Portugal bank bond defies Pimco/BlackRock boycott

A Portuguese bank has borrowed on the international debt market for the first time in more than a year, defying a boycott from BlackRock and Pimco, which are locked in a legal fight with the country’s authorities over losses incurred in 2015.

Caixa Geral de Depósitos’ €500m subordinated bond, which priced on Thursday at a coupon of 10.75 per cent, attracted more than €2bn of orders.

CGD, which is state-owned, is the second lender this month to tap investor interest in higher-yielding, although riskier, bank bonds from the eurozone’s so-called periphery. Bankia, the state-owned Spanish lender that became an emblem for the country’s financial collapse, attracted almost €5bn of orders for a €500m subordinated bond earlier this month.

“This is as risky a barometer as you’re going to get,” Chris Telfer, a portfolio manager at ECM Asset Management, said of the CGD bond. “It’s difficult to get that type of coupon anywhere else, otherwise you enter some really distressed names.”

The sale is the first from Portugal’s banking sector since controversy erupted in 2015 over Novo Banco, rival Portuguese lender, that is behind Pimco and BlackRock’s decision to shun the CGD issue.

In late 2015, the Portuguese central bank transferred Novo Banco bonds held by international investors to a sister “bad bank”, destroying much of their value, while leaving equivalent bonds held by domestic investors unscathed. A group of 14 bondholders, including Pimco and BlackRock, launched legal action against the central bank a year ago

On Thursday the two asset managers sought to increase the pressure on Portuguese authorities, releasing a statement claiming that “a settlement would yield substantial benefits for Portugal’s reputation and ultimately benefit the Portuguese taxpayer in the form of lower borrowing costs for the sovereign and the banking sector.”

The sale by CGD will allow the Portuguese government to inject €2.5bn of capital into the bank, as part of a state aid agreement with the European Commission. In August, the bank agreed a €5bn recapitalisation plan with the EU.

The CGD debt counts as “additional tier one” capital, and is exposed to losses during periods of distress for the bank. Europe’s market for such debt sold-off sharply early last year, in part because of the fallout from the Novo Banco losses, but has since rebounded.

Investors who bought AT1 bonds at last February’s lows will have generated returns of more than 30 per cent. Although Portugal’s economy has made progress — the country’s unemployment rate has fallen to just over 10 per cent from over 15 per cent in early 2014 — its government bonds have traded at a discount to other peripheral eurozone countries over the past year.

The 10-year bond is currently trading at 4.1 per cent, for example, compared with 1.7 per cent for the Spanish equivalent.

Last month, rating agency Fitch and the OECD warned that the country’s fragile banks and the lofty levels of public debt mean it is particularly at risk from any political strains on the eurozone this year as well as the threat of protectionism.