The world of sovereign bond guarantees

July 19, 2013

Just as Hungary is worrying foreign investors with a plan to help households laden with foreign currency mortgages – likely to prove expensive for its banks – its trade bank has come up with an interesting structure for a planned bond.

State-owned Eximbank has been holding a roadshow this week for a two-part bond, with one part of the bond guaranteed by the World Bank’s risk insurance arm, Miga.

It’s unusual for Miga, which has been operating since 1988, to guarantee sovereign debt.

The Miga-guaranteed bond tranche will have a top investment grade AAA rating, while the other part of the debt will have a BB+ rating, in line with the rating for Hungary.

The guarantee is likely to make the higher-rated bond tranche appeal to the sort of investors who would normally be unlikely to touch Hungarian debt with a bargepole.

The yield will be lower than on a normal Hungarian bond, but investors will be hoping for a yield pick-up over other high-grade borrowers, like Germany.

It’s a similar structure to the U.S. guarantee for a dollar bond from Tunisia last year, following the ousting of president Zine El Abidine Ben Ali in 2011. The bond was issued at record low yields for Tunisia, due to the guarantee.

Another country that could benefit from a highly-rated entity to guarantee its debt would be Egypt and many investors reckon Washington might be willing to do exactly that, given it refrained from calling the army’s ouster of President Mohamed Mursi a coup. Such a  guarantee would help the country in its desperate hunt for hard cash though it has been promised aid by Saudi Arabia, Kuwait and the United Arab Emirates.

But analysts are doubtful the world, or the United States is ready for a U.S.-guaranteed Egyptian dollar-denominated bond just yet.

According to Florence Eid, chief executive of consultancy Arabia Monitor:

This has occurred in the past…going forward this may occur again but we do not think Egypt will issue Eurobonds in the current environment given the elevated credit spread premium on Egypt. Also, with the below-market funding provided by the GCC, the need for such new international issuance is diminished.

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