2nd € 1 bln bond issue in Autumn

The government plans to proceed with a second bond issue, maybe as early as next autumn, after the relative success of the 5-year 750 mln euro bond issue last Wednesday.

Encouraged by its first official foray back into the markets, the aim is to set the bar higher at 1 bln euros for a 7-year issue.

However, this venture will probably wait to see how the banks fare in their own capital raising efforts and in particular with the upcoming stress tests in October when their liquidity ratios will be put to task.

This will also be after the sixth review by the Troika of international lenders.

Ministry of Finance officials have suggested that the interest rate on the 1 bln euro bond will be lower than the 4.75% achieved on the 750 mln issue last week, which in itself was higher than the 500 mln of the initial target.

This is probably why Finance Minister Haris Georgiades has appealed to both Bank of Cyprus and Hellenic Bank to proceed with fresh capital raising in order to raise their cushion for the benchmark Core Tier 1 ratio.

Cyprus formally returned to the markets last week after three and a half years with a 5-year, 750 mln euro bond attracting strong interest and a yield of 4.75%.

When the book opened earlier in the day it received 1.5 bln euros in interest and edged closer 2.0 bln by the end of the day, allowing the government to up the size of the bond issue from the 500 mln suggested a day earlier.

Finance Minister Haris Georgiades declared on Twitter: “It’s done. Cyprus back to the markets. EUR 750 million, 4.75%, 5- year benchmark due June 2019.”

“This will be used to repay a big part of existing, more expensive and more short-term internal borrowing, which had been exerting constant pressure on public debt management,” Georgiades later explained. “It will also help boost liquidity, and at the same time it will also enable the release of funds currently trapped in the system.”

The interest coupon was initially expected to be around 5.00-5.25%, Reuters said it opened with an official guidance of 4.90%, which is tighter than initial price thoughts released on Tuesday and having dropped to 4.85%, settled at 4.75%.

“It just shows that the chase for yield is still very much on and 4.75-4.85% for 5 years in a low inflation environment is going to get a lot of attention. It’s been a supportive factor of the euro for many months now,” said Ryan Littlestone commenting on Forexlive.com.

PROTECTION

“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,” added 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,” she added.

Deutsche Bank, Goldman Sachs, HSBC, UBS and VTB Capital were arranging the sale. Cyprus is rated Caa3/B/B- by Moody’s/S&P/Fitch (positive/ positive/ stable).

The issue follows a smaller 100 mln euro, 6-year bond in April, where the government wanted to test the waters and achieved a steep 6.50% via private placement. Although it had a high yield, it nonetheless helped rebuild confidence in Cyprus paper, allowing it to exit the bailout programme sooner and resort to competitive markets to manage its public debt, including government financing.

“We are satisfied with the very positive outcome and the fact that the rate is clearly below 5% suggests that Cyprus is rightly reappearing as a stable economy with sound fundamentals,” said ruling DISY/EPP party spokesman Prodhromos Prodhromou.

“With the pace of reforms continuing, we have every reason to believe that future reviews (by the Troika of international lenders) will continue to be positive,” Prodhromou said.

LAST CASUALTY

“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 earlier, 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 had added.

On Friday, Fitch Ratings described the return to the international capital markets as positive, noting however that this does not mean that market access will be permanent as risks to the economy outlook remain.

“Cyprus’s return to the international bond market is positive for the sovereign, helping it meet funding needs and improving its financing flexibility,” Fitch said in a press release, adding however that “it is not certain that market access will be permanent, and the high level of sovereign risk in Cyprus is reflected in its ‘B-’ rating.”

The rating agency pointed out that the issue came 15 months after Cyprus entered its 10 bln EU-IMF programme and three years after it lost international market access. It adds that other bailed-out countries such as Ireland and Portugal took 20 months to return to the markets, whereas Greece took four years. “Issuing five-year bonds strengthens financing buffers within Cyprus’s EU-IMF programme, which already includes a buffer of more than 2 bln euros,” Fitch noted, adding that “proceeds will be used to partly repay a government bond issued to Bank of Cyprus as part of its restructuring.”

It also noted that the Cypriot authorities plan a smooth bond redemption profile through future marker operations, as the island’s debt repayments are set to increase to around 1 bln euros in 2016 and 1.5 bln in 2017.

“Cyprus has outperformed its programme targets (the primary fiscal deficit in 2013 was 2% of GDP, versus a programme forecast of 3.1%), partly because the GDP contraction following the collapse of the financial sector was not severe as forecast. Government expenditure control has also been tight,” the agency added. “Although not as bad as feared last year, the recession will remain deep (we forecast a 3.9% GDP contraction in 2014).

The core domestic financial sector has been recapitalised, but asset quality has deteriorated,” Fitch noted.