Montenegro sells €300m Eurobond at 6% yield

Montenegro sells €300m Eurobond at 6% yield
By Denitsa Koseva in Sofia March 4, 2016

Montenegro opened the books on its five-year sovereign five-year sovereign Eurobond on March 3, at a yield of 6%. Podgorica sold €300mn, in line with its target.

Under its 2016 budget, Montenegro will need to borrow €667.1mn this year to patch its budget gap and to repay a total of €390.5mn of Eurobonds maturing in April. The government plans to borrow the whole sum from international sources. An increase in public debt is expected as Podgorica finances major investment projects in particular the Bar-Boljare motorway.

According to Reuters last week, Montenegro hired Citigroup, Deutsche Bank, Erste Group and Societe Generale are lead managers for the issue.

Raiffeisen analysts wrote in a March 4 note that the final pricing matched initial guidance, while the decrease in the target amount from €400mn to €300mn “could have underscored weaker market demand”.

Although the 6% “appeared generous ... we believe investors remained shy due risk profile of Montenegro taking into account large capital investments, short-term funding constraints, elevated external imbalances (with 20-30% of FDI coming from Russia and Cyprus) and growing reliance on debt,” Raiffeisen analysts wrote. “We see the new [Montenegro] bond as relatively attractive for tactical short-term positioning only but we would not be enthusiastic about parking long-term cash in this market.”

However, Timothy Ash, head of emerging-market strategy at Nomura International in London, wrote on March 3 that 6% was “not that generous” taking into account Montenegro’s budget deficit of 7% of GDP, substantial financing needs this year (18% of GDP according to the European Commission) and “political risks simmering around the Nato issue”. 

In advance of the issue, Ash forecast that Montenegro would be likely receive strong support from the US, the EU and other western governments for political reasons.

“Clearly ... in the midst of the current stand-off between the West and Russia, the migrant crisis, and Nato decision to allow Montenegrin membership if it meets the conditions of membership, Montenegro is likely to receive strong backing/support from the US, the EU and Western governments. Montenegro might still have to pay up to put this deal to bed, as it is unclear how it will cover redemptions in April without a new issue at this stage,” Ash wrote in an emailed note.

Last year, Montenegro successfully placed a €500mn five-year Eurobond with a 3.875% coupon.

Aside from the new Eurobond, the government plans to draw up to €205mn from a loan agreed with China's Exim Bank for the construction of the Smokovac-Uvac-Matesevo section of the Bar-Boljare motorway, and plans to finance the remainder of the works with up to €50mn which it will secure through bond issues and credit arrangements with local and foreign institutions.

The Bar-Boljare motorway is a significant investment project in comparison with the size of Montenegro's economy and is expected to boost its growth in the next four-to-five years. However, this is expected to also lead to a hike in public debt.

Montenegro’s government has set tourism, transport infrastructure and energy as top priority sectors for investments, hoping to boost further its economic growth in longer term, and plans to use the borrowed funds for these investments, Ash says.

“Unfortunately, much of this investment is being funded by the government and as a result the rise in public sector debt has been noticeable in recent years. The public sector debt/GDP ratio has thus risen from 53.4% of GDP in 2012, to an estimated 62-63% as of the end of 2015, and is forecast by the World Bank to rise to just under 80% of GDP by 2018,” he noted.

In November, the European Commission also projected that Montenegro’s public debt will most likely gradually grow in the coming years in line with subsequent withdrawals of tranches from the motorway loan. This projection matches the forecast made by the IMF the public debt should peak at around 77% of GDP over the next three to four years, from some 70% in 2015, before decreasing to around 73% of GDP in 2020. Standard & Poor's (S&P) also has forecasted that Montenegro's general government debt will most likely continue rising and reach 73% of GDP in 2018.

On the other hand, Montenegro’s economy has gained momentum last year and the annual GDP growth is estimated at some 4.0%. A similar pace is projected for this year thanks to expected strong FDI and a good tourism season.