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€100 mln EMTN raises storm in Cyprus

07 May, 2014

 * First 6-year bond on LSE “to test market” *

A six year international bond issue announced by the government last Wednesday in an attempt to test the market, has raised a storm with politicians and economists alike saying it was unwarranted and too expensive.
The Ministry of Finance announced that it issued a six year ‎ bond for a nominal value of 100 mln euros at a coupon rate of 6.50%. The said bonds, issued via private placement, will be listed at the London Stock Exchange and be settled via Euroclear. This access to the Eurobond market is taking place under its newly updated EMTN programme.
This is the first time that Cyprus is tapping into the EMTN market ever since a €10 bln bailout from the Troika of international lenders a year ago, that saw the island undergoing harsh austerity measures and a bail-in of unsecured deposits to rescue biggest lender bank of Cyprus.
“The proceeds of the EMTN transaction will be used for public debt management purposes, including government financing, always in compliance with Cyprus’ economic adjustment programme,” the Ministry of Finance said, suggesting it complies with the hawkish oversight of Troika inspectors who are back on the island this week to review the progress in the bailout.
“The success of the above transaction is attributed to the gradual rebuilding of confidence to the Cyprus economy which in turn is a result of the stronger than expected performance and full compliance of the Republic of Cyprus to the ESM/ IMF adjustment programme,” the ministry added, following favourable reviews by the Troika and upgrades of sovereigns ratings during the past month by all three agencies – Moody’s, Standard and Poor’s and Fitch.
Cyprus lost a foothold in markets in May 2011 after yields on benchmark 10-year bonds spiked rapidly. But from a high of close to 15% in March 2013, yields have now tumbled, quoted at 5.13% on April 9, according to Reuters Eikon data.
"We hope to be in a position to enter the markets towards the end of 2015. It is a very short period of time compared to countries under similar (bailout) programmes," President Nicos Anastasiades had said in an interview with Reuters earlier in April.
Just two weeks ago, the government said it was about to launch a 6-year savings bond programme for retail investors, carrying an average 4% annual coupon over the term and a 3% low-tax incentive on interest. The minimum subscription is 1,000 euros, issued monthly and open only to Cyprus residents, which includes EU and third country nationals working or with investments on the island.
Opposition MP Irene Charalambidou said that the 6.5% yield was too high as the government bonds maturing in 2020 carry a coupon rate of 5%.
At the forefront of unraveling financial scandals and probing deep into the loans-for-favours deals currently being probed by the House Ethics Committee, Charalambidou said that the issue did not go to auction, which could have reduced the yield.
“They limited themselves to just one investor. How transparent is this process? Was this in favour of the Cypriot taxpayer?”
“Seeing as the issue was made under English Law which ensures added security for the investor, the government should tell us what fees were charged.
“With the investor who bought the issue already selling the bond at 105-107%, does the government realise that we have donated a bonus of 5 mln euros to the investor in just one week?”
Citizens’ Alliance president Yiorgos Lillikas also joined the criticism saying that the government had not revealed all the parties involved in the issue, ultimately raising greater suspicion among the people.
On Monday, Finance Minister Harris Georgiades issued a statement in Brussles, on the sidelines of the meeting of Eurozone finance ministers, defending the bond issue.
“The successful issuing of the European bond, the first to a foreign investor after 2010, constitutes a strategic move that is related to the timely preparation of Cyprus’ return to the markets but also to the need to manage and better structure the public debt.”
“An important part of the existing debt has a high cost and a short term duration. This for example is true in the case of the bond that was issued to Laiki Bank in 2012. The particular bond, amounting today to approximately EUR 2 bln, has a 2017 repayment date and is not included in the Troika’s financial plan. In total, the expirations of debts the first 18 months after the completion of the programme exceed EUR 3 bln. Therefore, with the timely extraction of additional lending, the Republic of Cyprus will be able to manage and slowly repay the existing debt.”
To date, Cyprus has received a total of EUR 5.08 bln in financial assistance from the four tranchesd of the European Stability Mechanism and the IMF.
Some economists said the issue was “unwarranted” and that there was no need to test the market, as the government debt was fully funded well into 2016.
“The timing was wrong, the rate offered was too high,” said one, adding that “by the time it is repaid, it will have cost us double.”
On the other hand, a consultant at a wealth management company who trade in the global bonds market said that “this was a one-off issue that was either trying to test the markets or wanted to satisfy a particular investor’s need. Is 6.5% the actual yield on the bond and if so, is this really expensive? I am not so sure.”
“I believe this small bond issue is largely irrelevant in the grand scheme of things, such as the relative to the size of Cyprus’s overall economical/debt problems.
“Politicians in Cyprus try to spin it in many ways but all I can say is that this is largely a non-event and we should move on to more serious things to help get Cyprus out of recession and avoid a depression, at all cost.”

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