The Republic of Cyprus is considering entering its debut interest-rate swap to convert the fixed-rate liability on a recent EUR550 million (USD480 million) bond into a floating-rate obligation. The move comes as the Mediterranean republic's proportion of fixed-rate debt rises and as it looks to become a more sophisticated risk manager in preparation for its expected European Union entry in 2004. "We are getting more into the European market and as a result are becoming more conscious of pricing and market movements and interest rates," said Leslie Manison, advisor to the Ministry of Finance in Nicosia. The republic raised EUR550 million (USD480 million) through a 10-year deal earlier this month. In the swap it will pay a floating rate and receive the 5.5% coupon on the bond.
The swap could be of the cross-currency variety, as the sovereign may also convert the proceeds from the deal into U.S. dollars to pay off a dollar-denominated obligation that matures this summer. "We may be using the proceeds to repay a maturity that comes due in June," Manison said, referring to a USD300 million dollar-denominated bond issued in 1997. However, he said the recent euro-denominated deal will not be converted into the local currency, the Cyprus pound, because that is already loosely pegged to the euro. The sovereign has used fx swaps on a handful of previous occasions.
Any decision to use over-the-counter derivatives would be taken by the Ministry of Finance in conjunction with the Central Bank of Cyprus. "We are looking at the possibility of swapping it, we have not studied this issue but it remains an option," said Michael Michaelides, external debt officer at the central bank in Nicosia. "In the past perhaps it was not in line with our objectives." Prior to the recent deal, the sovereign had a total of CYP750 million (USD1.1 billion) outstanding in external debt, three quarters of which is fixed-rate. "We have no specific target, but with the issuing of the new bond we have to examine the situation," Michaelides said.
Credit Suisse First Boston and Deutsche Bank underwrote the bond deal and Manison said they would be considered among other firms, such as JPMorgan, for potential counterparties. "We would try to open it up for bidding," adding that such a process helped the sovereign achieve an attractive funding rate of 5.50% on the recent deal.
Moody's Investors Service rates Cyprus A2, Standard & Poor's rates it A and Fitch Ratings rates it one notch higher at A plus.
