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July 2006

Republic of Portugal. The new OT 2016. The Next Step in the Development of the OT Benchmark Curve. July 2006. CONTENTS:. Section 1: New issue summary Section 2: Portugal’s Public Finance Reform Programme Section 3: Debt management and funding. Key new issue considerations.

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July 2006

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  1. Republic of Portugal The new OT 2016 The Next Step in the Development of the OT Benchmark Curve July 2006

  2. CONTENTS: • Section 1: New issue summary • Section 2: Portugal’s Public Finance Reform Programme • Section 3: Debt management and funding

  3. Key new issue considerations • 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

  4. The new benchmark OT 2011 The new benchmark OT 2016 OT October 15, 2016 Issue Details • 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 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

  5. Italy Spain Scandinavia Other 3% 2% Germany 3% 3% 26% Portugal 4% France 6% USA 7% Benelux Ireland/UK 22% 24% OT issuance in 2006 Until now Syndicated issue of OT 2037 Final book distribution • OT April 2037-> EUR 3 billion launched via syndication in March with a strong participationof international investorsplus EUR 1.1 billion through auction • OT April 2011->EUR 3 billion through auctions • OT July 2009-> EUR 1 billion through auction THE NEXT STEP:The new OT 2016 OT/PGB benchmark yield curve The new OT 2016

  6. CONTENTS: • Section 1: New issue summary • Section 2: Portugal’s Public Finance Reform Programme • Section 3: Debt management and funding

  7. Portuguese public finance reform programme • A stable political and social environment • 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

  8. Portugal’s public finance reform programme • The Portuguese government has astrong mandate to put public finances on a sustainable footing • The Stability and Growth Programme (SGP), 2005 - 2009 (December 2005) includesa comprehensive set of measures aimed at a major overhaul of public finances, includingthe 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 commitmentsand objectives included in the SGP

  9. The Stability and Growth Programme • 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 Budget deficit Gross debt Sources: SGP (December, 2005)

  10. Portuguese economy on recovery path Real GDP growth Harmonized ICP Source: Bank of Portugal Source: SGP (December, 2005) Economic Sentiment Indicator Monthly Coincident Indicator Source: Bank of Portugal Source: Bank of Portugal

  11. Reforming the Public Administration • Cost control of the human resources expenditures • New rules and guidelines to improve human resources management • Promotion of the sustainability of the social security system, through fundamental changes of applicable rules, in line with major demographic trends Structural reforms… • Measures to reduce public expenditure

  12. Structural reforms… • Measures to reduce public expenditure • 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)

  13. … 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

  14. Supported by an important privatisation programme • 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

  15. Portuguese fiscal foundations • Portugal has a lower debt burden than euro area average and better than “core” Europe and other rating peers General government gross debt - 2005 Source: European Commission, May 2006

  16. CONTENTS: • Section 1: New issue summary • Section 2: Portuguese Public Finance Reform Programme • Section 3: Debt management and funding

  17. The most important driving factor: The main pillars: • Predictability • Transparency • Accountability Liquidity A market driven borrowing strategy • Aiming at building up a Portuguese benchmark yield curve • Size • Tradability – Efficient and standard market conditions A market oriented borrowing strategy • Priority to the development of a government benchmark yield curve Active debt management - derivatives and buy-backs • Interest rate and refinancing risk management

  18. OT issuance schedule 1 bln 1 bln 1 bln EUR billion 3 bln Syndicate + 1st + 2nd + 3rd auction auction auction Joint -Leads Retention + Co-lead pot Co- Leads OT issuance process • 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 Full pot • 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

  19. An efficient and liquid secondary market Participants in MEDIP/MTS Portugal OT secondary market driven by MTS Portugal ABN Amro Bank Banco Espírito Santo Barclays Bank PLC BCP de Investimento BNP Paribas Caixa Geral de Depósitos Citigroup Global Markets CALYON Deutsche Bank Goldman Sachs International HSBC France Lehman Brothers International Morgan Stanley Société Générale Unicredit Banca Mobiliare Fortis Bank • 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/MTS1and Bloomberg • Daily turnover, reference prices and a daily fixing in www.mtsportugal.com 15 OEVT/ Primary Dealers 16 Market Makers Banco Santander C. Hispano CCCAM CDC IXIS CECA Commerzbank Credit Suisse First Boston Dresdner Bank JP Morgan Securities Landesbank B-W Nomura International WestLB 11 Market Dealers

  20. An efficient and liquid secondary market (as of June 16, 2006) • 5-year bid-offer spreads • 10-year bid-offer spreads • 15-year bid-offer spreads • 30-year bid-offer spreads

  21. EuroMTS 1000 MTS Portugal 800 600 EUR million 400 200 0 J J F F N D S M M M M O J* A A A 2000 2001 2002 2003 2004 An efficient and liquid secondary market (as of June 16, 2006) • OT Daily average turnover in MTS Portugal and EuroMTS • Very liquid wholesale cash and repo segments • 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 J2005 J2006 • OT Repo Market Daily Average Turnover

  22. Other non-EMU Belgium & Central 6% Luxembourg Banks Other Finland Brokers Other EMU 9% 4% 1% 0.5% 8% Pension 2% Netherlands Portugal Funds & 1% 15% Insurance Italy 9% 6% Spain 4% Other UK Investment Banks France 34% Funds 61% 13% Germany 17% 10% Highly internationalised and diversified OT market • Around 85% of the turnover* in the OT secondary market is generated by non-domestic investors *Turnover with final investors reported by PD (excluding intra-PD trading) - 2005

  23. Tel: +351 21 7923300 Fax: +351 21 7993795 E-mail:info@igcp.pt Web site: igcp.pt Reuters pages: IGCP01 Bloomberg pages: IGCP IGCP: Further information on the Portuguese economy can be obtained from: Further information on the Portuguese secondary market can be obtained from: Economic Research and Forecasting Department at the Ministry of Finance Budget Department National Statistics Office Banco de Portugal (Central bank) www.mtsportugal.com Reuters pages: PT/MTS1 MTS Portugal: www.dgep.pt www.dgo.pt www.ine.pt www.bportugal.pt DISCLAIMER The 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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