Hungary pays large premium as it issues first CEE dim sum bond

Hungary pays large premium as it issues first CEE dim sum bond
Hungary's appetite for Chinese favour saw it pay a high premium
By bne IntelliNews April 14, 2016

Hungary has raised CNY1bn (€137mn) via the issue of a 3-year dim sum bond, the economy minister announced on April 14. The sovereign paid a handsome premium to Chinese investors as it seeks to cosy up to Beijing.

The debt - issued outside China but denominated in yuan - is first dim sum issue from Central and Eastern Europe, and Hungary's first action in international markets for around two years. Budapest has been mulling an issue for some months.

The move is also part of a concerted effort in recent years to cement ties with Beijing as part of a push by Budapest to open up markets to the east. Hungary is also eyeing China's massive reserves, as it races others in Central and Eastern Europe for incoming investment from the Asian giant.

"Today, Hungary has issued yuan-denominated government bond, becoming the first country to do so in the Central and Eastern European region," the economy ministry said in an invitation to a press conference. "Chinese-Hungarian relations in the financial field are further strengthened by the issue."

Hungary mandated the Bank of China to arrange a dim sum bond of benchmark size on April 13. The bond was issued on April 14, at a yield of 6.25%. However, following the swap of the yuan to euro, the actual yield is expected to be 2-2.5%, according to Economy Minister Mihaly Varga. Three year forint-denominated bonds trade at around 1.5%.

Hungary announced in January that it planned to return to the international bond market in early 2016 after a hiatus of close to two years, and that it was preparing both a Eurobond and a dim sum bond. Bank of China arranged meetings with potential investors interested in the renminbi issue, but the issuance did not happen at the time.

Overall, Hungary was due to repay €4.8bn worth of foreign currency debt in 2016, more than double the €2.35bn expiring in 2015. The total includes €1.5bn due to the European Commission - which Hungary already repaid in April - and €3.2bn worth of FX bonds.

However, having paid such a handsome premium to make friends with Beijing, further issues on the international market are unlikely for the immediate future, suggest analysts at RBI.

"Although the government vowed to issue more bonds on international markets this year we see the chance of EUR or USD issue as slim, at least until the Hungarian credit rating remains below the investment grade," they write. "We would not expect another international issue till H2, while the Hungarian government does not have the urge to issue as long as domestic HUF market yields remain relatively low."

Poland has also suggested it is set to issue dim sum bonds. However, Warsaw has held fire for the meantime as China's economic slowdown has hit bond markets in the country. Poland instead went into the market on April 13 by tapping a 20-year Eurobond.