Hungary takes out USD 4.25 bn debt in bond issue
The order book eventually grew to USD 15.5 bn. As the ÁKK’s amended financing plan released on Monday allows for EUR 4.5 bn (USD 5.3 bn) debt issue this year, demand equalled triple the theoretical maximum.
The USD 15.5 bn book is a record in Hungary for a single-day bond issue, and so is the USD 4.25 bn eventually issued.
According to IFR, the yield premium of the two bonds continued to shrink during the day and eventually came to 100 bp above the 10-year U.S. government bond (down from 130 in the morning) and 150 bp for the 30-year bonds (down from 180 bp).
As the 10-year U.S. government bond currently has a yield of 1.29%, Hungary secured funding at 2.29% in this maturity. The 30-year U.S. bond has a 1.855% yield, which means Hungary will be paying 3.355% interest on these.
According to data form the ÁKK website, it made single-day bond issues of UD 3 bn in 2011, USD 3.25 bn in 2013 and USD 3 bn in 2014, which means yesterday’s USD 4.25 bn set a new record. As for euro bonds, the biggest issue had been EUR 1 bn until last November, when Hungary issued EUR 2.5 bn to pre-finance FX bonds maturing this year and also in preparation for EU budget debates.
What are the funds needed for?
As IFR News noted in its EEMEA monitor, this was Hungary's first USD deal since 2014 when it launched USD 1 bn and USD 2 bn in March. Unnamed sources also revealed how the Hungarian government is allegedly planning to spend the new funds, which may come to EUR 4.5 bn with today’s euro bond issue:
- EUR 500 million is reportedly to make up for delayed EU recovery funding. (This appears to be wrong as pre-payment of EUR 0.93 bn at current rates, 13% of the total, will be accessible immediately as soon as Hungary’s recovery plan is approved.)
- EUR 2.86 bn will serve to pre-finance debt maturing in 2022. The eagerness to pre-pay debt could be related to the National Bank of Hungary’s (MNB) recent statement that it will slow down its forint bond purchase programme before stopping it altogether, so this is kind of an escapre forward in order to decrease the load on the forint bond market.
- The remaining EUR 700 mn will finance “various budget spending including infrastructure development, pensions and education,” the report said.
If the above is true, most of the funding secured yesterday will service next year’s debt,
but it also provides for substantial budget spending (EUR 700 mn, or roughly HUF 240 bn).
These could include pension premium spending this autumn as fast economic growth and high inflation means pensioners are entitled to compensation, but the government may also choose to spend it on buying Budapest Airport.
This is interesting because budget deficit in the first eight months of the year only came to 47% of the revised target, so there appears to be ample room for year-end spending. However, the government has pledged several spending items through earlier decrees and promises, which will use up a good part of the remaining amount. The fact that the government is spending extra tax revenues resulting from fast economic growth as fast as they are coming in also supports this view.
As such, securing funding not only for the first two goals (delayed EU recovery funds and pre-financing 2022 debt) but also for a rather loosely described third one was probably necessary because
while the budget has less room to manoeuvre than apparent, the government wants to finance certain items this year (infrastructure, pensions, education).
Cover photo: Portfolio
