Yields drop to 3.8% as government sells €1bn 7-year bond

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By Stelios Orphanides

The finance ministry said it sold a €1bn seven-year bond at an average annual yield of 3.8 per cent.

The bond issue in London, the first after Cyprus completed its adjustment programme in March, was almost two-and-a-half times oversubscribed, the finance ministry said in an emailed statement on Tuesday. The issued pays a coupon of 3.75 per cent per year which was priced at 99,698.

“The transaction comes under the annual financing programme for 2016 as approved by the finance minister in accordance to the public debt management laws and in accordance with the 2016-2020 public debt management medium term strategy,” the ministry said. The bond will mature on July 26, 2023.

Tuesday’s bond issue which was also the first after Cyprus re-established market access in October with the sale of a €1bn €10bn bond at an average yield of 4.25 per cent, came less than a month after a referendum in which British voters decided to leave the European Union, upsetting global financial markets.

Cyprus, still rated in the non-investment grade area by all major rating companies which cite the huge mountain of unserviced loans in the banking system, sold a seven-year bond in May 2015 tapping a total of €1bn at an average yield of 4 per cent. The bond was traded on Tuesday at 3.29 per cent, according to a Bank of Cyprus statement seen by the Cyprus Business Mail.

It was a “gutsy” step as the issue coincided with increased tensions in the eastern Mediterranean, four days after a coup aiming at deposing Turkish president Recep Tayyip Erdogan failed prompting him to wage an unprecedented purge in the ranks of the military, the judiciary and the police, a financial professional who spoke on condition of anonymity said.

Cyprus’s highest sovereign credit rating is a BB- from Standard & Poor’s which is three notches below investment grade. The credit rating assigned by Fitch Ratings, Moody’s Investors Service is B+ and B1, both four grades into the junk area, while that assigned by DBRS is B which is five notches below investment grade.

The government, which aims at generating a balanced budget this year, posted a deficit of 1 per cent of economic output last year caused mainly by financial support extended to the Cooperative Central Bank in December. According to the Central Bank of Cyprus, the government had at the end of June almost €1bn deposited at the lender and is facing up to €0.8bn in total maturities this year and less than €0.5bn in 2017. The Cyprus Business Mail understands that the finance ministry is likely to use proceeds from the bond sale to smooth out 2019 and 2020 maturities which together total almost €4bn.

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