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AKK raises $3.75 billion in record bond issue

The transaction is Hungary’s biggest international bond issue, while the 30-year bond is the longest foreign bond issued in the country’s history.

Hungary issued $3.75 billion in dollar-denominated bonds, including $3 billion in 10-year bonds and $750 million in 30-year bonds on March 24, the Government Debt Management Center (ÁKK) announced. The 10-year bond was priced at 310 basis points over the comparable US treasuries and the 30-year bond was priced at 330 basis points over the respective US paper. The transaction will cover more than half of ÁKK’s foreign issuance plan of €4 billion for this year.

Due to the significant, almost threefold, oversubscription, the spreads were narrower than it was indicated in the earlier pricing guidance, the ÁKK said. The preliminary spread terms were 325 bp for the 10-year bonds and 345 bp for the 30-year bonds.

The issue attracted offers in the value of $13 billion, said National Economy Ministry state secretary András Kármán, who is also the chairman of the ÁKK. The issue was a record in terms of its size, of the strong demand, as well as of the terms of the securities, not just in Hungary but also in the Central European region, Kármán noted.

Investor confidence increased in parallel with the government leaking the details of its structural reform package, the Széll Kálmán Plan, Equilor analyst Tamás Gerőcs told the Budapest Business Journal. In addition, many politically sensitive issues have been resolved lately, such as the nomination of the new members of the Monetary Council with “relatively reliable experts,” he added.

Although the issue drew strong demand, investors asked quite high returns on Hungarian assets, Gerőcs noted. Hungary benefited from the crisis of the eurozone this time, as investment funds, which would like to get rid off their assets from the weaker countries of the eurozone, are seeking new targets. Hungary is in a special position because while still in investment grade, it is on the verge of the being cut to junk, so investors demand higher returns on Hungarian assets. There are not many products with such high premiums in investment grade, he noted.

Meanwhile, Standard & Poor's said it has maintained Hungary’s credit rating at BBB- with a negative outlook, due to risks in implementing the government’s budget plan. This means that Hungary’s credit grade may be cut to junk if the government’s commitment to implement policies weakens. The grade and outlook of Standard & Poor's on Hungary is similar to that of Moody’s Investors Service and Fitch Ratings.

The ÁKK said it would use the proceeds of the issue for general financing purposes. “It is a massive issue, but Hungary needed it as a large amount of foreign debt will expire this year,” Gerőcs said. Expiring debt includes a €1 billion bond issued in 2001 with a 5.625% coupon expiring in June, another €1 billion bond issued in 2004 with a 3.625% coupon expiring in October, and the first, €2 billion repayment on Hungary's IMF-led bailout package due to the European Commission in November.

Three banks, BNP Paribas, Citi and Deutsche Bank, were picked through a tender to organize the bond issue. The banks organized a series of meetings with bond market investors in Europe and the United States between March 17 and 24. Although the goal of the meetings was to inform and inquire, not an immediate bond issue, the issue took place very soon after the roadshow, indicating restored trust by foreign investors.

“We are very happy that the bond has received a good reception,” Citibank Hungary CEO Batara Sianturi told the BBJ. “I think it is a positive message to the markets.”

“Our Hungarian team as well as our teams in London and the US attended the road show,” Sianturi said. “Citi’s leverage is globality, we are in 101 countries, we have investors all over the place. If we look at the profiles of investors of the last bond issue, we see investors from Europe, Asia and North America.”

Sianturi pointed out that the public sector is a very important sector for Citibank. The bank also organized bond issues for the previous government, including a eurobond in 2009 and a dollar bond in the value of $2 billion in 2010.

Gabriella Lovas