2nd € 1 bln bond is­sue in Au­tumn

Financial Mirror (Cyprus) - - FRONT PAGE -

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.

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