July 2006 Republic of Portugal The Next Step in the Development of the OT Benchmark Curve.
Transcript of July 2006 Republic of Portugal The Next Step in the Development of the OT Benchmark Curve.
July 2006July 2006July 2006July 2006
Republic of Portugal
The Next Step The Next Step
in the Development of the OT Benchmark Curvein the Development of the OT Benchmark Curve
2
Section 1: New issue summary
• Section 2: Portugal’s Public Finance Reform Programme
• Section 3: Debt management and funding
CONTENTS:CONTENTS:
3
The new OT provides an attractive yield pick-up on asset swap basis versus
technically tight core issues
Portugal has a highly liquid and comprehensive yield curve with a
government bond segment up to 30 years
A very internationalized and diversified base of investors in the OT market
Recent OT issuance into the 30-year has enhanced support for the OT curve
with a broadened investor base
Portugal is committed to having manageable amounts of debt due for
redemption in any year; this reduces refinancing risks and aids secondary
market performance
A new 10-year benchmark OT will complete and consolidate Republic of
Portugal’s comprehensive and liquid yield curve
Key new issue considerationsKey new issue considerations
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The new benchmark OT 2011
Issuer: Republic of Portugal
(AA-/Aa2/AA)
Initial size: EUR 3 billion
Launch and pricing: TBA
Start of book building: TBA
Maturity: October 15, 2016
Joint-Leads Managers: CGD, Citigroup, Goldman
Sachs, Morgan
Stanley,
SG CIB
Co-Leads: The remaining PD
Issue DetailsOT October 15, 2016
A new Euro benchmark bond to
further complete the Portugal’s
maturity curve and to provide
liquidity for investors
To reach a final size no lower than
EUR 5 billion giving enhanced
liquidity to the OT yield curve
Under market-making obligations
on MTS Portugal and EuroMTS
To be admitted as a benchmark
issue by Tradeweb and Bondvision
The new benchmark OT 2016The new benchmark OT 2016
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The new OT 2016The new OT 2016
OT/PGB benchmark yield curve
OT issuance in 2006OT issuance in 2006
THE NEXT STEP:THE NEXT STEP: TThe new OT 2016
Until now Syndicated issue of OT 2037Final book distribution
Germany26%
Scandinavia3%
France6%
USA7% Benelux
22%Ireland/UK24%
Portugal4%
Italy3% Spain
2%Other 3%
OT April 2037 -> EUR 3 billion launched via syndication in
March with a strong participation of international investors plus
EUR 1.1 billion through auction
OT April 2011 -> EUR 3 billion through auctions
OT July 2009 -> EUR 1 billion through auction
0
1,000
2,000
3,000
4,000
5,000
6,000
OTA
ug07
OT
Jul0
8
OT
Jul0
9
OT
May
10
OTA
pr11
OT
Jun1
1
OT
Jun1
2
OT
Sep
13
OT
Jun1
4
OT
Oct
15
OTA
pr21
OTA
pr37
EU
R m
illio
ns
6
• Section 1: New issue summary
Section 2: Portugal’s Public Finance Reform Programme
• Section 3: Debt management and funding
CONTENTS:CONTENTS:
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• The two main political parties have the backing of roughly 80% of the
Portuguese voters and share the objective of budgetary consolidation
• A government with absolute majority in the Parliament since February 2005
• A new President of the Republic was elected in January 2006
• No elections in the near term (until 2009 for Central and Local Government
and 2011 for the Presidency)
• A high degree of social consensus
Portuguese public finance reform programmePortuguese public finance reform programme
A stable political and social environment
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Portugal’s public finance reform programmePortugal’s public finance reform programme
The Portuguese government has a strong mandate to put public finances
on a sustainable footing
The Stability and Growth Programme (SGP), 2005 - 2009 (December
2005) includes a comprehensive set of measures aimed at a major
overhaul of public finances, including the following:
Central Government restructuring
Social Security reform
Improvement in the use of public resources
Fight against fraud and tax evasion
2006 Budget Law presented to the Parliament reaffirms the
Government’s commitments and objectives included in the SGP
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Gro
ss d
ebt
Bu
dg
et
def
icit
Public finances in the medium-term: SGP 2005-2009
Government committed to reduce budget deficit over the coming years
Deficit reduction based on structural measures rather than on one-off and
temporary measures
The Stability and Growth ProgrammeThe Stability and Growth Programme
Sources: SGP (December, 2005)
2.72.9
4.3
2.9 2.93.2
6.0
4.6
3.7
2.6
1.5
0
1
2
3
4
5
6
7
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
(As
a p
erce
nta
ge
of
GD
P)
Forecast
51.450.4
52.9
55.557.0
69.3
66.2
68.468.7
58.7
63.9
50
55
60
65
70
75
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009(A
s a
per
cen
tag
e o
f G
DP
)
Forescast
10
Portuguese economy on recovery pathR
eal
GD
P g
row
thM
on
thly
Co
inc
iden
t In
dic
ato
r
Eco
no
mic
Sen
tim
ent
Ind
icat
or
Source: Bank of Portugal
Source: SGP (December, 2005)
Source: Bank of Portugal
Har
mo
niz
ed
IC
P
Source: Bank of Portugal
3.9 3.9
2.0
0.8
-1.1
1.2
0.4
1.1
1.8
2.4
3.0
-2
-1
0
1
2
3
4
5
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
(% c
han
ge)
Forecast
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
II III IV I II III IV Jan Feb Mar Apr May
2004 2005 2006
(%, Y
oY
ch
an
ge
)
Portugal
Euro area
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
II III IV I II III IV Jan Feb Mar Apr May
2004 2005 2006
82
84
86
88
90
92
94
96
98
II III IV I II III IV Jan Feb Mar Apr May
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Structural reforms…Structural reforms…
Measures to reduce public expenditure
• Cost control of the human resources expenditures
• New rules and guidelines to improve human resources management
Reforming the Public Administration
Promotion of the sustainability of the social security system, through
fundamental changes of applicable rules, in line with major demographic
trends
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Improving the use of public resources
• Streamlining of the fundamental public services (education, healthcare, justice and local
Government), including the harmonization of public health protection systems in line with
the private sector regime
• Rationalization of real-estate properties
Budgetary control
• Review of legislation regarding the framework of Local Authorities financing system,
including the strengthening of financial reporting obligations
• Creation of the position of (strong) Financial Controller in each ministry
• Wage moderation (growth rates in line or below the inflation rate)
Structural reforms…Structural reforms…
Measures to reduce public expenditure
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… underpinning fiscal consolidation… underpinning fiscal consolidation
Measures to increase tax revenue
Tax rate increases
• Increase in VAT, as well as in personal income tax rate, with some of the revenue assigned to the social security system
• Tax increase on tobacco and fuel
• New additional personal income tax bracket for the highest incomes
Fight against fraud and tax evasion
• Lifting banking secrecy for tax purposes
• Publication of tax debtors list
• New debt recovery instruments and mechanisms, significant worsening of sanctions for non-compliance with tax obligations)
Reduction of tax benefits and exemptions
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At least 80% of the revenues will be used to reduce the outstanding government debt, thus reducing the borrowing needs
Expected privatisation revenues
Privatisation Programme
(EUR millions)2006 2007 2008 2009
Privatisation revenues 1.600,0 800,0 700,0 600,0% GDP 1.1 0.5 0.4 0.3
Privatisation program for 2006-2007
Sectors Pulp and paper Oil and gas Electricity Electricity transmission Portuguese airlines Air navigation public services
Supported by an important privatisation programmeSupported by an important privatisation programme
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General government gross debt - 2005
Portuguese fiscal foundationsPortuguese fiscal foundations
Portugal has a lower debt burden than euro area average and better than “core” Europe and other rating peers
Source: European Commission, May 2006
0
20
40
60
80
100
120
GRE ITA BEL GER FRA POR AUS NETH SPA FIN IRE
(As
a %
of
GD
P)
Euro area average = 70.8%
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CONTENTS:CONTENTS:
• Section 1: New issue summary
• Section 2: Portuguese Public Finance Reform Programme
Section 3: Debt management and funding
17
Aiming at building up a Portuguese benchmark yield curveAiming at building up a Portuguese benchmark yield curve
A market driven borrowing strategyA market driven borrowing strategy
• Size
• Tradability – Efficient and standard market conditions
The most important driving factor:
LiquidityLiquidity
A market oriented borrowing
strategy
A market oriented borrowing
strategy
Active debt management -
derivatives and buy-backs
Active debt management -
derivatives and buy-backs
Priority to the development of a government benchmark yield curve
Interest rate and refinancing risk management
• Predictability Predictability
• TransparencyTransparency
• AccountabilityAccountability
The main pillars:
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Full pot
Co-Leads
Joint-Leads
Retention+
Co-lead pot
OT launched through syndication…OT launched through syndication…
Building up an international and diversified investor base
Benchmark size: € 3 billion
Allowing the benchmark OT to be traded in MTS Portugal with quoting obligations from start
… and increased through auctions
OT syndication processOT syndication process
PD are the only underwriters
PD committed to place bonds in high quality investors
IGCP is the active manager
E-book building
OT issuance processOT issuance process
OT issuance scheduleOT issuance schedule
Syndicate + 1stauction
+ 2ndauction
+ 3rdauction
EU
R b
illi
on
1 bln
1 bln
1 bln
3bln
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Participants in MEDIP/MTS PortugalParticipants in MEDIP/MTS Portugal
An efficient and liquid secondary marketAn efficient and liquid secondary market
ABN Amro Bank Banco Espírito Santo Barclays Bank PLCBCP de Investimento BNP Paribas Caixa Geral de Depósitos Citigroup Global Markets CALYONDeutsche BankGoldman Sachs InternationalHSBC FranceLehman Brothers InternationalMorgan StanleySociété GénéraleUnicredit Banca Mobiliare
Fortis Bank
Banco Santander C. HispanoCCCAMCDC IXIS CECACommerzbankCredit Suisse First BostonDresdner Bank JP Morgan SecuritiesLandesbank B-WNomura InternationalWestLB
16 M
arke
t M
aker
s11
Mar
ket
Dea
lers
15 O
EV
T/
Prim
ary
15 O
EV
T/
Prim
ary
Dea
lers
Dea
lers
All OT listed in Lisbon on MEDIP/MTS Portugal
In parallel quotation with EuroMTS
MEDIP/MTS Portugal a regulated “local” market
Driven by market-making obligations from Primary Dealers
Market-making obligations in line with other MTS platforms
Prices spreading over other market segments
Trading spreads within a narrow range and similar to market peers
Settlement through Euroclear/Clearstream
Prices disclosed in real-time to non participants: Reuters PT/MTS1 and Bloomberg
Daily turnover, reference prices and a daily fixing in www.mtsportugal.com
OT secondary market driven by MTS PortugalOT secondary market driven by MTS Portugal
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10-year bid-offer spreads10-year bid-offer spreads
An efficient and liquid secondary marketAn efficient and liquid secondary market(as of June 16, 2006)
5-year bid-offer spreads5-year bid-offer spreads
30-year bid-offer spreads30-year bid-offer spreads 15-year bid-offer spreads15-year bid-offer spreads
Maximum B/O spreads of 4 ticks
0
1
2
3
4
Mar
-05
Apr
-05
May
-05
Jun-
05
Jul-0
5
Aug
-05
Sep
-05
Oct
-05
Nov
-05
Dec
-05
Jan-
06
Feb
-06
Mar
-06
Apr
-06
May
-06
Jun-
06
Tic
ks
Maximum B/O spreads of 10 ticks
0
1
2
3
4
5
6
7
8
9
10
Mar
-05
Apr
-05
May
-05
Jun-
05
Jul-0
5
Aug
-05
Sep
-05
Oct
-05
Nov
-05
Dec
-05
Jan-
06
Feb
-06
Mar
-06
Apr
-06
May
-06
Jun-
06
Tic
ks
Maximum B/O spreads of 20 ticks
0
2
4
6
8
10
12
14
16
18
20
Mar
-06
Apr
-06
May
-06
Jun-
06
Tic
ks
Maximum B/O spreads of 5 ticks
0
1
2
3
4
5
Mar
-05
Apr
-05
May
-05
Jun-
05
Jul-0
5
Aug
-05
Sep
-05
Oct
-05
Nov
-05
Dec
-05
Jan-
06
Feb
-06
Mar
-06
Apr
-06
May
-06
Jun-
06
Tic
ks
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An efficient and liquid secondary marketAn efficient and liquid secondary market
OT Daily average turnover in MTS Portugal and EuroMTS
OT Repo Market Daily Average Turnover
• MTSP OT daily average turnover in
2005 : € 517.5 million
Jan-June 2006 : € 531.3 million
• A last resort repo window provided by
IGCP to all market makers in MTSP
Very liquid wholesale cash and repo segments
J200
5
J200
6
0
500
1000
1500
2000
2500
3000
J 20
02 F M A M J J A S O N DJ
2003 F M A M J J A S O N D
J 20
04 F M A M J J A S O N DJ
2005 F M A M J J A S O N D
J 20
06 F M A M J*
EU
R m
illio
n
0%
100%
200%
300%
400%
500%
600%
700%
800%
as
% o
f c
as
h t
urn
ov
erDaily average turnover
As % of cash turnover
0
200
400
600
800
1000
2000
2001
2002
2003
2004
F M A M J J A S O N D F M A M J*
EU
R m
illi
on
EuroMTS
MTS Portugal
(as of June 16, 2006)
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Highly internationalised and diversified OT marketHighly internationalised and diversified OT market
Banks61%
Central Banks
4%Brokers
8%
Other1%
Other Investment
Funds17%
Pension Funds &
Insurance9%
Other EMU2%
Other non-EMU6%
Netherlands1%
UK34%
Portugal 15%
Belgium & Luxembourg
9%Finland0.5%
Italy6%
Spain4%
France13% Germany
10%
*Turnover with final investors reported by PD (excluding intra-PD trading) - 2005
Around 85% of the turnover* in the OT secondary market is generated by Around 85% of the turnover* in the OT secondary market is generated by non-domestic investors non-domestic investors
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Further information on the Portuguese economy can be obtained from:
Tel: +351 21 7923300Fax: +351 21 7993795E-mail:[email protected]
Economic Research and Forecasting Department at the Ministry of Finance
Budget Department
National Statistics Office
Banco de Portugal (Central bank)
Web site: igcp.ptReuters pages: IGCP01
Bloomberg pages: IGCP
Further information on the Portuguese secondary market can be obtained from:
MTS Portugal: www.mtsportugal.com
Reuters pages: PT/MTS1 www.dgep.pt
www.dgo.pt
www.ine.pt
www.bportugal.pt
IGCP:
DISCLAIMERThe information and opinions contained in this document have been compiled or arrived at from sources believed to be reliable and in good faith, but no representation or warranty, express or implied, is made as to their accuracy, completeness or correctness. All opinions and estimates contained in this document are published for the assistance of recipients, but is not to be relied upon as authoritative or taken in substitution for the exercise or judgment by a recipient and, therefore, does not form the basis of any contract or commitment whatsoever. IGCP does not accept any liability whatsoever for any direct or consequential loss arising from any use of this document or its contents.