articles | 25 April 2019

Cyprus double bond sale raises €1.25b to repay Russian loan

Cyprus raised €1.25 billion from a double-bond issue that was hugely oversubscribed as Nicosia tapped European markets to pay-off a 2011 Russian loan early.

Nicosia marketed a five-year and its first ever 30-year bonds, with demand exceeding €10 billion, split almost evenly between the two maturities.

Combining both tranches, the transaction attracted the largest orderbook the Republic of Cyprus has received since returning to the capital markets in June 2014.

The interest rate on the 5-year bond was 0.65% (mid-swap + 60 basis points) and for the 30-year maturity bond, it was 2.88% (mid-swap +175 basis points).

The weighted average yield of the two interest rates is 1.98%. Demand exceeded €4.9 billion for the 5-year bond and €5.9 billion for the 30-year bond. Cyprus raised €500 million from the issue of the five-year bond, and €750 million from the 30-year bond.

Nicosia sought early repayment of the €2.5 billion loan it obtained in 2011 from Moscow to avert financial crisis as it became locked out of markets.

The loan from Russia was restructured in 2013 after the country secured a bail-out from international lenders and depositors at its two biggest lenders took a bail-in on their deposits. The loan’s repayment period was extended to 2021 and the interest rate was cut to 2.5% from 4.5%. The outstanding amount of the loan is €1.57 billion.

Finance Minister Harris Georgiades said Cyprus was enjoying its lowest cost of borrowing which was vindicated for its economic policies.

“This is due primarily to conditions prevailing in international markets, as Cyprus is certainly not at the heart of international markets…and secondly, it’s down to the drastic improvement in Cyprus’ image, as the Financial Times reported,” Georgiades told CyBC radio Thursday.

Georgiades said the government chose to pay off the Russian loan early because there was an opportunity to do so.

“Not all loans carry an early repayment option. That is also why two years ago we paid off part of a loan we secured from the IMF. We had paid off the most expensive part of that loan early because we had the right to do so”.

Georgiades said that as far as borrowing costs are concerned, Cyprus is closing in on the European average.

He said Cyprus used to borrow money at an interest rate of 4% higher than the rest of the eurozone, now the difference has dropped to less than 1%.

“We are in a better position than countries like the US, Italy and Greece, and we are very close to the cost of borrowing Portugal and Spain and higher than Germany and the Netherlands.

But what we need to focus on is the difference between the cost of our own borrowing and that of Germany. Germany is the reference country, the country with the most stable and favourable interest rates. This difference is at the lowest point ever.”

Georgiades added that the double bond issue ensured savings in debt servicing and securing very long-term lending and facilitating debt management.

The demand for 30-year debt from a country that needed a bailout from the European Union and International Monetary Fund just five years ago is remarkable and says as much about the state of the European economy and bond market as Cyprus’ prospects, debt managers told Reuters.

Several other eurozone countries have sold super long-dated debt in recent years and the average maturity of government bonds in the bloc is now at the highest level on record at nearly 7.4 years.

“It is a demonstration of the backdrop we are in at the moment and it also shows how far Cyprus has come from the crisis days,” one of the bankers managing the bond sale told Reuters.

Cyprus’ 10-year bond yield fell almost six basis points on the day to 1.51% in the wake of the strong demand for the new bond deals. It had touched a one-month high at around 1.61% in early trade Wednesday.

Similarly, Cyprus’ current longest-dated bond, a 15-year note, hit a three-week high of 2.277% before dropping to 2.18%, lower nearly 8 bps on the day.

Nicosia returned to the bond markets in 2014 and has regained an investment grade credit rating from two of the three main ratings agencies.

A successful 30-year debt issue would reflect as much the broader market environment as Cyprus’ recovery, Commerzbank rates strategist Rainer Guntermann told Reuters.

“This combination of a view that growth will stay relatively sluggish and inflation will be lower, and rates will stay lower almost forever is fuelling this hunt for yield, and investors are taking more risk and duration for pick up,” he said.

Source: Financial Mirror

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