Cyprus seeks ‘cash reserve’ from bond issue ahead of programme exit Tue, 20 Oct 2015
By Stelios Orphanides
Cyprus will test international markets for the second time this year aimed at creating a cash reserve as it prepares to exit the cash-for-reforms programme in March 2016 without requesting a credit line, the finance ministry said.
The government is currently considering issuing a bond that will have a maturity between 7 and 10 years and help address “refinancing risk by increase of liquid funds pre programme exit,” the finance ministry said in a document presented to potential bond buyers at overseas roadshows and obtained by the Cyprus Business Mail.
The government, which returned to markets 15 months after its March 2013 bailout and issued a €1bn 7-year bond at an average yield of 4 per cent, will consider market access restored with a successful third bond issue. The new issue is “subject to market conditions”, the ministry said. The yield of the 7-year government bond maturing in May 2022 on the secondary market was below 3.45 per cent on Wednesday.
Finance minister Harris Georgiades said on Monday that the government decided to exit its adjustment programme without requesting a credit line from international creditors, with which the government has not yet discussed the terms of the bailout exit. On October 6, Georgiades said in response to a Financial Times report that the government was considering to borrow less than €1.5bn with the new bond issue.
Sovereign credit rating remains below investment grade. Fitch Ratings assigned Cyprus a B- rating, Moody’s Investors Service B3 and Standard & Poor’s BB-. The Fitch and S&P ratings have a ‘positive’ outlook, while Moody’s outlook is ‘stable’. Fitch is scheduled to announce a new rating decision on Friday.
The finance ministry said that the government, which held meetings with rating agencies in May to September this year, considers the “strong” budgetary performance exceeding expectations and also “strong” implementation of programme conditionality as two of its rating strengths which also include the removal of capital controls in April and the low tax environment.
On the other hand, the banking sector’s high stock of non-performing loans, the high private and public debt levels, as well as a lack of parliamentary majority that could potentially affect the implementation of the privatisation programme are causes for concern, the ministry said. Another headache is the economy’s vulnerability to external factors.
According to the finance ministry document, the government faces a total of €1.5bn in financing needs in the fourth quarter of the year comprised of €0.4bn in maturing treasury bills, €0.9bn in maturing bonds and a total of €0.2bn in fiscal needs. The ministry plans to cover these needs by rolling over the treasury bills, using a total of €0.6bn of recently disbursed bailout funds, covering €0.1bn from funds from other sources, including retail bonds and the European Investment Bank, and €0.4bn in “intra-year cash”. Total financing needs drop to €1.1bn in 2016.
“Cyprus intends to maintain a presence in international markets over 2016,” the ministry said. “Since financing needs are largely covered by the European Stability Mechanism – International Monetary Fund financing, the international bond issuance aims mainly at other objectives such as the reduction of refinancing risk in future years and the expansion of the international bond yield curve. International markets will remain a main source of financing over the medium-term”.
The government’s medium-term debt strategy until 2019 aims to smoothen the debt profile and extend the maturity of marketable debt, mitigate risk by reducing exposure to foreign exchange and interest rate risks, the finance ministry said. In addition, the government will aim to build an international bond yield curve and enhance relations to investors as well as expand investor base.
Cyprus property prices point to an accelerating growth, according to the THIRTIETH edition of the RICS (Cyprus) Property Price Index.
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