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By Sarka Halas
LONDON, April 9 (IFR) - Greece's announcement that it is taking indications of interest for a five-year benchmark-sized euro-denominated bond just as the US bond market opened supports widespread speculation that US investors will feature prominently in the landmark deal.
Bankers expect big US emerging market accounts to invest in the C rated sovereign, taking advantage of the likely attractive yield.
Speculation has been rife for days over the exact timing of the deal.
Now that is out of the way, there are two questions on everyone's lips: what will the price of the deal look like and who will buy it?
"No question there's massive upside in this deal. Greece should be trading 25bp wide of Portugal," said Hans Humes, New York-based CEO of Greylock Capital.
"It's priced to be a blowout as a vote of confidence in Greece."
Demand for the deal is big. The orderbook is already more than 11bn based on price talk of 5%-5.25%.
"I've heard a rumour that one bank offered to underwrite the whole thing. So you know demand is there," said one banker away from the deal. "They've done a lot of non-deal marketing in the US. Their expectation is to sell to big EM funds in the US."
The make-up of the dealer group supports this contention. There are four US investment banks out of the six lead managers: Bank of America Merrill Lynch, Deutsche Bank, Goldman Sachs, HSBC, JP Morgan, and Morgan Stanley.
Humes believes that real money credit investors and big crossover funds - hedge funds that bought the restructured Greek bonds - are backing its comeback trade.
The deal is expected to price on Thursday, a lead manager said. Bankers speculate that leading investors such as Franklin Templeton could be prominent. Franklin has been a big investor in Ireland and Greece.
Market participants said the rumour was that the government was targeting a yield of less than 5% on the new bond.
When initial talk was first announced, the yield on Greece's 2024 bond was around 6%, but it has closed at 5.83%, according to Tradeweb. Meanwhile, the gap between Greek and Portuguese 10-year bonds has contracted to 194bp from 220bp.
Last month Greek lender Piraeus Bank sold its first bond in over four years. The 5% 500m March 2017 bond offered investors a yield of 5.125%. It is currently trading around 350bp over mid-swaps or 4.125% yield. A five-year bond from the sovereign targeting a yield of around 5% would mean a pricing level of 400bp over mid-swaps.
"That's feasible," said the banker away from the deal.
Another banker, who worked on Portugal's bond sale in January, said the price had been a moving target and that the issue would price where Greece wants it to price. Unlike Greece, Portugal has a well-defined curve.
The big European banks would have a harder time picking up new Greek bonds. Investors in Greek bonds suffered a 53.5% notional haircut in February 2012, and they participated in a bond buyback at an average price of 33.5% of par in December 2012.
Nonetheless a five-year deal would entice a broad investor base, while filling in a gap in Greece's bond curve between its short-dated T-Bills and its restructured bonds, the shortest of which matures in 2023.
"I'm very interested in the new bond. I would expect them to issue around 5%, roughly 200bp over Portugal, even a bit below," Jason Manolopoulos, managing partner at Dromeus Capital, a Greek asset manager, told Reuters recently.
"I am a happy holder of Greek debt. Greece is cheap versus other peripherals," he said.
But while Piraeus is a natural purchase for financial investors, Greece is a sovereign - and hence the pre-deal marketing in the US.
Although emerging markets investors have a natural preference for dollar bonds, US demand for euros is picking up.
As evidence, bankers point to a 1.5bn 2016 private placement from Slovenia last year that was taken up exclusively by one US emerging markets account.
Moody's rates Greece nine notches below investment grade at Caa3, while Standard & Poor's and Fitch put it six notches below investment grade at B-.
The last time Greece sold a bond in capital markets was in early 2010, when it issued a five-year at 310bp over mid-swaps. Since then, there are have been two bailout programmes worth 245bn. (Reporting by Sarka Halas; Additional reporting by Marius Zaharia; Editing by Alex Chambers and Sudip Roy)