Panayiotis Rougalas
On Tuesday, April 4th, 2023, Cyprus made its debut on the markets with a sustainability bond, raising €1 billion for the first time in its history. The yield based on the bond price was set at 4.21%, with a nominal annual interest rate of 4.12%, while demand from investors exceeded €12.1 billion. In the first 30-35 days of the new government's rule, the Republic of Cyprus came to the markets with a new type of bond, with a "green" orientation. The preparation for the issuance had been made by the previous leadership of the Ministry of Finance, but the current one was waiting for the right moment to be successful. The climate with the banks in the United States, Switzerland, and the overall confusion with the investment community and the general turmoil in the markets seem to have delayed the process of issuing slightly. The Cyprus News Agency (CNA) had reported that Cyprus would enter the markets in the first days of its rule with a sustainability bond worth €1 billion, while experts had "predicted" a yield of around 4.10%. The issuance eventually came out slightly more expensive, at 4.21%, and Cyprus considered it more appropriate to come to the markets after Moody's and DBRS evaluation last Friday. Cyprus - as well as all countries with high-interest rates and economic turbulence - will no longer borrow money from investors unless it is necessary.
Satisfactory performance
How do experts comment on the issuance? As the financial analyst of Athlos Capital, Fanos Vladimiros, reports, Cyprus raised 1 billion euros with an interest rate of 4.219% (MS + 125bps) through the issuance of a 10-year sustainability bond.
Cyprus has significant liquidity, which is sufficient to cover its financial needs for this year by 3.5 times.
As he explained, this was the first issuance of a sustainability bond by the Republic of Cyprus and it attracted strong interest, as total demand exceeded 12.1 billion euros. "This resulted in the yield of the bond to decrease from the initial guidance which was at (MS + 140bps)," he commented. Mr. Vladimiros noted that, given the international conditions of the continuous increase in interest rates, the yield of the Cypriot bond is deemed to be absolutely satisfactory as it is very close to the yield of Italy's 10-year bond. The financial analyst of Athlos Capital emphasized that the demand was particularly high as investors recognize the progress made in the public finances, as well as in the country's banking sector. Wanting to give specific examples, Mr. Vladimiros noted that last year Cyprus presented a high economic growth rate (5.6%), a fiscal surplus (2.3% of GDP), while significant improvement was also recorded in the public debt to GDP ratio, which decreased to 86.5% from 101% in 2021. Finally, Mr. Vladimiros added that as a result of the issuance, Cyprus improved its liquidity and increased its visibility in international markets.
"Green vs Sustainable"
What are sustainability bonds and what is their main difference from green bonds? Sustainability bonds are fixed-income financial instruments (bonds) where the proceeds will be used exclusively to finance or refinance a combination of Green and Social Projects and which align with the four basic elements of the International Capital Market Association's (ICMA) Green Bond Principles and Social Bond Principles. The main difference between green, social, and sustainability bonds lies in their sustainable categories for income distribution, with sustainability bonds required to combine both social and green categories.
All ministries of the Cyprus Republic are aware of the eligibility criteria for projects under the current framework and are called upon to identify potentially eligible expenditures for further examination and distribution by the Public Debt Management Office. Ministries are required to submit proposals at least annually, in relation to their usual budget planning cycle, but they can also propose projects for review on an ad hoc basis throughout the year. Proposals from ministries suggesting potential projects for distribution under the current framework should not only mention the eligibility criteria but also describe the alignment of the proposed projects with the ICMA's Green and Social Bond Principles.
In general, the Cyprus government is stepping up its efforts to promote sustainability and tackle climate change, and sustainable bonds offer a promising instrument to finance environmental and social initiatives.
Working group for sustainable financing
The Public Debt Management Office has established an inter-ministerial working group for sustainable financing (SFWG), which, together with the relevant ministries and government agencies responsible for budgeting and project implementation, is a key element of governance around the assessment and selection of projects under the framework of sustainable financing in the Republic. The SFWG is chaired by the senior official of the Public Debt Management Office responsible for the sustainable financing of debt and also includes representatives from the Ministry of Finance, the Ministry of Agriculture, Rural Development and Environment, the Ministry of Energy, the Ministry of Labor and Social Security/Vice President of the Ministry of Social Welfare, and the Ministry of Transport, Communications and Works.
[This article first appeared in Kathimerini's Oikonomiki edition and was translated from its Greek original]
