‘A vote of confidence in Cyprus’ economy’

THE FINANCE Ministry was all smiles yesterday following the “great success” of the 10-year foreign bond issue, which raised €1 billion at a “very competitive rate”.
Finance Minister Charilaos Stavrakis called it “a vote of confidence in Cyprus’ economy” by both foreign and local investors.
He said that the bonds – which will give a yield of 4.68 per cent and will expire in February 2020 – will cover all of the state’s financing needs until November 2010, and will significantly ease medium-term refinancing requirements.
Stavrakis added that, given the unprecedented negative economic climate generally and in the government bond market in particular, “this is a vote of confidence in Cyprus’ economy”.
As a specific indication of investor confidence in Cyprus, Stavrakis said that the offer was set “at the extremely competitive spread of 1.25 per cent over the midswap Euribor rate for German bonds”, which is the common reference-point. This compares with 1.50 per cent spread on 10-year bonds issued two weeks ago by Ireland – which has a better credit rating than Cyprus – and 3.50 per cent spread on Greece’s recent 5-year bond issue.
He added that the €1.5 billion issue last spring had a spread of 1.30 per cent for four years, but “this year, under much worse conditions, we borrowed for 10 years with a 1.20 per cent spread”.
Stavrakis described last Wednesday, when the book on the issue was opened, as “an exceptionally difficult day” due to the collapse of the price of bonds issued by Greece, but within four hours bids of €1.2 billion had been received from some 80 banks, institutional investors, hedge funds, insurance companies and others from several European countries. This followed “roadshows”, or investor presentations, in Brussels, Zurich, Frankfurt and London.
The Finance Minister said that as well as the immediate benefits of increased liquidity provided by the inflow of cash, and the means to finance the current accounts deficit, there were also important longer-term benefits, such as the increased diversity of foreign investors and an ongoing reduction in the cost of funding the public debt. He added that by borrowing for 10 years to refinance debt maturing in the shorter term, a yield-curve is created which will improve the country’s credit rating.
Stavrakis said that although Cyprus’ public debt grew from 48 per cent of GDP in 2008 to 55 per cent at the end of 2009, this rise of 7 per cent was much lower compared to other EU and eurozone countries, “so in fact Cyprus’ competitive advantage improved again last year”.
The Ministry decided to allocate 65 per cent of the issue to foreign investors and 35 per cent to Cyprus-based investors. Foreign investors had 100 per cent preference given to their bids, and local bids were scaled back accordingly. The exception was the Social Insurance Fund (SIF), whose bid of €205 million was accepted in full.
Stavrakis said that, as the bonds will be listed on the London Stock Exchange, “henceforth, the SIF has a negotiable investment, and the social partners can decide at any moment to cash it in without even having to ask the government. This is the big difference, the creation of a genuine reserve invested in a bond with a guaranteed yield, fixed for the next 10 years with an interest rate of some 4.7 per cent”.
The minister said that no further bond issues are expected for this year, “unless we decide to take advantage of opportunities that might arise to create a bigger reserve for future years”. He added that Cyprus has the option of converting the interest rate of this issue from fixed to convertible, in response to possible market movement.
Lead managers for the issue are Deutsche Bank, Societe Generale and UBS, while the three co-lead managers are Cypriot banks, Bank of Cyprus, Marfin Popular Bank and the Co-operative Central Bank, with all of the issue managers purchasing a proportional share in the bonds.