Economy 9 January 2020, 9:40am

Hungary buys back USD 800 mn of dollar bonds

Portfolio

Last autumn, the Government Debt Management Agency (ÁKK) repurchased USD 800 million (nearly HUF 250 bn) worth of dollar bonds that were set to mature in January. Hungary will still have to pay investors nearly USD 1 bn in about three weeks' time, but there are funds allocated for this in the government's liquidity account.

Hungary to repay further FX debts this year

In 2020, Hungary will have to repay HUF 741 bn worth of foreign currency debt, of which HUF 534 bn is in maturing FX bonds, according to the financing plan published by the ÁKK in December. Another HUF 131 bn will be paid on maturing domestic FX bonds (PÉMÁK), while loans from international institutions will require payments of HUF 76 bn.

The document also reveals that the ÁKK may have repurchased HUF 270 bn worth of FX bonds last year. These buybacks are typically low-key affairs during the year, unlike the auctions for repurchasing forint bonds.

Looking at FX bonds, the ÁKK database shows the following maturities for this year:

A 10-year dollar bond series originally sold for USD 2 bn will mature on 29 January.
An EUR 1 bn series issued in 2005 will mature on 24 February.
A three-year series worth 1 bn Chinese yuans will have to be repaid on 27 July.

The government plans to pay most of the above using forints. At the press conference introducing the financing plan in December, Zoltán Kurali, CEO of the ÁKK, said no more than EUR 1 bn of new FX bonds would be issued this year, primarily aimed at the domestic retail market and at Japanese and Chinese investors.

Several repurchases last year

As a result of mid-year buybacks, it is far from certain that the entire series of the three bonds listed above are still on the market. The ÁKK only publishes year-end figures, but Reuters continuously tracks repurchases.

According to the debt manager's summary, USD 1.76 bn of the FX bonds maturing in JAnuary were still on the market at the end of 2018. Reuters puts the current figure at USD 964 mn, which makes sense considering the USD 800 mn repurchase mentioned above. Of the euro bonds maturing in February, EUR 860 mn was on the market a year ago and this has not changed according to Reuters, which has no further information on the yuan bonds.

With the repurchases, the ratio of foreign currency within total debt could decrease faster than natural processes would justify, as these FX bonds will be removed from debt upon maturity, while the ÁKK will mostly finance the buybacks using forint funds. Partly as a result of this, the ratio was below 18% last November, compared to 20% a year earlier.

The Reuters database also shows when the ÁKK made repurchases, or at least when the changes were logged in the statistics. According to this, there was a USD 200 mn repurchase in February, followed by a USD 130 mn buyback in October and nearly USD 500 mn at the end of November.

Is should be noted that based on its previous communications, the ÁKK is not adamant on making the buybacks on the market. This is because reducing the stock of FX bonds is a costly move, as the bonds have to be purchased at market price, typically above 100% of nominal value. This may be one reason the ÁKK focused on the bond with shortened maturity expiring this January, as holders were more likely to sell. The timing of the repurchases relies on two factors:

The liquidity situation of the government (funds available)
The willingness of bond holders and the price they will find acceptable.

This means that the ÁKK can make substantial repurchases when it has funds available and can get a good price on the market. This could also be affected by one-off events: for example, last autumn's large-value buyback coincided with troubles in the U.S. interbank market, when several major investors may have needed liquidity and were thus willing to sell at a price more favourable to Hungary.

Where did the government get the money for this?

One might ask how the government suddenly came up with HUF 250 bn to buy back FX bonds. The answer is the government’s ready cash stock (KESZ account) held at the National Bank of Hungary (MNB) for just such purposes. This is where all revenue from bond sales or EU transfers come in, and this is where the government's expenses are paid from month by month, including the salaries of teachers or police officers. Of course, all this requires continuous liquidity management.

Looking at the KESZ account last year, it rose to a 30-month high of nearly HUF 2,000 bn in August before decreasing by about HUF 500 bn in September-October, the period when the ÁKK bought back bonds for more than HUF 600 bn.

At the end of November, the KESZ account stood at nearly HUF 1,700 bn, so there are ample funds for the USD 1 bn (nearly HUF 300 bn) repurchase along with coupon payments due in three weeks. If the ÁKK keeps up the practice of recent years, and if it has the funds available, it could continue repurchasing bonds this year as well. The primary target could be a series of dollar bonds set to mature next March, of which more than USD 2.5 bn is still in the market.

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