Re­tail bonds start year with new high

Financial Mirror (Cyprus) - - FRONT PAGE -

The Pub­lic Debt Man­age­ment Of­fice (PDMO) at the Min­istry of Fi­nance has auc­tioned a record EUR 47.9 mln 6year re­tail bonds, with the Jan­uary 2016 se­ries set­ting the pace for the gov­ern­ment’s fi­nanc­ing needs in the new year.

With the 2015 to­tal reach­ing EUR 205.18 mln, the PDMO will con­tinue to of­fer EUR 10 mln dur­ing its monthly auc­tions in the pri­mary mar­ket, which are mainly sub­scribed by third coun­try na­tion­als seek­ing to take ad­van­tage of Cyprus “de­posits for res­i­dency” pro­gramme.

The re­tail bonds, of­fered only to in­di­vid­ual in­vestors, carry a higher in­ter­est rate over the 6-year pe­riod, in ad­di­tion to a com­pet­i­tive 3% tax on in­ter­est, com­pared to a 30% rate on de­posits in com­mer­cial banks.

The PDMO said that for the Jan­uary 2016 se­ries, it re­ceived a to­tal of 130 ap­pli­ca­tions to­talling EUR 47,920,000. Of th­ese, 114 ap­pli­ca­tions were sub­mit­ted by Cypri­ots and 16 ap­pli­ca­tions by for­eign in­vestors. Of­fers ranged from EUR 3,000 to 2.95 mln.

The sec­ond se­ries for 2016 will be is­sued on Fe­bru­ary 1, main­tain­ing a monthly cap of EUR 10 mln, ap­pli­ca­tions for which may be sub­mit­ted from Jan­uary 4 to 20.

The ra­tio of lo­cal to for­eign in­vestors had been about 1:2, but this is ex­pected to change in favour of non-EU na­tion­als, with any in­vest­ment up­ward of EUR 5 mln en­ti­tling the buyer to a fast-track cit­i­zen­ship.

En­thu­si­asm in the monthly is­sue of 6-year re­tail bonds, the gov­ern­ment’s al­ter­na­tive fi­nanc­ing method af­ter the econ­omy crashed two years ago, re­cov­ered in Septem­ber when the PDMO in­tro­duced the lower in­ter­est rates to an av­er­age 6-year yield of 2.79%, down from the 4% av­er­age at the launch of the pro­gramme.

The re­tail bond that aimed to raise EUR 100-120 mln a year, has so far col­lected more than 300 mln for the gov­ern­ment since the pro­gramme was launched in 2014 that has only this year re­turned to the mar­kets fol­low­ing an aus­tere bailout pro­gramme im­posed the Troika of in­ter­na­tional lenders in 2013.

As of the Septem­ber 2015 se­ries, the in­ter­est rate had been ad­justed down­wards by 0.25 per­cent­age points and ranged from 2.50% for the first year to 5.50% in the fi­nal year. This works out at 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.

Mean­while, ac­cord­ing to a re­cent PDMO pre­sen­ta­tion, the gov­ern­ment’s to­tal fi­nanc­ing needs in 2016 are es­ti­mated at EUR 1.2 bln, of which 0.4 bln is short term T-Bills debt, 0.7 bln is medium/long term debt, and 0.1 bln is the fis­cal deficit.

The PDMO said ad­di­tional trans­ac­tions will con­tinue in the lo­cal mar­ket in 2016 and there is in­tent to con­tinue in­ter­na­tional bond is­suances once a year.

Mean­while, the Euro­pean Cen­tral Bank has bought EUR 285 mln worth of Cypriot gov­ern­ment bonds up un­til Novem­ber 30, un­der the Pub­lic Sec­tor Pur­chase Pro­gramme (PSPP) on sec­ondary mar­kets, which be­came ef­fec­tive since March 2015.

Also, ac­cord­ing to data re­leased by the ECB, the Eurosys­tem bought Cypriot gov­ern­ment bonds worth EUR 97 mln in Novem­ber hav­ing first stared in July 2015.

The in­clu­sion of the Cypriot gov­ern­ment bonds in the ex­tended pur­chase pro­gram is ex­pected to keep hav­ing direct ben­e­fits for Cyprus, mainly through fur­ther re­duc­tion of bor­row­ing costs and in­di­rectly through en­hanc­ing con­fi­dence to­wards the econ­omy gen­er­ally and to­wards the do­mes­tic bank­ing sys­tem specif­i­cally.

Pur­chases are con­ducted on the sec­ondary mar­ket from mainly Cypriot gov­ern­ment bond­hold­ers, ie. banks and in­vest­ment funds, which are will­ing to sell some of their in­vest­ments in Cypriot gov­ern­ment bonds.

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