Monday 23 April 2018

Austria taps the market with first 100-year bond

Near-zero rates in the eurozone mean moves to riskier debt. Stock photo
Near-zero rates in the eurozone mean moves to riskier debt. Stock photo

Lyubov Pronina and Boris Groendahl

Austria is poised to become the first euro member to issue a benchmark-sized century bond, allowing it to lock in some of the lowest-ever funding costs for the next 100 years.

Ireland is among the handful of countries to have previously issued a 100-year bond, but in the Irish case it was far smaller at €200m than the Austrian debt and was in response to a specific request from a lender who wanted to balance its own portfolio.

Austria is borrowing the debt maturing in 2117 at a fairly small premium of half a percentage point more than it pays for its existing 30-year benchmark bond. Demand is high.

Investor orders for the notes have topped €11bn, according to an email from Austrian treasury spokesman Christian Schreckeis.

Near-zero interest rates in Europe and the US have forced many investors running funds that need to cover pension or insurance liabilities into riskier, or longer-maturity debt in search of better yields.

That's made it easier and cheaper for lower-rated borrowers, such as emerging market governments to raise money and for high-quality issuers to sell debt with longer maturities.

In the bond market the interest, or coupon, is paid annually but the principal only falls due at the end of the term in a single payment.

With a 100-year bond there is a significant risk that inflation will gobble up the real value over time. There's even a heightened chance than the borrower state may no longer exist by the time the debt falls due.

The Austrian Republic, like Ireland, did not exist as a state 100 years ago.

"From an issuer perspective it's fantastic as it enables them to lock in ultra-low yields for a very long time," said Uwe Maderer, portfolio manager at Deka Investment in Frankfurt, who said he may bid for the bonds if the spread remains above 57 basis points over the benchmark.

"This is really affecting global investing in bonds, not only in the eurozone," he said.

Austria is also marketing a sale of euro benchmark five-year notes that have received more than €11.5bn of bids, Schreckeis said.

Argentina sold $2.75bn in century bonds in June, just 14 months after returning to international capital markets for the first time since a 2001 economic collapse resulting in a $95bn default and years of litigation with Wall Street hedge funds.

Ireland and Belgium have also sold century bonds but below so-called benchmark size, according to data compiled by Bloomberg.

Bank of America, Austria's Erste Group, Goldman Sachs, NatWest Markets and Societe Generale are arranging the sale.

Irish Independent

Business Newsletter

Read the leading stories from the world of Business.

Also in Business