Montenegro will issue its first bond in USD on the international financial market tomorrow, potentially attracting new investors to participate in the country’s public debt, announced Gojko Maksimović, the director of the financial markets sector at Hypothekarbank.
“Up until now, the Ministry of Finance has issued several series of bonds on the international market, all denominated in EUR. In this context, tomorrow’s issuance gains even more significance as it will quickly determine the market value of Montenegro’s public debt in dollars,” Maksimović stated in a LinkedIn post.
He pointed out that this won’t be the first USD-denominated debt arrangement for Montenegro, given its credit line with the Chinese Exim Bank. The planned bond is set to have a maturity period of seven years, with the due date in 2031. The expected issuance amount ranges from $500 million to $700 million, corresponding to the maximum defined borrowing for the year outlined in Montenegro’s budget.
Maksimović explained that issuing bonds in a different currency from the domestic one is a common transaction in international markets. Reasons for this may include the cost of borrowing, obtaining better terms in foreign currency compared to the domestic one, generating future revenues in a foreign currency, and attracting a new group of investors to the financing process.
“In our case, deciding to issue in USD can be justified by two main reasons, providing an advantage and a positive assessment of this decision. Firstly, by issuing in USD, our country as the issuer attracts new investors into our public debt,” Maksimović emphasized.
He highlighted that, as Montenegro has previously only used EUR issuances, this marks the first time its public debt will be accessible to investors with funds in USD, especially those willing to invest in higher-risk instruments like Montenegrin bonds.
“This opens up a new market, strengthening the buyer base for Montenegro’s debt with new investors,” Maksimović added.
The second reason, according to Maksimović, is related to cost. Comparing data from the market, it is expected that Montenegro could borrow with an effective yield of around 7.5% annually.
“This represents a ‘more expensive’ interest rate compared to the potential rate that could be achieved with a EUR issuance,” Maksimović noted.
He suggested that, following tomorrow’s bond issuance, the Ministry of Finance plans to conclude a currency swap arrangement with foreign banks covering the total amount of the issuance. This would immediately hedge the currency risk.
“The purpose of this instrument is to allow the state to repay the debt in EUR while receiving inflows in USD. The amount of the arrangement would match the borrowing, and the payment terms would correspond to the bond’s maturity,” Maksimović explained.
The current cost of this instrument for a seven-year period to receive USD at a rate of 7.5% is around 5.9% in EUR, according to Maksimović.
In practical terms, Montenegro would receive USD at a rate of 7.5% from foreign banks and use them to cover bond obligations, while having an obligation to pay EUR to foreign banks at a rate of approximately 5.9%.
“On this basis, the net effect is a debt in EUR at a rate of around 5.9%, achieving significantly better conditions compared to the potential primary borrowing in EUR, which could range from 6.5% to 7%, thus impacting the budget’s expenditure side positively,” Maksimović concluded.
He acknowledged that the main drawback and potential issue lie in the duration of the swap arrangement, with the maximum fixed period being four years, requiring a reassessment after this period. Another challenge is the potential low liquidity of the instrument on the secondary market due to regulatory considerations.
Maksimović highlighted that considering more than half of Montenegro’s international bond issues are held by Montenegrin residents, increased demand for EUR-denominated bonds could be expected in the future. The introduction of a new USD-denominated instrument might result in a rise in the prices of current international issuances, following basic supply and demand principles.
