the internal emission was bought with price above the nominal value and the external – with discount from the nominal value.

In a perfect world we could’ve plotted balanced budget for this year (not a deficit of a little above BGN 1 billion), which would make possible to finance our debt payments (BGN 1,8 billion in January 2013) from the internal market only. However, the internal market has limited capability of buying government securities and with the budget deficit in place, the government resorted to the external market.

Except for the possibility the issuing of external debt to be avoided, several other questions around the new emission deserve our attention. One of them is whether there was no opportunity for gradual paying off of the principle in several payments. Doing so, in 2017, when the payment of the new emission should be made, we could’ve avoided consecutive turmoil on where and at what price the money for paying the whole sum are going to be taken from.

Another open question is why the Bulgarian investors were excluded from the emission. The explanation, which the minister of finance gave, that “it isn’t right” the internal investors to buy from an external emission, was not very convincing. One more logical explanation is that MF is trying to guarantee an unused limited source of money from the internal market, because the financial needs of the government for the next 6-7 months are close to BGN 3 billion, if we take account for the payments of the external debt in the middle of January 2013 and the plotted deficit for 2012. The new emission managed to raise BGN 1,86 billion, a source for another BGN 1 billion must be found and the government obviously counts on the internal market to be such a source.

If the internal investors were allowed to the new issue, the resource for the next emissions could’ve got smaller and thus making them more expensive. Another question is that now the internal investors can buy from the new emission on the secondary market (although a bit more expensive, which is missed opportunity for them), which might lead to the same effect.

To summaries the last week’s Eurobond emission was indisputable success. The question stands whether we should have come this far and depend on the mood of the foreign investors or maybe we should’ve made an attempt to consolidate the budget position more swiftly and limit the financial needs for the next 6-7 months, covering them cheaper internally.