Eurobond Market May Offer Yields Hungary Can’t Ignore Anymore

  • Long-maturity foreign-currency debt ‘logical step’: Aberdeen
  • Reliance on domestic debt market may shift to pay Russian loan

Hungary’s record-low borrowing costs may be enough to coax the country to reconsider its two-year absence from dollar and euro bond markets. 

The eastern European nation said last month it may explore ways to replace a 10 billion-euro ($11.3 billion) loan it took from Russia to finance new nuclear reactors via bonds, without specifying whether the sale would take place domestically or abroad. Aberdeen Asset Management Plc and Concorde Securities said Eurobonds would be a favorable option for Hungary after a rush of issuance that drew even sanctioned Russia back to global debt markets in May.

Borrowing internationally would save Hungary money because the loan it took from Russia in 2014, which has yet to be tapped, carries an interest that’s as much as 3.34 percentage points higher than the current yield on the country’s euro-denominated bond due in 2020 of 0.61 percent. An international sale would mark a shift in strategy for a government that’s relied on domestic borrowing to wean itself off of foreign money since a 2008 International Monetary Fund bailout.

"Issuing long-maturity euro debt would be a logical step," said Viktor Szabo, a money manager who helps oversee $11 billion of emerging-market debt at Aberdeen in London. "There would definitely be demand for the notes.”

Russian Loan

Prime Minister Viktor Orban signed the loan accord with Russia as part of the contract to build new reactors at the Paks nuclear plant, located about 75 miles south of the capital Budapest. With Eurobond yields then running about 4 percent, the loan was seen as a comparable form of financing and in line with Orban’s aim of strengthening ties with the country’s former Soviet partner.

Borrowing costs for Hungary have since fallen as European Central Bank stimulus boosted demand for higher-yielding assets while the nation’s current-account surplus grew and Fitch Ratings returned sovereign debt to investment grade. 

"The market’s assessment of Hungary has improved considerably," Janos Lazar, the minister in charge of Orban’s office, told lawmakers late last month. "We are prepared and able to replace the loan with lending from the market, possibly in the near future.”

Available Options

Swapping the Russian line of credit for a Eurobond isn’t the only option available to Hungary, as it could issue debt on the domestic market or renegotiate terms with Russia, according to the country’s Debt Management Agency. Construction on the nuclear plant isn’t set to begin until 2018.

Selling about 1 billion euros a year in additional debt for 10 years wouldn’t represent a problem for Hungary, whether it’s in the form of Eurobonds or domestic debt, said Janos Samu, the head of research at Concorde, Hungary’s largest brokerage. The country issued a total of 31 Eurobonds in the 10 years leading up to its last sale in 2014, raising a total of $35 billion, according to data compiled by Bloomberg.

Emerging-market sovereigns have increased issuance this year as issuers assess prospects for higher U.S. interest rates and take advantage of low borrowing costs in Europe. Russia sold a $1.75 billion note last month in its first sale since 2013 amid U.S. and European Union sanctions. Poland has raised $1.75 billion and 2.5 billion euros this year while Romania has also raised 1 billion euros.

The yield on Hungary’s 2020 euro-denominated bond has fallen 90 basis points in the last year as the current-account surplus widened to a record 5 percent of economic output and public debt fell the lowest since 2008. While the country hasn’t sold dollar or euro debt in two years, it issued a 1 billion-yuan ($152 million) bond earlier this year.

“Hungary can now issue Eurobonds with lower borrowing costs than the Russian deal," Concorde’s Samu said. "The wider external surplus has significantly improved financing conditions and made the debt agency’s job a lot easier.”

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