* Bailed-out country looks to get head start on 2014 funding
* Return to regular auctions unlikely in volatile markets
* Debt cliff approaches in 2015 after Troika programme ends
By John Geddie
LONDON, Oct 14 (IFR) - Portugal is considering a debt
exchange later this year in order to capitalise on improved
investor demand for its paper and start tackling its EUR8.2bn of
financing needs for 2014, a Portuguese government source close
to the discussions said on Monday.
Following comments over the weekend from new finance
minister Maria Luis Albuquerque that the country may now look to
issue more bonds later this year to meet demand, the source said
a debt exchange may be the most viable option.
"Exchanges are something that is on Portugal's agenda of
The country could replicate a manoeuvre it made 12 months
ago, when it took securities close to maturity from investors
and offered bonds that are due in 2015.
Yields on Portuguese bonds have rallied considerably since
its Troika of lenders revised its growth forecasts upwards at
the conclusion of the latest review earlier this month. 10-year
bonds yielded over 7.3% when the EC, ECB and IMF arrived in
Lisbon in mid-September, and are now over one percentage point
tighter at 6.26%.
"After the recent Troika review, the market is improving,
demand is coming back and the PGB curve is normalising," said
Portugal's last debt exchange back in October 2012 also
capitalised on investor demand and paved the way for its return
to syndicated markets in January.
In that debt exchange, Portugal managed to swap around
EUR4bn of a bond maturing in September 2013 for a deal due in
October 2015, markedly reducing its refinancing needs this year.
Portugal has a EUR6bn 4.375% June 2014 bond which could be a
candidate for similar debt management exercise later this year.
Portugal voiced its ambition earlier in the year to return
to regular bond auctions, something it has not done since April
2011. However, a sell-off across the PGB curve inspired by the
prospect of the US tapering its quantitative easing programme
appears to have put these plans on ice.
"You need a more stable backdrop to offer debt in this kind
of regularity," said the source, adding that further
syndications in euros are also unlikely until next year given it
has already offered two such sales in 2013.
This does not, however, rule out a US dollar-denominated
transaction, something Portugal has publicly stated it has been
looking at for some time.
However, one bank syndicate official said this could mean
"dancing with the devil", in reference to the US hedge funds
that could be lured into such a deal, and would be unlikely to
support the country over the long-term.
Hedge funds that tend to focus on distressed debt in
emerging markets have circled Portugal's debt in recent years,
and were blamed for the poor secondary performance of a EUR2.5bn
syndicated five-year tap it issued back in January.
The IGCP, Portugal's debt agency, said those funds had been
replaced by traditional European rates buyers when it issued a
new 10-year benchmark in May, and prompted it to start forming a
plan for a return to regular auctions.
Being able to regularly raise money in debt markets is
crucial for Portugal as it approaches the end of its EU-IMF
bailout in the middle of next year.
In 2013, EU-IMF funds amounted to EUR10.1bn of its financing
needs, while its issuance of bonds and treasury bills amounted
to EUR5.4bn and EUR2.4bn respectively, according to its investor
presentation updated this month.
Next year, Portugal is scheduled to receive EUR8bn in EU-IMF
financing, leaving it with EUR8.2bn to raise on its own.
In 2015 and 2016, it will need to raise EUR18.6bn and
EUR14.2bn, respectively, a feat many analysts think may be a
tall task without further official sector help.
(Reporting by John Geddie, editing by Alex Chambers, Julian