Croatia makes successful Eurobond issue despite shaky economy

By bne IntelliNews March 5, 2015

Clare Nuttall in Bucharest -


Croatia sold €1.5bn worth of 10-year Eurobonds on March 4, attracting robust investor demand despite forecasts of a slow exit from recession and political uncertainty as elections approach towards the end of this year.

Demand for the issue was around €6.5bn. The bond priced at a yield of 3.25% - mid-swaps + 255 bps compared to initial pricing guidance set at mid swaps + 287.5 bps - according to an analyst note from Erste Group, which points out that robust investor demand allowed for the hefty issue size and more favourable pricing.

The yield was almost one percentage point lower than in May last year when the country returned to international markets to sell €1.25bn in eight-year Eurobonds, above the target of €1bn.

“The [ministry of finance] made good use of the favourable market environment, securing record cheap funding and substantially decreasing financing risks for the remainder of 2015, as the focus now shifts to local demand (this is likely to be the sole Eurobond this year, unless some pre-financing is done ahead of the upcoming election period), where we see very limited risks of negative surprises,” Erste analysts wrote on March 5.

Barclays, Erste Group, JP Morgan and UniCredit managed the Eurobond issue. Croatia is rated BB by Fitch, Ba1 by Moody's and BB by Standard & Poor's.

Zagreb announced on February 27 that the economy emerged from recession in the final quarter of 2014, when GDP was up 0.3% y/y, according to a preliminary estimate from the national statistical office (DZS). This followed 12 consecutive quarters of falling GDP. However, DZS’s estimate also shows that GDP contracted by 0.4% for the full year 2014.

"I am pleased to see it, given that it is difficult to build on rotten foundations. Quarters and quarters of stagnation are behind us. There have been some downs, while before that a sharp downturn was registered in 2008, 2009 and 2010," Prime Minister Zoran Milanovic commented on February 27, state news agency Hina reported.

Milanovic’s Social Democrats came to power in 2011, replacing the previous government led by the Croatian Democratic Union (HDZ), which is now the main opposition group.

Parliamentary elections must be held by February 2016, and the election is expected to be towards the end of this year, though a date has not yet been announced.

The vote will pit the Social Democrats against the HDZ, whose candidate Kolinda Grabar-Kitarovic scored a surprise victory over incumbent Ivo Josipovic in the January 2015 presidential elections.

With the presidential election seen as an indicator of public sentiment ahead of the more important parliamentary election, Josipovic’s defeat does not bode well for the Social Democrats. Milanovic’s government has sought to woo voters with recent decisions such as a write-off of debts for the country’s poorest citizens and the freezing of the exchange rate used to calculate the Croatian kuna value of personal loans taken out in Swiss francs.

However, the performance of the economy, which is lagging behind others in Southeast and Central Europe, is likely to be the primary factor for voters in the upcoming election.

Despite the positive Q4 2014 figures from DZS, forecasts for 2015 are mixed. The European Commission’s winter forecast, published on February 5, reveals that for the first time since 2007, all EU member states will show positive growth, but at just 0.2% Croatia’s growth forecast is the lowest in the 28-country bloc.

Both the European Bank for Reconstruction and Development (EBRD) and the World Bank forecast in January that Croatia’s economy would expand by 0.5% this year. However, Erste analysts expect the economy to contract by 0.5% in 2015. “We have to reckon with a recession in Croatia,” Erste Group Bank CEO Andreas Treichi told a February 27 press conference.


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