Bloomberg News

Hungary Raises $3.25 Billion in Bond Sale Replacing IMF

February 13, 2013

Hungary Files for First Dollar Bond Since 2011 Replacing IMF

Hungary’s financing costs tumbled last year as Orban took steps to cut the country’s debt and bond buying by the Federal Reserve boosted demand for higher-yielding assets. Photographer: Akos Stiller/Bloomberg

Hungary raised $3.25 billion in its first sale of foreign bonds in 21 months, returning to the debt market after Prime Minister Viktor Orban abandoned a quest for International Monetary Fund support.

“The sale will probably improve sentiment on the government bond market and boost the forint,” Zoltan Arokszallasi, a Budapest-based analyst at Erste Group Bank AG, wrote in a research report today. “The issuance greatly improved the refinancing position and so a further foreign- currency sale this year may not even be necessary.”

The government sold $2 billion of 10-year notes to yield 345 basis points above U.S. Treasuries and $1.25 billion of five-year securities at a spread of 335 basis points, data compiled by Bloomberg show. The Debt Management Agency received $12 billion in bids, Orban’s office said in an e-mailed statement today. Yields on the notes due 2023 fell 20 basis points to 5.219 percent, 331 basis points above the U.S. Treasuries of similar maturity.

Hungary tapped the market after failing to obtain a flexible credit line from the IMF during a year of disputes over central bank independence and Orban’s measures to cut the biggest debt burden in the east of the European Union. The country’s debt agency plans to issue as much as 4.5 billion euros ($6 billion) on international markets in 2013 to help repay 5.1 billion euros in foreign-currency liabilities, the government said in its statement today.

Bond Rally

The country’s financing costs tumbled last year as Orban took steps to reduce debt and the U.S. Federal Reserve’s bond buying program boosted demand for higher-yielding assets. Yields on forint notes plunged as the Magyar Nemzeti Bank lowered the benchmark rate by a cumulative 1.5 percentage points since August to 5.5 percent, the lowest level since 2010.

Yields on Hungary’s five-year forint-denominated bonds fell five basis points, or 0.05 percentage point, to 5.6 percent by 4:59 p.m. in Budapest, the lowest level in more than seven years and down from a peak of 10.84 percent in January 2012. The forint appreciated 0.1 percent to 289.78 per euro, the strongest in more than a month.

“The foreign-debt sale is positive for the local debt market as it relieves pressure on local issuance,” Maja Goettig, Warsaw-based strategist at KBC Groep NV, wrote in an e- mailed report today.

Liquidity Boost

The government hired BNP Paribas SA, Citigroup Inc., Deutsche Bank AG and Goldman Sachs Group Inc. for the sale, the Debt Management Agency said in an e-mailed statement.

Hungary has benefited “tremendously” from the “global tide” of liquidity and Orban’s fiscal commitment, Iryna Ivaschenko, the IMF’s representative in Budapest, told a conference yesterday. The country remains “susceptible to sudden changes in investor sentiment,” she said.

The junk-rated nation issued a record $3.75 billion of foreign bonds in March 2011 and 1 billion euros two months later in its previous sale on international markets. Hungary scrapped Eurobond plans last year in anticipation of a loan from the IMF.

Turkey, which like Hungary is rated one step below investment grade by Moody’s Investors Service, sold 10-year dollar bonds on Jan. 8 yielding 160 basis points over Treasuries, compared with a 377 basis-point spread at a sale of similar-dated Turkish bonds in February 2012.

“The pricing of the bonds were not cheap when compared to the recent dollar bond sales of emerging markets,” Janos Samu, a Budapest-based economist at Concorde Ertekpapir Zrt., Hungary’s largest independent broker, wrote in a note today.

Orban Opportunity

Orban has nationalized privately managed pension assets, levied special taxes on banks, telecommunications and energy companies and forced lenders to take losses on foreign-currency loans since taking office in 2010.

The prime minister may use the opportunity created by a successful bond issuance for another “negative” turn in policy, possibly by naming Economy Minister Gyorgy Matolcsy as central bank president, Peter Attard Montalto, a London-based strategist at Nomura Holdings Inc., said by e-mail yesterday. “We need to be on alert” after the bond sale, Montalto said.

Matolcsy has been named as the most likely successor to central bank President Andras Simor, who leaves office in March, by media including the Index and vg.hu news websites.

The forint tumbled as much as 3 percent after Matolcsy said in December that the bank should “bravely” use unorthodox methods to bolster the economy. Hungary’s currency rebounded after Matolcsy and the central bank’s rate-setting Monetary Council each urged caution two weeks ago on using “unconventional” monetary tools.

‘Paranoia, Complacency’

Moody’s affirmed Hungary’s credit rating at Ba1 with a negative outlook Feb. 8, saying Orban’s policies have weakened the economy since November 2011, when it cut Hungary to one step below investment grade.

Hungary’s financing needs in 2013 are the largest among its peers in central and eastern Europe, at an estimated 19 percent of gross domestic product, according to Moody’s. The debt agency has raised more than 1 billion euros from euro-denominated inflation-linked bonds sold under Hungarian law and also increased sales of forint-based notes to households.

The cost of insuring against default on Hungary’s debt with credit-default swaps was little changed at 291 basis points, according to data compiled by Bloomberg.

“A sale at these yields, despite Hungary’s much more pronounced idiosyncratic risks, speaks volumes about how market conditions have changed over the past several months,” Nicholas Spiro, managing director of Spiro Sovereign Strategy Ltd. in London, said by e-mail. “The pendulum of sentiment towards Hungary has swung from paranoia to complacency.”

To contact the reporters on this story: Andras Gergely in Budapest at agergely@bloomberg.net; Selcuk Gokoluk in Istanbul at sgokoluk@bloomberg.net

To contact the editors responsible for this story: Gavin Serkin at gserkin@bloomberg.net; Wojciech Moskwa at wmoskwa@bloomberg.net


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