By Stelios Orphanides
The secondary market yield on the Bank of Cyprus bond it issued in January fell by 246 basis points reflecting economic recovery on the island and the bank’s “turn-around story,” an asset manager said.
The yield on the €250m corporate bond issued by the bank on January 12, a week after it fully repaid its outstanding emergency liquidity and a week before its official listing at the London Stock Exchange, stood at 6.79 per cent on Tuesday morning, according to a Bank of Cyprus document seen by the Cyprus Business Mail. The bid price of the subordinated tier 2 bond, maturing on January 19, 2027 and issued at an average yield of 9.25 per cent, stood at €109.05 today.
“The 9.25 per cent yield appeared somewhat high at the beginning,” said Savvas Theophilou, senior portfolio manager at Argus Stockbrokers, a Nicosia-based asset management company, in a telephone interview on Tuesday. “But the purpose was to demonstrate that they could access financial markets”.
“The fundamental challenge is the bank’s non-performing loans,” Theophilou continued. “As their top executive John Hourican recently said, they are done with the liability side of their balance sheet and are turning their focus onto the asset side”.
Another factor which contributed to the drop of the Bank of Cyprus bond yields may have been the search for return by investors in an environment in which around one third of corporate bonds also have negative yield, Theophilou said. “There have been always been investors willing to accept higher risk in exchange of higher yield,” he said.
Bank of Cyprus’s non-performing loans stood at the end of 2016 at 54.8 per cent of total loans, or €11bn compared to €14bn or 61.8 per cent at the end of 2015. Last year, it generated a net profit of €64m compared to a €438m net loss the year before. The bank paid in December the remaining €200m of emergency liquidity assistance (ELA) which it mostly inherited in March 2013 from Cyprus Popular Bank, widely known as Laiki. ELA peaked the following month at €11.4bn.
Still, the successful performance of the Bank of Cyprus bond and the bank’s share at the London Stock Exchange, the latter gained since listing 3.4 per cent and closed on Monday €3.33, does not mean that it opens the door also for other Cypriot companies to follow on Bank of Cyprus’s steps as most don’t meet regulatory criteria or lack the necessary sophistication. “Investors are more careful now after they saw what happened with other securities,” Theophilou said in an obvious reference to the fate of bondholders in Cyprus which saw their investment wiped out during the financial crisis four years ago.
“It is more difficult to convince abroad,” the Argus portfolio manager said and added that Bank of Cyprus, steered by heavy weights of the international banking, does have access to international investors.
On the other hand, Theophilou continued, the yield drop of the Bank of Cyprus bond may signal that conditions are also favourable for the government to go ahead with a new debt issue, before rising inflation starts pushing interest rates and bond yields upwards.
According to the latest Eurostat figures, inflation rate in the euro area recovered to 1.9 per cent from minus 0.2 per cent in April 2016.
The yield of the Cypriot government bond maturing in November 2015, continued its downward course over the past weeks, boosted by the election of Emmanuel Macron in the French elections, and dropped by 3 basis points to 3 per cent on Tuesday morning, which is an all-time low. The initial yield of the bond was 4.25 per cent.