Croatian Ministry of Finance announced its plans yesterday to issue two new local bonds today – 5Y HRK paper and 15Y EUR-indexed paper. Total amount is planned at HRK 10bn, with distribution among the two papers unknown. The books are opening today while settlement will take place on November 27th, two days before RHMF-O-19BA matures.
As expected, Croatian Ministry of Finance decided to enter capital markets for the last time this year in order to secure funds for maturing RHMF-O-19BA. Two bonds are to be issued today in total amount of HRK 10bn, around HRK 2.5bn more than Ministry needs to proceed to holders of RHMF-O-19BA. As we stated above, investors will be able to choose between 5Y HRK paper and 15Y EUR-indexed one; something for everybody as banks will probably have 5Y HRK paper as their darling while insurance companies and pensions funds could likely invest more in the other one due to its higher yield, indexation and/or longer maturity. As both papers are to be settled two days before RHMF-O-19BA matures, holders of RHMF-O-19BA have the opportunity to pay for the new bonds with the maturing paper but 2 days of accrued interest should be deducted from the full coupon.
Let’s talk some numbers know and see what could we expect from today’s pricing. For 5Y HRK paper calculation should be quite straight forward. Simple interpolation between RHMF-O-23BA and RHMF-O-257A (based on bid prices) indicates yield of 0.36%. We find that realistic as high liquidity could be poured in mid-term paper that yields slightly below 40bps; level that only month ago you could attain by investing in longest HRK papers.
On the other hand, 15Y EUR-indexed paper is not such an easy one to price. The obvious choice was to start form existing local EUR-indexed paper, RHMF-O-327A, that was also 15Y paper when issued two years ago (back then yield stood at 3.355%). At the moment dealers’ bid for RHMF-O-327A varies hugely from 120.4 up to 125.0 while last transaction was done just few days ago above 126.0 (1.05%), so we used average of all bids on BBG resulting in price of 122.37, i.e. YTM of 1.32%. On the top of that some additional basis points are expected to be paid for 2,5y longer maturity placing YTM around 1.40%.
Second method we used was based on spread occurring on the Eurobond market between CROATI 2028 and BGARIA 2028 (both EUR denominated) which currently stands at 44bps. Adding that to current YTM of interpolated BGARIA 2034 (0.94%) leads to expected yield of 1.38%, similar end result as with the first method. However, the third method shifted expectation towards a bit lower yield. Using extrapolation method with EUR denominated Eurobonds, CROATI 2028 (0.62%) and CROATI 2030 (0.77%), we ended up with YTM of 1.22%. The crucial detail here of course will be the distribution among the two papers and demand of pension and investment funds, as we expect insurances to bid that paper heavily due to long term liabilities.
With today’s auction coupled with the foreign one in the beginning of summer when EUR 1.5bn worth of CROATI 2029 was issued, Croatian Ministry of Finance will secure funds for the year but also finance small deficit planned for the year. Under the assumption that Ministry issues HRK 5bn of shorter and HRK 5bn of 15Y paper at 36bps and 130bps respectively, i.e. 83bps in aggregate, on notional of EUR 1bn, that means that Croatian Ministry of Finance will save EUR50m a year or EUR 750m in 15 years. Thank you Mr. Draghi once again.
Source: Bloomberg, InterCapital
