Bloomberg News

Romania Yields Below Higher-Rated Hungary Before Bond Sale

June 06, 2011

(Updates bond prices from second paragraph and domestic debt in last paragraph.)

June 6 (Bloomberg) -- Romania’s borrowing costs are falling to the lowest level since November and widening the gap below higher-rated Hungary, as spending cuts boost confidence in the Balkan country’s first international bond offering in a year.

The yield on Romania’s Eurobonds due 2018 has fallen 59 basis points since February to 5.46 percent, according to data compiled by Bloomberg at 5:15 p.m. in Bucharest. That’s 36 basis points below similar-maturity investment-grade bonds from Hungary, Bloomberg data show. At the start of June last year, junk-rated Romania’s yield was 129 basis points above Hungary’s.

Romania, the recipient of two international bailouts since 2009, plans its first Eurobond sale in more than a year this week as it seeks to avoid drawing on a 5 billion-euro ($7.3 billion) credit provided by the International Monetary Fund and the European Union. The government should take advantage of lower borrowing costs on financial markets and lower its short-term domestic debt stockpile, International Monetary Fund Mission Chief Jeffrey Franks said by phone from Washington on June 2.

Romania’s “bond issuance should go well and there continues to be a large appetite from global investors for central and eastern European paper in either euros or dollars,” said Peter Attard Montalto, a London-based economist at Nomura International Plc. “Romania would be wise to mop up any excess demand and issue in larger size if it can get away with doing so without a significant increase in cost.”

Spending Cuts

Investors are returning after Prime Minister Emil Boc cut spending on government staff spending by 20 percent as part of a budget plan to narrow the budget deficit this year to 4.4 percent of gross domestic product from 6.5 percent in 2010. The economy grew 1.6 percent in the first three months of 2011, the first quarterly expansion since 2008.

Hungarian bonds, the world’s best performers this year, fell as much as 4.4 percent in dollar terms in May on concern the government may fail to implement steps to reduce the biggest debt burden among the EU’s eastern members.

Romania is seeking to sell between 500 million euros and 1.5 billion euros of bonds with a maturity of at least five years by the end of this week, depending on market conditions, Deputy Finance Minister Bogdan Dragoi said in a phone interview last week. Romania is scheduled to address investors in London today in meetings organized by Erste Group Bank AG and Societe Generale SA, according to Dragoi.

Default Swaps

The offering will probably be priced to yield 250 basis points above the benchmark mid-swap rate, or 20 basis points less than Hungary paid a month ago in a sale of bonds due 2019, according to estimates from Nomura and UniCredit SpA.

“The positive sentiment toward the Romanian market is still there and we see non-resident investors particularly interested,” said Gyula Toth, a Vienna-based emerging-market strategist at Unicredit.

Romania will probably offer about 750 million euros and end up raising about 1 billion euros, Nomura’s Montalto said.

Romania has the highest speculative-grade ranking from Standard & Poor’s and Fitch of BB+. Hungary is one step higher at BBB-. Moody’s Investors Service has Romania and Hungary at Baa3, the lowest investment grade category.

Fitch Credit Rating

Fitch changed today Hungary’s credit outlook to stable from negative, affirming the country’s ratings for long-term foreign at ‘BBB-’ and local currency at ‘BBB’.

The cost of insuring against a default by Romania has dropped 54 basis points in the past three months to 231 basis points at the end of last week, 23 basis points less than credit-default swaps for Hungary, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. Contracts for Romania were 259 basis points more expensive than Hungary in January 2009.

“The macroeconomic story of Romania remains relatively solid with a pretty strong performance in the currency and we see more and more flows of interest in the local treasuries,” said Luis Costa, an emerging-market strategist at Citigroup Inc. in London.

Return to Market

Improved sentiment is helping eastern European governments return to world capital markets to help bridge budget deficits. Serbia will select advisers by the end of this month for its first-ever Eurobond sale, seeking as much as 700 million euros by October, Deputy Finance Minister Vuk Djokovic said on June 2. Croatia plans to sell euro- denominated bonds “before summer,” Finance Minister Martina Dalic said on March 21.

“The situation for Romania to access markets is much better than a year ago,” Franks at the IMF said. Still, the government must be “vigilant” in case of a worsening of Europe’s sovereign-debt crisis, he said.

The government has sold 27.4 billion lei of domestic Treasuries this year, beating its target of 24.2 billion lei. It also raised 939 million euros in three-year bonds on the domestic market. The ministry must repay more than 2.5 billion euros of maturing euro-denominated debt in July.

--With assistance from Krystof Chamonikolas in Prague and Piotr Skolimowski in Warsaw. Editors: Stephen Kirkland, James M. Gomez

To contact the reporters on this story: Irina Savu in Bucharest at isavu@bloomberg.net, Andra Timu in Bucharest at atimu@bloomberg.net.

To contact the editor responsible for this story: James M. Gomez at jagomez@bloomberg.net


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