April 2007April 2007April 2007April 2007
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
A new OT 2017A new OT 2017OT/PGB yield curve
OT issuance in 2007OT issuance in 2007
€ 12 - 14 billion (gross) to be issued through government bonds (OT)
• Two new benchmarks to be launched through syndication
• Reopening of OT previously issued
ANNOUNCED
ALREADY IMPLEMENTED
THE NEXT STEP: The new OT 2017
€ 1 billion (gross) issued through auction of the OT October 2016
0
1,000
2,000
3,000
4,000
5,000
6,000
OTA
ug
07
OT
Jul0
8
OT
Jul0
9
OT
Ma
y10
OTA
pr1
1
OT
Jun
11
OT
Jun
12
OT
Se
p1
3
OT
Jun
14
OT
Oct
15
OT
Oct
16
OTA
pr2
1
OTA
pr3
7
EU
R m
illio
n
issued before 2007 issued in 2007
4
Issuer: Republic of Portugal
(AA-/Aa2/AA)
Initial size: EUR 3 billion
Launch and pricing: Week of April 23, 2007
Start of book building: Week of April 23, 2007
Maturity: October 16, 2017 (short first)
Joint-Leads Managers: BES, HSBC, Lehman
Brothers, Morgan Stanley,
SG CIB
Co-Leads: The remaining PD
Issue DetailsOT October 16, 2017
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 2017The new benchmark OT 2017
5
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
Efficient and liquid secondary market: market-driven borrowing strategy focused on
channelling liquidity into Euro benchmarks
Strong historical performance of OT benchmarks vs. peers
A very internationalized and diversified base of investors in the OT market
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
6
• Section 1: New issue summary
Section 2: Portugal’s Public Finance Reform Programme
• Section 3: Debt management and funding
CONTENTS:CONTENTS:
7
• 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 meaningful 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
8
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), 2006 - 2010 (December 2006)
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
2007 Budget Law reaffirms the Government’s commitments and objectives
included in the SGP
9
Public finances in the medium-term: SGP 2006-2010
• Government committed to reduce budget deficit over the coming years
• Deficit reduction based on structural measures rather than on one-off and temporary
measures
• In 2006, the deficit decreased from 6% to 3,9% of GDP, a figure well below the 4,6%
objective pointed in the Stability Growth Programme 2006-2010
• Therefore, the SGP is now under review by the Government in order to adjust public
finances objectives to this better-than-expected result
• However, the Prime Minister has already set the deficit target for 2007 at 3,3% of GDP
(0,4pp below the SGP forecast), which increased the probability of having a deficit below
3% in 2008
• Most recent forecasts from IMF support government’s projections for budget deficit
The Stability and Growth ProgrammeThe Stability and Growth Programme
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, 2006)
Source: Bank of Portugal
Har
mo
niz
ed
IC
P
Source: Bank of Portugal
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
I II III IV I II III IV Jan Fev Mar
2005 2006 2007
(%, Y
oY
ch
an
ge
)
Portugal
Euro area
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
I II III IV I II III IV Jan Fev
2005 2006 200784
86
88
90
92
94
96
98
100
102
I II III IV I II III IV Jan Fev
3.9 3.9
2
0.8
-1.1
1.2
0.4
1.41.8
2.4
3.0 3.0
-2
-1
0
1
2
3
4
5
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
(% c
han
ge)
Forecast
11
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
12
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
13
… underpinning fiscal consolidation… underpinning fiscal consolidation
Some measures already taken to increase tax revenue and
others in progress
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
14
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
15
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%
16
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 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:
18
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 up to € 5 or € 6 billion
OT 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
Syndicate +1stauction
+2ndauction
+3rdauction
EU
R b
illi
on
1 bln
1 bln
1 bln
3 bln
Co-Leads
Joint-Leads
Full pot
Retention+
Co-lead pot
19
Participants in MEDIP/MTS Portugal
An efficient and liquid secondary marketAn efficient and liquid secondary market
ABN Amro Bank Banco Espírito Santo Barclays Bank PLCBNP Paribas Caixa Geral de Depósitos Citigroup Global Markets CALYONDeutsche BankGoldman Sachs InternationalHSBC FranceLehman Brothers InternationalMorgan StanleySociété GénéraleHVB
Banco Millennium BCPIFortis BankING Bank NV
Banco Santander C. HispanoCCCAMCECACommerzbankCredit SuisseDresdner Bank JP Morgan SecuritiesLandesbank B-WMitsubishi UFJ Securities Int. plcNatixisNomura InternationalWestLB
17 M
arke
t M
aker
s12
Mar
ket
Dea
lers
14 O
EV
T/
Prim
ary
14 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 Portugal
20
10-year bid-offer spreads
An efficient and liquid secondary marketAn efficient and liquid secondary market(as of April 13, 2007)
5-year bid-offer spreads
30-year bid-offer spreads 15-year bid-offer spreads
0
1
2
3
4
5
Feb
05
Mar
05
Apr
05
May
05
Jun
05Ju
l 05
Aug
05
Sep
05
Oct
05
Nov
05
Dec
05
Jan
06F
eb 0
6M
ar 0
6A
pr 0
6M
ay 0
6Ju
n 06
Jul 0
6A
ug 0
6S
ep 0
6O
ct 0
6N
ov 0
6D
ec 0
6Ja
n 07
Feb
07
Mar
07
Apr
07
TicksMaximum B/O spreads of 5 ticks
0
5
10
15
20
Mar
06
Apr
06
May
06
Jun
06
Jul 0
6
Aug
06
Sep
06
Oct
06
Nov
06
Dec
06
Jan
07
Feb
07
Mar
07
Apr
07
Ticks Maximum B/O spreads of 20 ticks
0
1
2
3
4
Feb
05
Mar
05
Apr
05
May
05
Jun
05Ju
l 05
Aug
05
Sep
05
Oct
05
Nov
05
Dec
05
Jan
06F
eb 0
6M
ar 0
6A
pr 0
6M
ay 0
6Ju
n 06
Jul 0
6A
ug 0
6S
ep 0
6O
ct 0
6N
ov 0
6D
ec 0
6Ja
n 07
Feb
07
Mar
07
Apr
07
TicksMaximum B/O spreads of 4 ticks
0123456789
10
Feb
05
Mar
05
Apr
05
May
05
Jun
05Ju
l 05
Aug
05
Sep
05
Oct
05
Nov
05
Dec
05
Jan
06F
eb 0
6M
ar 0
6A
pr 0
6M
ay 0
6Ju
n 06
Jul 0
6A
ug 0
6S
ep 0
6O
ct 0
6N
ov 0
6D
ec 0
6Ja
n 07
Feb
07
Mar
07
Apr
07
Ticks Maximum B/O spreads of 10 ticks
21
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
2006 : € 444 million
2007 (as of April 13): € 415 million
• A last resort repo window provided by
IGCP to all market makers in MTSP
Very liquid wholesale cash and repo segments
0
150
300
450
600
750
900
2000
2001
2002
2003
2004
2005
J200
6 F M A M J J A S O N D
J200
7 F M
EU
R m
illio
n
Avg OT - EuroMTS
Avg OT - MTS Portugal
0
500
1000
1500
2000
2500
3000
3500
4000
4500
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 J A S O N DJ
2007 F M
EU
R m
illio
n
0%
200%
400%
600%
800%
1000%
1200%
1400%
as %
of
cash
tu
rno
ver
Daily average turnover
As % of cash turnover
22
Highly internationalised and diversified OT marketHighly internationalised and diversified OT market
*Turnover with final investors reported by PD (excluding intra-PD trading) - 2006
Around 82% of the turnover* in the OT secondary market is generated by non-domestic investors
Fund Manager38.9%
Other3.0%Hedge Fund
2.4%
Banks40.4%
Pension Funds & Insurance
6.1%
Central Bank and Other Public Entity
9.2%
New EU0.1%
France25.0%
Belgium & Luxembourg
5.7%
Spain2.0%
Other EMU1.8%
Other countries2.8%
Italy3.5%
Netherlands2.2% Portugal
18.3%
UK29.3%
Germany9.3%
23
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.
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