A splash of CEE issuances hit the market last week and it’s definitely worth our while to explore the implied valuations recorded on these transactions. In our view, the focus of CEE interest was on ROMANI€ placement last Tuesday (8Y at 5.326% YTM and 13Y at 5.686% YTM), so we’re going to pay extra attention to this particular placement. But let’s take the story from the very beginning.
Romania managed to collect a total of 8bn USD this year prior to Tuesday’s funding, mostly through the USD placement because of around 100bps cheaper cost. Tuesday’s dual tranche collected another 3.2bn EUR, raising this year’s funding level to 10.6bn EUR. Speaking about German paper and G-spread, the 8Y was placed at DBR 0 02/15/2032€+288.5bps (1.8bn EUR placement versus 3.5bn EUR book, implying a 1.94 bid-to-cover), while the 13Y floated at DBR 4 01/04/2037€+308.2bps (1.4bn EUR placement versus 2.9bn EUR book, implying a 2.07 bid-to-cover). Here’s the fun part – Finance Minister Marcel Ciolacu said that they plan a total net 2024 issuance between 8.5bn EUR and 9.5bn EUR, meaning that this syndication might be the last one this year. We beg to differ since several rounds of election spell public wage and pension hikes, meaning that fiscal largesse might bring one more bond placement into the game in the second half this year.
However, the main question is did these prospects for stronger fiscal spending this year prompt financial markets to ask for a bigger premium from ROMANI€? Well, the short answer is – no, they didn’t. Junior traders might be amazed by this observation, but the veterans know how the game works – low volatility and a good run on equities meant that the risk premium on HY was fading away, opening up a window of opportunity for the Romanian Ministry of Finance to get some extra funding cheaper than a few months ago. Check out how the premium to Germany on the existing ROMANI 2 01/28/2032€ shrank significantly this year from about B+360bps to about B+280bps:
Naturally, the Ministry of Finance is definitely going to interpret this move as a vote of confidence in global financial markets, however be mindful that this has got more to do with the direction of global risky assets (equities and HY) than idiosyncratic factors such as fiscal policy. Ask yourself – if FED decides to hold interest rates higher for longer and SPX takes a nosedive, do you think that global markets will give another favorable vote of confidence to ROMANI€? Pay attention that this is not a move we anticipate, but rather a scenario we try to highlight in order to make our readers mindful of the risks they are carrying on their balance sheets.
A more important question we need to ask ourselves is – where are these bonds trading now? With a bid-to-cover on ROMANI€ close to 2.0x, you can expect the paper to trade slightly wider compared to when issued, and you would be completely correct. So, ROMANI 5.25 05/30/2032€ is traded at DBR 0 02/15/2032€+290bps, while ROMANI 5.625 05/30/2037€ is traded at DBR 0 02/15/2037€+310bps, meaning that both are a tad wider. We don’t see a big selling pressure coming from anywhere, meaning that the hedge funds might have been sitting this one through. Time will tell.
The chart submitted above and the sentiment from the markets might be telling us that after a spread tightening of this magnitude, spreads to benchmark might have only one way to go, but we caution against taking these one-sided views. Several bulge bracket banks have been advocating in favor of opening up carry-positive trades throughout the summer because we might see a season of low volatility taking hold until Jackson Hole (August 22nd-24th). Nevertheless, banks are cheering for positive carry/low duration trades, so it’s a question of how does this fit in the overall strategy (we have 8Y and 13Y placement). What we do see on the Street is that our investors are not scared of duration anymore and it seems that very few are taking the possibility of introducing additional rate hikes in the US very seriously. Could be that the recent move north of the benchmark curve might have been the hike markets have been looking for and the FED needs not to do anything in addition?
Again – time will tell.
According to the latest report on the performance of the Croatian financial institutions, the total loans issued in March 2024 grew by 0.5% MoM, 3.7% YoY and amounted to EUR 43.6bn. At the same time, the average interest rate on new housing loans amounted to 3.76%, on new consumer loans 5.92%, while for corporates the average interest rate amounted to 5.04%, all growing on a YoY basis, but showing signs of slowdown on the MoM basis.
Recently, the Croatian National Bank, HNB, released its report on the performance of Croatian financial institutions, including the data on loans in the country, for March 2024. In the report, we can see that the total loans issued amounted to 43.6bn, growing by 0.5% MoM, and 3.7% YoY.
Breaking this down further, the two largest categories, i.e. household loans and corporate loans recorded growth on both the MoM and YoY basis during the month. Household loans amounted to EUR 22.2bn, growing by 1% MoM, and 10.4% YoY. Corporate loans meanwhile, amounted to EUR 14.4bn, also growing by 1% MoM, and 2.9% YoY.
Corporate and household loans growth rates (January 2015 – March 2024, YoY, %)
Source: HNB, InterCapital Research
Taking a closer look at these categories, inside the household loans, housing loans remain the largest category at 49.7% of the total, or EUR 11.1bn in absolute amount, growing by 0.6% MoM, and 10.8% YoY. Following them there are consumer loans, which amounted to EUR 8.3bn, representing 37.2% of the total, and growing by 1.6% MoM, and 12.6% YoY. One other notable category is the other loans category, which recorded total loans issued of EUR 1.35bn, growing by 1.7% MoM, and 7% YoY.
Moving on to corporate loans, they are broken down into three main categories: working capital loans, investment loans, and other loans. The largest of these, i.e. investment loans, amounted to EUR 6.04bn in March 2024, growing by 1.2% MoM, and 7.8% YoY. Following them there are working capital loans, which amounted to EUR 4.57bn, growing by 3.1% MoM and 5.7% YoY, as well as the other loans’ category, which amounted to EUR 3.95bn, and decreased by 0.7% MoM, and 4% YoY.
Composition of Croatian loans to households (October 2011 – March 2024, EURm)
Source: HNB, InterCapital Research
Turning our attention to the 2nd most important component of loans, i.e. interest rates, we can see that while growth is still recorded on a YoY basis, there has been somewhat of a slowdown and stabilization on a MoM basis. The average interest rate on newly issued housing loans amounted to 3.76%, growing by 0.84 p.p. MoM, and 0.04 p.p. YoY. For consumer loans, the average interest rate was 5.92%, an increase of 0.47 p.p. MoM, but a decrease of 0.16 p.p. YoY, while for corporate loans, the average interest rate was 5.04%, an increase of 1.12 p.p. MoM, but a decrease of 0.16 p.p. YoY.
Average new housing and corporate loan interest rates (December 2011 – March 2024, %)
Source: HNB, InterCapital Research
Overall, what can be said about the loans in Croatia is the fact that there is obviously still demand for them, especially from households. One interesting factor is the fact that consumer loans continue to grow as much, while also having on average the highest interest rate. Stabilization in the overall interest rates has been recorded, however, and this was to be expected as no hikes from the ECB were seen for quite a while now. Given that the Croatian economy has largely avoided a recession, with growth in real wages and overall GDP growth recorded, it is unlikely that growth in the coming period will stop. In the future, it is unlikely that the interest rates will increase anywhere higher, and with the expected rate cuts, the interest rates on loans could also start receding. While profitability in banks across the board has largely been driven by these higher rates, a reduction in ECB rates to app. 2.5% which is currently estimated would still leave room for profit on the net interest margin, while at the same time allowing for more room for volume expansion.
Here you can find the dates for the upcoming events of the regional companies.
| wdt_ID | Date | Ticker | Announcement | Country |
|---|---|---|---|---|
| 44 | 27.5.2024 | POSR | Sava Re General Meeting of Shareholders, announcement of resolutions | Slovenia |
| 45 | 29.5.2024 | ADPL | AD Plastik Supervisory Board Meeting | Croatia |
Due to the nature of these events, they are subject to change (might be postponed or canceled).