Hungary returns to bond market after IMF talks stall

Hungary borrowed $3.25 billion (2.5 billion euros) in a return to the bond market late on Tuesday after almost two years.

In Hungary's first bond sale since May 2011 and the recent breakdown in its talks with the International Monetary Fund, Hungary sold $1.25 billion of 5-year bonds at 335 basis points (3.35 percentage points) over the corresponding US Treasury yields.

It also raised $2 billion with 10-year notes at 345 basis points over the benchmark, Laszlo Andras Borbely deputy head of the government debt management agency AKK, said on Wednesday.

In an interview on state radio, Borbely said the AKK opted for a dollar bond issue due to demand by US investment funds for higher risk, higher yielding instruments.

Hungary is rated below investment-grade by all the main agencies: Ba1 by Moody's, BB by Standard and Poor's and BB+ by Fitch.

The two bonds were nearly four times oversubscribed, AKK said in a statement on Wednesday.

Borbely said the issue was swapped into euros worth 2.5 billion.

"The year's international bond programme has been more than half completed with Tuesday's successful issue," he added.

The proceeds compare to this year's foreign exchange expiries of 5.1 billion euros, of which AKK plans to repay 4-4.5 billion through bond issues.

The spread on the ten-year bond exceeded the spread of Hungary's last ten-year dollar bond issued to a value of $3 billion in March 2011, although the coupon is significantly lower.

That bond, which matures on March 29, 2012, has a coupon of 6.375, and was priced at 99.062 percent to yield 310 basis points over US treasuries.

Yields on Hungary’s dollar bonds due March 2021 fell to 4.79 percent, the lowest level in two weeks and 330 basis points more than the US benchmark.

Hungary has not issued a five-year bond since AKK overtook the organisation of the sovereign foreign issues from the National Bank of Hungary at the start of 1999.

Hungary, not a member of the eurozone, is in recession and had been seeking a 15-billion-euro ($19.2-billion) aid package from the EU and the IMF since 2011.

The long-running talks stalled, however, owing to the concerns at the EU and IMF over the independence of Hungary's central bank and the government's economic policies which, they said, were 'unsustainable'.

On January 30, Hungary's Prime Minister Viktor Orban said in Brussels that the negotiations were "coming to an end".

He said: "We don’t need a loan because we’d prefer to be financed via the markets."

In launching the dollar bond, Hungary took advantage of a "dramatic improvement" in the market in Europe, and in particular the eurozone, analysts told Hungarian state news agency MTI Wednesday.

Nicholas Spiro of Spiro Sovereign Strategy told MTI that the exceptionally favourable market conditions were one of the major factors in the strong demand shown by investors.

Spiro said the other factor was that nervousness regarding Hungary's stalled talks with the IMF on financial aid had eased before the dollar bond issue.

This was indicated by the fact that Hungary could draw on considerable resources with its forint-denominated issues, too, and that the foreign ownership ratio on the bonds market is one of the highest among emerging markets, he said.