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Fitch says Cyprus’ €850m bond issue reduces refinancing risks

Cyprus’ €850m bond issue reduces refinancing risks and demonstrates the sovereign`s improved financing flexibility, Fitch Ratings said, although some factors continue to weigh on the island’s sovereign credit profile.

The seven-year bond was priced to yield 2.8 per cent, the lowest-ever rate achieved by Cyprus for a euro benchmark bond, despite the fact that the island 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.

The US-based rating agency said on Friday that with existing cash buffers estimated at around 8 per cent 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.

According to Fitch, the transaction reduces medium-term refinancing risks by lengthening the sovereign`s debt maturity profile and reducing 2019 and 2020 refinancing needs.

Of the €846m in net proceeds, €560m has been used to exchange the 2019 and 2020 maturities, and €280m is earmarked for prepayment of a portion of Cyprus’ IMF loans.

This will move Cyprus’ next debt repayment peak of around €1.5b to 2025 from 2019, and the percentage of public debt maturing over the next five years to 34 per cent from 38 per cent.

The IMF prepayment will also help reduce debt service costs by locking in the bond’s lower rate against the IMF`s 3.52 per cent floating-rate loan, and will bring the outstanding amount owed to the IMF down to around €720m.

The agency said a sustained track record of market access at affordable rates is one of several factors that could lead to an upgrade of Cyprus’ `BB-`/Positive sovereign rating, which Fitch affirmed on April 21.

However, Fitch says some factors continue to weigh on Cyprus’ 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 per cent at the end of February, the highest of Fitch-rated sovereigns.

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.

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