(Adds context, quotes)
By Alice Gledhill
LONDON, Jan 12 (IFR) - Bank of Cyprus will discover whether
investors have bought into its recovery story as it offers its
first public bond since imposing losses on bondholders in 2013
during the Cypriot banking crisis.
The bank began marketing a 200m minimum 10-year non-call
five-year Tier 2 bond at 9.5% area on Thursday morning via Bank
of America Merrill Lynch, Credit Suisse, Deutsche Bank and HSBC.
The transaction is expected to be rated Caa3 by Moody's.
Bank of Cyprus is rated Caa2 by Moody's and B- by Fitch.
Investors suffered heavy losses during the Cypriot banking
crisis, but the lender last week repaid in full its 11.4bn
Emergency Liquidity Assistance in what it described as a
"significant milestone" in its journey back to strength.
"It's probably one for the brave," said a portfolio manager.
"9.5% is quite massive but Bank of Cyprus is only trying to
raise a small amount. Also, they paid back the ELA last week and
are probably in better shape than other lenders in Europe."
Despite its chequered past, leads reckon there is now
appetite for the credit, which must issue debt to comply with
European rules known as Minimum Requirement for Own Funds and
"This is a completely different investor base from the one
you would see on a traditional Tier 2 and I expect it will be
mostly hedge funds," the investor said.
The issuer met investors in London earlier this week and
only needs to raise 200m.
However, after an ebullient start to the year the European
financial bond market has softened in recent days after more
than 32bn of euro supply. The iTraxx subordinated index widened
10bp on Thursday morning to 217bp.
"It will be interesting to see where it clears," said a
banker away from the deal, prior to books opening. "You need
animal spirits for these things to go well."
Bank of Cyprus is capitalising on a much-improved issuance
backdrop for southern European lenders. Last week national
champions Intesa Sanpaolo and Santander seized on thriving
conditions to sell the region's first broadly syndicated
subordinated bank bonds since May 2016. Bank of Cyprus is not
only smaller but also a much lower-rated lender.
Initial price thoughts at 9.5% area are roughly in line with
9% coupons that smaller banks - Spanish Banco de Credito Social
Cooperativo and Banco Mare Nostrum - were forced to pay as they
sold sub-benchmark Tier 2 bonds last year.
Bank of Cyprus said as part of its Q3 results that it was
examining various funding opportunities including both senior
debt and/or subordinated capital to optimise the level and
composition of its liabilities.
It cited existing and upcoming regulatory requirements,
including the European Union's Minimum Requirement for Own Funds
and Eligible Liabilities (MREL). MREL is similar to TLAC (total
loss-absorbing capacity) - a set of global rules that requires
banks to build a layer of loss-absorbing debt to protect
taxpayers from bank failures.
(Reporting by Alice Gledhill; editing by Helene Durand, Alex