Cyprus readies for € 500 mln bond issue

Cyprus aims to formally return to the markets with a 500 mln euro bond issue “very soon”, possibly even at the end of June, appointing Deutsche Bank, Goldman Sachs, HSBC, UBS and Russia’s VTB Capital to arrange road shows.

This follows statements made over the weekend by Finance Minister Harris Georgiades that the government plans to return to international markets a year sooner than anticipated, even though the Cyprus bailout aid programme covers the island’s financial needs until the first quarter of 2016.

The reaction from political parties was mostly encouraging, with some opposition voices expressing concern that when the government went out with a 100 mln private placement nearly two markets ago “to test the markets” it achieved a steep 6.5% yield.

“Bond yields have been falling, there has been a string of good news on the macroeconomic front and if you have any lingering worries that Russia might suddenly change its mind about the EUR 2.5 bln restructured bond, the fact that you can tap the markets provides some protection,” said Fiona Mullen, Director of Sapienta Economics.

“So, as long as the coupon (interest rate) is not too high and it helps to smooth out maturities then it is a sensible move right now,” added the Financial Mirror columnist.

“While the economy was badly burnt in the bailout [a year ago], forcing the government to trim the holdings of depositors to recapitalise the banking sector, Cyprus has done much better than many feared,” the Financial Times reported, adding that the island is the last of the eurozone crisis casualties to return to bond markets.

“Standard & Poor’s upgraded the country’s credit rating to B after the economy only shrank by 5.4% last year - less than expected by the IMF - and predicted that the contraction would slow to 4% this year,” the FT added.

The yield on Cyprus’ 2020 bond declined to a four-year low of 4.75% on Tuesday, down from over 16.46% in June 2012.

“This is a very positive development for us. It’s a clear sign of trust towards our economy. Our liquidity will increase and we will be able to pull ourselves up,” Georgiades said on Saturday, adding that the Troika of international lenders has already given the green light to the issue.

Combined with the positive troika evaluation of the adjustment programme, the Finance Ministry, according to Georgiades, decided to risk the island’s re-entry to international markets.

“This is a result of implementing a responsible and credible policy and is a clear indication that we are on the right track,” said ruling DISY spokesman Prodromos Prodromou.

“But our problems are far from disappearing. We must continue on this course to wipe out entirely the dark cloud from the previous mismanagement,” he said.

Responding to criticism from the opposition AKEL, Prodromou added that “they seem to forget that from 2008 to 2013 our public debt shot up from 8.4 bln euros to 15.3 bln and that when they left (the previous administration) we inherited a further 10 bln euros from the bailout memorandum.”

Georgiades had said that the return to the bond markets follows recent positive developments, such as the lifting of all local currency controls, a profit report from Bank of Cyprus, the arrival of EBRD (with an anticipated investment of 600-700 mln by 2020) and the last positive review of the Troika of international lenders.

Former junior coalition partner DIKO also praised the government’s action, with party leader Nicholas Papadopoulos saying that “one of the fundamental parameters to restart the economy is for there to be liquidity in the market.”

“This has been achieved by the repayment of debt by local borrowing,” he said, adding that the fact that there is foreign investor interest is positive for Cyprus.

House President and socialist EDEK leader Yiannakis Omirou said that there must be full transparency in the issue process, as with the recent ECB decision there has been a drop in investor interest for bonds from the Eurozone periphery with the yield for the Cyprus 10-year bonds now firmly below 5%.

“So, there should be repeat of the past mistake of issuing the 100 mln euro bond at the 6.5% coupon rate.”

Alexandros Michaelides of the Citizens’ Alliance said that the return to the markets bodes well, but warned of the previous issue that was achieved with a “loan shark” interest of 6.5%.

“Our return to the markets should be when the condition are right and is we can offer it at a lower rate,” he said.