Cyprus completes 1-bn-euro debt swap

Cyprus said on Monday it has completed a one-billion-euro ($1.3 billion) swap of government bonds for new ones with longer maturities under its bailout deal with international lenders.

Last week's announcement of the swap prompted a downgrade by ratings agencies Standard & Poor's and Fitch.

"The Public Debt Management Office of the ministry of finance announces that the exchange of 1 billion euros of Cyprus government bonds has been successfully completed," a finance ministry statement said.

Nicosia said the earlier bonds, which were to mature during the bailout period (2013 through the first quarter of 2016), have been replaced with five new issues holding the same coupon rate and at five-10 year maturities.

The finance ministry said the transaction is intended to facilitate government cash-flow management and ensure adequate funding with terms that do not compromise achieving the long-term public debt target.

The move was required under the terms of the bailout deal with the European Union and the International Monetary Fund.

In exchange for a 10-billion-euro loan from the EU and the IMF, Cyprus agreed in March on 13 billion euros in measures to cut its budget deficit and to restructure its bloated banking system.

On Friday, Cyprus's bond ratings were downgraded by both Standard & Poor's and Fitch following the announcement of the debt swap.

S&P said the "exchange materially changes the terms of the affected debt and constitutes what we consider a distressed exchange".

"We view the extension of maturities without what we find to be adequate offsetting compensation as the exchange of new debt on less favourable terms to the existing debt."

It lowered Cyprus's long- and short-term sovereign credit ratings to SD (selective default) from CCC/C.

After the exchange, S&P said liquidity strains on the government should be alleviated, and that the rating is expected to rise to CCC+.

However, it noted that the "government will still need to deal with the forthcoming rollover of a stock of 950 million euro treasury bills," equivalent to five percent of GDP.

Fitch also lowered Cyprus's long-term local currency rating to RD (restricted default) from CCC.

"This transaction constitutes a DDE (distressed debt exchange)... as the maturity extension at existing coupon rates represents a material reduction in terms for bondholders," Fitch said.

The debt exchange was welcomed by the European Commission and IMF last month.

"Once this transaction is completed, the refinancing commitment undertaken by the Cypriot authorities in support of the adjustment programme would be fulfilled," the European Commission had said.