26/06/2017 09:40
Cyprus`s €850 million bond issue reduces refinancing risks and demonstrates the sovereign`s improved financing flexibility, says a Fitch Ratings report on Friday, adding that the transaction is the second benchmark issue following Cyprus`s exit from its EU and IMF bailout programme in March 2016.
The rating agency says that with existing cash buffers estimated at around 8% of GDP and covering financing needs until 2Q18, the transaction was launched for debt management reasons and to allow Cyprus to benefit from favourable market conditions and low interest rates. The seven-year bond was priced to yield 2.8%, the lowest-ever rate achieved by Cyprus for a euro benchmark bond, despite the fact that Cyprus is not included in the European Central Bank`s public sector purchase programme. It was offered in conjunction with a simultaneous exchange for three outstanding bonds maturing between June 2019 and May 2020.
As Fitch points out, the transaction reduces medium-term refinancing risks by lengthening the sovereign`s debt maturity profile and reducing 2019 and 2020 refinancing needs. Of the €846 million in net proceeds, €560 million has been used to exchange the 2019 and 2020 maturities, and €280 million is earmarked for prepayment of a portion of Cyprus`s IMF loans. This will move Cyprus`s next debt amortisation peak of around €1.5 billion to 2025 from 2019, and the percentage of public debt maturing over the next five years to 34% from 38%. The IMF prepayment will also help reduce debt service costs by locking in the bond`s lower rate against the IMF`s 3.52% floating-rate loan, and will bring the outstanding amount owed to the IMF down to around EUR720 million.
It also notes that a sustained track record of market access at affordable rates is one of several factors that could lead to an upgrade of Cyprus`s `BB-`/Positive sovereign rating, which Fitch affirmed on 21 April.
However, Fitch says that some factors continue to weigh on Cyprus`s sovereign credit profile. The banking sector`s exceptionally weak asset quality poses a significant downside risk to economic recovery. The ratio of the sector`s non-performing exposures to total loans was 46% at end-February 2017, the highest of Fitch-rated sovereigns. At over 100% of GDP, gross general government debt (GGGD) is more than double the `BB` category median, and net external debt at over 140% of GDP is far higher than the `BB` median of around 20%. This limits the private and public sectors` abilities to finance economic activity and deal with shocks.
Fitch expects the cyclical recovery to support small fiscal surpluses in 2017 and 2018, leading to a decline in the GGGD/GDP ratio to around 100% by 2018. “But risks to the fiscal outlook are tilted to the downside, as presidential elections and the expiration of wage settlements in 2018 could lead to fiscal relaxation”.
As well as sustained market access, the rating agency says that developments that could lead to an upgrade include a marked improvement in banking sector asset quality, further economic recovery and a reduction in private sector indebtedness, a lower government debt/GDP ratio, and a narrowing of the current account deficit and reduction in external indebtedness.
The rating agency says that with existing cash buffers estimated at around 8% of GDP and covering financing needs until 2Q18, the transaction was launched for debt management reasons and to allow Cyprus to benefit from favourable market conditions and low interest rates. The seven-year bond was priced to yield 2.8%, the lowest-ever rate achieved by Cyprus for a euro benchmark bond, despite the fact that Cyprus is not included in the European Central Bank`s public sector purchase programme. It was offered in conjunction with a simultaneous exchange for three outstanding bonds maturing between June 2019 and May 2020.
As Fitch points out, the transaction reduces medium-term refinancing risks by lengthening the sovereign`s debt maturity profile and reducing 2019 and 2020 refinancing needs. Of the €846 million in net proceeds, €560 million has been used to exchange the 2019 and 2020 maturities, and €280 million is earmarked for prepayment of a portion of Cyprus`s IMF loans. This will move Cyprus`s next debt amortisation peak of around €1.5 billion to 2025 from 2019, and the percentage of public debt maturing over the next five years to 34% from 38%. The IMF prepayment will also help reduce debt service costs by locking in the bond`s lower rate against the IMF`s 3.52% floating-rate loan, and will bring the outstanding amount owed to the IMF down to around EUR720 million.
It also notes that a sustained track record of market access at affordable rates is one of several factors that could lead to an upgrade of Cyprus`s `BB-`/Positive sovereign rating, which Fitch affirmed on 21 April.
However, Fitch says that some factors continue to weigh on Cyprus`s sovereign credit profile. The banking sector`s exceptionally weak asset quality poses a significant downside risk to economic recovery. The ratio of the sector`s non-performing exposures to total loans was 46% at end-February 2017, the highest of Fitch-rated sovereigns. At over 100% of GDP, gross general government debt (GGGD) is more than double the `BB` category median, and net external debt at over 140% of GDP is far higher than the `BB` median of around 20%. This limits the private and public sectors` abilities to finance economic activity and deal with shocks.
Fitch expects the cyclical recovery to support small fiscal surpluses in 2017 and 2018, leading to a decline in the GGGD/GDP ratio to around 100% by 2018. “But risks to the fiscal outlook are tilted to the downside, as presidential elections and the expiration of wage settlements in 2018 could lead to fiscal relaxation”.
As well as sustained market access, the rating agency says that developments that could lead to an upgrade include a marked improvement in banking sector asset quality, further economic recovery and a reduction in private sector indebtedness, a lower government debt/GDP ratio, and a narrowing of the current account deficit and reduction in external indebtedness.