The Republic of Cyprus will price its first public benchmark bond issue since it was bailed out later on Wednesday, offering yield-hungry investors the chance to buy into the sovereign’s recovery story.
Cyprus follows in the footsteps of Ireland, Portugal and, most recently, its southern neighbour Greece, which have all made successful bond market returns in recent months.
However, unlike those countries, which had to take careful steps back into the market, Cyprus has been able to capitalise on its positive credit story and investor yield appetite and return much more quickly and boldly.
“Cyprus is part recovery story, part yield story,” said Stuart Culverhouse, chief economist, Exotix Partners, adding that reform commitment, policy initiatives undertaken by the authorities and readjustment of long-term fundamentals such as a possible reunification with the north and the discovery of gas reserves, are arguments for the sovereign’s recovery.
The yield on the new euro June 2019 benchmark bond has been set at 4.85%, tighter than official guidance of 4.90% area. Initial price thoughts were released on Tuesday at 5% area.
Indications of interest are at 1.9bn, slightly more than the 1.5bn quoted when books opened.
“We are not surprised by the book size. Cyprus has a small illiquid curve and their funding needs are smaller,” said a syndicate official working on the deal, adding that even before the crisis, the sovereign generally issued smaller bonds of up to around 1bn.
“The yield Cyprus is offering is attractive for investors when compared to other peripheral countries that were distressed not long ago and are now yielding around 2%-3%,” said Culverhouse.
“Sentiment towards peripheral European debt has steadily improved since the beginning of the year, and 10-year government bond yields have fallen to record euro-era lows.”
Greece sold its first post-bailout bond in April, a five-year that priced to yield 4.95%. It has since tightened to 4.17%.
REAL MONEY DEMAND
A banker working on the Cyprus deal said accounts from the UK were strong in the order book, with fund managers, hedge funds and big real money accounts involved.
“We are seeing good demand from those investors who were following the European recovery stories, investors who have been with the likes of Ireland and Greece from the start,” said a banker on the deal.
Cyprus was shut out of the international markets in May 2011 on heightened fears of an accelerating European sovereign debt crisis. This caused its bond yields to spike above 14%.
Last year, and due to a collapsing banking system heavily exposed to Greece, Cyprus was the recipient of a 10bn bailout.
“This is a good opportunity for investors who are new to the Cyprus story,” said a banker.
Culverhouse echoed that sentiment, but added that while Cyprus had surprised people with its recovery, it still needed to show growth.
Real GDP contracted by 5.4% in 2013, still a sizeable decline but less than the 8.7% decline projected when the IMF programme was approved.
The IMF expects a return to positive growth in 2015, at a modest 0.9% rate, after three successive years of negative growth.
Deutsche Bank, Goldman Sachs, HSBC, UBS and VTB Capital are arranging the sale.
Cyprus is rated Caa3/B/B- by Moody’s/S&P/Fitch (positive/positive/stable).
Back in April, the sovereign was raised one notch by S&P amid a diminishing threat of the country not being able to meet loan repayments. Moody’s will be next to review the country’s rating, on July 18.
Reuters