Cyprus Returns to Public Debt Markets

By Dow Jones Business News, 
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Cyprus returned to public debt markets Wednesday, just over a year since it needed a multi-billion-euro bailout to save it from financial collapse.

The small Mediterranean island nation pocketed EUR750 million ($1 billion) of five-year cash, paying a yield of 4.85% and attracting around EUR2 billion of orders.

To put those borrowing costs in context, Cyprus's bond maturing February 2020 was yielding almost 14% last July, according to Tradeweb. That bond is now yielding about 4.75%. Bond yields drop as prices rise.

The fall in Cyprus's borrowing costs follows a wider trend for countries in the euro zone's riskier so-called periphery as the threat of the region's debt crisis recedes and record low interest rates pushes investors into more adventurous assets to boost returns, driving down yields.

"Investors will look at the yield and see that it is offering about two or three percentage points more than other periphery bonds and that could be quite appealing," said Stuart Culverhouse, chief economist and head of research at Exotix, an investment banking brokerage.

Portuguese bonds maturing in 2019, for example, are yielding about 2.3%, Tradeweb data show. Spain's benchmark five- year bond is yielding just 1.4%.

"The yield (for Cyprus) may have looked shockingly low, but when you compare it to the European context, it is really not that surprising that it was able to print where it did," said James Barrineau, a portfolio manager at Schroders.

More than half of the bonds were bought by investors in the U.K., according to Cyprus's debt management office. Just under a quarter were bought by other European investors, with Cypriot investors bagging 14.5% of the offer. Money managers accounted for about half of the bonds sold, with hedge funds taking up a little more than a quarter.

Cyprus agreed a EUR10 billion rescue package in March last year as the country's banking system teetered on the brink of bankruptcy. That deal saw losses imposed on some bank deposits, the first time savers had been forced to share the burden of a euro-zone bailout. The government also introduced a range of capital controls to prevent a flood of money from leaving the country. About EUR12 billion of foreign cash from outside the euro zone was still deposited in Cyprus's banks at the end of April, data from its central bank show. That is down from almost EUR16 billion in April 2013.

A report from the European Commission earlier this year said Cyprus was on track to implement its bailout program. The commission said that while Cyprus's fiscal targets were met with room to spare last year, the country's economy is likely to contract 4.8% this year before returning to growth in 2015.

The Cypriot government prepared the ground for Wednesday's debt sale by selling EUR100 million of bonds directly to one overseas investor in a so-called private placement in April.

It also follows Greece's bond-market comeback earlier this year when the Greek government raised five-year money with a yield below 5%.

Deutsche Bank AG, Goldman Sachs International, HSBC Holdings PLC, UBS Investment Bank and VTB Capital were the banks running Wednesday's deal.

Cyprus is rated Caa3 by Moody's Investors Service Inc., B by Standard & Poor's Corp. and B- by Fitch Ratings, placing it below investment grade.

Josie Cox contributed to this article.

Write to Ben Edwards at ben.edwards@wsj.com

Subscribe to WSJ: http://online.wsj.com?mod=djnwires


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