Re­tail bonds over­sub­scribed, again

Financial Mirror (Cyprus) - - FRONT PAGE -

Last month, the Public Debt Man­age­ment Of­fice Min­istry of Fi­nance sold 6-year gov­ern­ment bonds worth EUR 31 mln in its monthly of­fer, the sec­ond high­est in the pro­gramme that started last year, sug­gest­ing that in­vestors con­tin­ued to have an ap­petite for this in­vest­ment, un­af­fected by the gov­ern­ment’s move to lower in­ter­est rates on the re­tail bonds for in­di­vid­ual in­vestors from the next is­sue.

The PDMO said that the Au­gust se­ries raised EUR 30,055,900 from 187 ap­pli­cants, of whom just four were for­eign­ers who pumped in half the amount, en­ti­tling them to ap­ply for per­ma­nent res­i­dency or even in­vestor-based cit­i­zen­ship. The size of bids ranged from EUR 3,000 to 5 mln.

The re­tail bond of­fer, that is re­stricted to in­di­vid­u­als and sup­posed to have a monthly cap of EUR 10 mln, with the aim of rais­ing EUR 100-120 mln a year, seems to be this ad­min­is­tra­tion’s hen that lays the golden egg, with up­com­ing of­fers also ex­pected to be picked up.

Non-EU ap­pli­cants must in­vest about EUR 3 mln in bonds or long-term de­posits, or other tan­gi­ble as­sets such as prop­erty or eq­uity in a com­pany, and hold on to the in­vest­ment for sev­eral years in or­der to be el­i­gi­ble for cit­i­zen­ship.

The PDMO had said that for the July bonds, the sev­enth se­ries this year, it re­ceived 123 of­fers for the to­tal of EUR 31,103,800, of which 22.5 mln were from just eight for­eign in­vestors. The size of bids ranged from EUR 1,000 to 5 mln.

The re­tail bonds were con­ceived as an al­ter­na­tive source of mid-term funds hav­ing been shut out of mar­kets since 2011 when the is­land’s banks in­vested in toxic Greek gov­ern­ment bonds that led to their down­fall and a EUR 10 bln bailout pro­gramme from the Troika of in­ter­na­tional in­vestors.

The PDMO has said that it is not lim­ited to re­ceiv­ing bids for only EUR 10 mln a month and that it can ac­cept to sell all the re­tail bonds, if it so wishes.

The big­gest amount of re­tail bonds sold was in De­cem­ber 2014 when it sold EUR 37 mln, up from EUR 27 mln in Novem­ber, with most of the in­ter­est con­tin­u­ing to come from for­eign in­vestors.

The ninth se­ries for Septem­ber will ac­cept bids for EUR 10 mln from Au­gust 3 to 20.

In its first quar­ter 2015 re­port, the PDMO had said that the is­sues of 6-year bonds con­tin­ued un­hin­dered and raised EUR 57 mln in the first three is­sues of the year.

The in­ter­est rate for the 2015 se­ries has been ad­justed down­wards by 0.25 per­cent­age points and ranges from 2.50% for the first year to 5.50% in the fi­nal year. These are sub­ject to 3% tax on in­ter­est.

In May, the PDMO said it was low­er­ing the in­ter­est rate on fu­ture bonds start­ing from the Septem­ber se­ries, of­fered this month. Thus, the rate will be low­ered to 2.5% for the first 24 months, 2.75% for 24-48 months, 3.00% for 48-60 months and 3.25% for 60-70 months.

This will gen­er­ate an av­er­age 6-year yield of 2.79%, down from the 4% av­er­age at the launch of the pro­gramme. As a con­so­la­tion prize, the PDMO said that the pre­vi­ous rates would be main­tained on the bonds al­ready is­sued, un­til they ex­pire.

At the be­gin­ning of the year, the PDMO low­ered rates by 0.5% start­ing from an ini­tial 2.5% for up to 24 months and grad­u­ally in­creas­ing to 5.5% for a 60-72 months hold­ing, for an av­er­age an­nual yield of 3.875%.

The an­nual coupon rate when the se­ries was first launched in May 2014 started from 2.75% and av­er­aged at an at­trac­tive 4% over a six-year pe­riod, with a min­i­mal 3% in­come tax on the in­ter­est, far bet­ter than the 30% im­posed on all in­ter­est-yield­ing prod­ucts.

The Min­istry of Fi­nance said that the eighth se­ries of its re­tail bonds were three times over­sub­scribed, with the Au­gust se­ries rais­ing EUR 30 mln. How­ever, in­ter­est may be sub­dued for the up­com­ing is­sues as a lower in­ter­est rate kicks in.

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