Bloomberg News

Hungary Plans 1st Eurobond Since 2011; Fitch Raises Outlook

December 20, 2012

Hungary plans to end a 19-month hiatus on international bond markets in 2013 as Fitch Ratings raised the junk-rated country’s outlook to stable from negative on the government’s commitment to narrowing the deficit.

Hungary plans to issue 4 billion euros ($5.3 billion) to 4.5 billion euros in foreign-currency bonds on the international market in 2013, the Debt Management Agency said today. The agency will probably start discussing a sale with investors in early 2013 and issue “as soon as possible” depending on market conditions, Deputy Chief Executive Officer Laszlo Andras Borbely told reporters in Budapest.

“We could get by in the first quarter without a sale, but we’d like to refinance foreign-currency debt if possible,” Borbely said today. “We have managed to reduce borrowing costs, giving the market some calm and stability.”

Prime Minister Viktor Orban’s government scrapped plans to sell foreign-currency debt in 2012, expecting an aid deal with the International Monetary Fund would cut borrowing costs. While IMF talks stalled, the yield on Hungary’s 2021 dollar bonds fell to a seven-week low of 4.81 percent yesterday and is down from 9.37 percent in January, as investors were encouraged by Hungary’s ability to reduce public debt and demand for higher- yielding assets grew.

Junk Grade

Fitch kept Hungary’s long-term rating at BB+, its highest junk grade and on par with Macedonia, according to a statement today. Standard & Poor’s lowered Hungary’s rating to two steps below investment grade on Nov. 23, based on government policies that are eroding economic-growth prospects.

“Pricing was just too tempting for the Hungarians to resist coming to market,” Tim Ash, a London-based strategist at Standard Bank Group Ltd., wrote in an e-mail today. “The strategy will probably be to do as much financing as early as possible.”

The yield on Hungary’s 2021 notes, which traded at 4.77 percent by 5:49 p.m. in Budapest today, is still almost two percentage points higher than the 3.07 percent yield on similar- maturity dollar bonds from Turkey. Both countries are rated Ba1 by Moody’s Investors Service and BB by Standard & Poor’s. Average yields for emerging-market dollar bonds have fallen to 4.5 percent from 6 percent at the start of January, according to JPMorgan Chase & Co.’s EMBI Global index.

The forint gained 0.3 percent to 285.25 per euro today.

State-owned Magyar Export-Import Bank Zrt. sold $500 million in five-year bonds this month at a yield of 5.75 percent in a sale billed by the government as a “test” of investor appetite for the sovereign.

‘Huge Inflows’

“There are still huge inflows to emerging-market bond funds,” Csaba Szalma, who helps manage $5.3 billion at a unit of Budapest-based OTP Bank Nyrt (OTP), said in an interview on Dec. 13. “The window is open, investors would love to buy and the state needs the financing.”

Hungary’s foreign-debt redemptions amount to 5.1 billion euros next year, including 1.4 billion euros in bonds and 3.6 billion euros owed to the IMF from an earlier bailout, according to data published by the debt agency today. The government must repay 1 billion euros of notes maturing on Feb. 6, according to data compiled by Bloomberg. The 5.1 billion euros due excludes funds to be repaid to the IMF via Hungary’s central bank, Borbely said.

Financing Need

Hungary’s total net financing need for 2013 is about 700 billion forint ($3.2 billion), with total gross debt issuance planned at 5.9 trillion forint, 75 percent of it in Hungary’s currency, Borbely said.

The market will “easily absorb” the amount of foreign- currency notes the government plans to issue, Viktor Szabo, who helps manage about $10 billion in emerging-market debt at Aberdeen Asset Management, said in e-mailed comments after today’s announcement.

The forint fell to a record low against the euro and the yield on the country’s 2021 dollar bond yield peaked in January as Orban’s tax increases and seizure of pension assets cost Hungary its investment-grade credit rating and forced it to request aid from the IMF.

Hungary abandoned plans to issue foreign-currency bonds this year because the forint and local bonds were among the best performers in the EU, Economy Minister Gyorgy Matolcsy said in a Dec. 15 interview with state-run MR1-Kossuth radio.

“Hungarian households also significantly increased their holdings of government securities,” Borbely said, adding that the financing plan calculates with no fresh loans from the IMF in 2013.

Bond Returns

Hungary’s local-currency bonds returned 36 percent this year in dollar terms, the most worldwide after Greek and Portuguese debt, according to Bloomberg/EFFAS indexes. Non- residents increased their holdings to a record 5 trillion forint on Dec 14, according to state data.

Hungary’s public debt will fall to 73 percent of gross domestic product in 2013 from a projected 77 percent this year, according to government forecasts.

While Hungary’s repayment deadlines in February and March pose “significant” risks, the surge in non-resident holdings has reduced the need to issue “large amounts” of foreign- currency debt, Nicholas Spiro, the head of Spiro Sovereign Strategy in London, and Concorde Ertekpapir Zrt., Hungary’s largest non-bank broker, wrote in a joint report on Dec. 17.

The forint jumped 10 percent in 2012 as the country reduced its budget deficit and bond purchases by central banks in the euro region and the U.S stoked demand for riskier assets.

“With money flowing into emerging-market bond funds, even paper rated below Hungary gets oversubscribed,” Aberdeen’s Szabo said in e-mailed comments before the AKK’s announcement. “They are still in time to go out to the market.”

To contact the reporters on this story: Andras Gergely in Budapest at agergely@bloomberg.net; Edith Balazs in Budapest at ebalazs1@bloomberg.net

To contact the editor responsible for this story: Wojciech Moskwa at wmoskwa@bloomberg.net


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