Croatia Issues up to 6bn HRK of Local Debt on Friday in a 3Y/10Y Dual Tranche

In the first days of February the Croatian Ministry of Finance is not dormant – the first large government debt auctions are taking place in the following seven days. With 1.5bn EUR of FX treasury bill maturing next week, the government plans to issue 1bn EUR of brand new 455-day TB, as well as 6bn HRK of longer paper; this is effectively some 2.3bn HRK more than the debt becoming due and 54% of the planned deficit for 2019 (4.2bn HRK). And 2019 is just getting started…

Last week the Ministry of Finance of Croatia announced that it will issue up to 1.0bn EUR of new 455-day treasury bill in order to refinance the 1.5bn EUR of bills maturing next week; the auction will take place today, starting at 09:00 and ending at 11:00 (it’s possible to take part through AUPD function on Bloomberg). Speaking about return, it’s likely that it will end up barely in positive – this paper is mostly purchased by banks for liquidity purpose and any non-negative yield is considered a bargain.

The remaining 500m EUR would be refinanced through a dual tranche of 3Y EUR-indexed bond (RHMF-O-222E) and a tap of 10Y HRK paper (RHMF-O-297A), the cumulative amount not planned to exceed 6.0b HRK.

Speaking about the shorter paper (RHMF-O-222E), the yield is likely to end up between 0.55% and 0.65%, depending upon the investors demand which might turn up to be substantial as many local financial institutions might find this paper quite attractive. The current pricing is some 105/115bps above DBR 01/04/2022 (-0.50% YTM looking at the bid levels) – not bad for the paper that’s close to the belly of the curve, issued by the country that’s confidently approaching ERM II.

However, yield hunters such as pension funds and insurance companies would probably be focused on RHMF-O-297A; using the bids displayed yesterday by four market makers, the reoffer price should be a couple of pips below par (99.97 looks attainable), meaning that the investors might get an opportunity to go long on 10Y LCY bond @ 2.375% YTM (at par YTM is equal to the coupon). We should take this calculations with a grain of salt: with liquidity levels at all time highs (35b HRK, 9.2% GDP) and ample dry powder on long term investors’ balance sheet, it’s possible that the reoffer price might end up substantially above par. Looking at the secondary market in January, the paper was under intense buying pressure and has been trading between 100.00 and 100.78 in clean price; even the ones who bought it at 100.78 shouldn’t be disappointed too much – the government plans to issue up to 6bn HRK of bonds in total, which is just a tip of the iceberg of demand; expect modest allocations.

Ivan Dražetić
Category : Blog

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