A Differentiated View Exposes Value in Cyprus

How thorough research and risk analysis led us to Cyprus sovereign debt

Jun 28, 2019 @ 12:01 am

The financial crisis in Cyprus earlier this decade was so severe that it required an international bailout, prompting many investors to flee the small Mediterranean country. However, T. Rowe Price international fixed income team members—who cover more than 80 countries, 40 currencies, and 15 sectors—decided to stick around and look a little deeper. What they found were some intriguing opportunities. Ken Orchard, a London-based global, multi-sector bond portfolio manager, explains the story of finding value in Cyprus.

InvestmentNews Content Strategy Studio (INCSS): Give us an overview of the crisis and how it affected Cypriot bonds.

KEN ORCHARD: The global financial crisis in 2008 triggered a recession in Cyprus. The local economy was very slow to recover, and by 2011 commercial property values had declined by roughly a third and non-performing loans were putting pressure on the banking system. Worse, Cypriot banks were holding large amounts of Greek public- and private-sector debt and had to take write-offs in the wake of the Greek government-debt crisis. All of those pressures led to fears that the Cypriot banks would collapse. The government took over one major bank, but the crisis continued and the price of long-term government bonds plummeted, with yields rising to more than 12%. After considerable negotiation, the European Union, the International Monetary Fund, and the European Central Bank arranged a €10 billion bailout in March 2013, which came with strict financial guidelines for the government and Cypriot banks.

INCSS: What happened next?

KEN ORCHARD: Over the following two years, most investors steered clear of Cyprus because the ratings agencies were concerned about the situation and had downgraded Cyprus sovereign debt well into junk territory. But in doing our research and analysis, we saw that the government was following the rescue program fairly closely. The economy was turning around, the budget was turning back into surplus, and the current account balance was looking better. We thought this could be a great turnaround and recovery play.

INCSS: What more did you do before you decided to invest?

KEN ORCHARD: We went to Cyprus and met with the Finance Ministry, the central bank and the nation's largest banks. We also met with officials at the U.S. Embassy to talk about the political situation. After that on-the-ground research and number-crunching analytic work, we came to the conclusion that Cyprus was a very interesting investment.

INCSS: How did the investment turn out?

Ken Orchard: Over the last five years, Cyprus has had a dramatic turnaround and now has the largest fiscal surplus in the Eurozone1. Since its ratings have gone back up into investment grade territory, it was no surprise to us that they returned to the bond market with a 15-year issue in February. We participated in that issuance, even though it was heavily oversubscribed. Everyone's back now, but we were among the first.

INCSS: What would you say is the lesson for investors in the Cyprus story?

KEN ORCHARD: We were able to offer a different perspective on Cyprus because few global firms have our breadth of resources. And that's not just about having bottom-up analysts, economists, mathematicians, and quant statisticians — it's about how many areas and how much information the team is able to cover on a deep level. It's also about an environment that supports everyone working together to connect the dots that other people don't, and being able to do what we say we do.

To learn more about Informed Investing, click here.

1European Commission, Autumn 2018 The views contained herein are those of speaker as of March 2019 and are subject to change without notice; these views may differ from those of other T. Rowe Price associates. This information is for informational purposes and is not intended to reflect a current or past recommendation, investment advice of any kind, or a solicitation of an offer to buy or sell any securities or investment services. The opinions and commentary provided do not take into account the investment objectives or financial situation of any particular investor or class of investor. Investors will need to consider their own circumstances before making an investment decision. The specific securities identified and described do not necessarily represent securities purchased, sold, or recommended and no assumptions should be made that the securities identified and discussed were or will be profitable. Past performance cannot guarantee future results. All investments are subject to market risk, including the possible loss of principal. All charts and tables are shown for illustrative purposes only. T. Rowe Price Investment Services, Inc. Distributor. 2019 T. Rowe Price. All rights reserved. T. ROWE PRICE, INVEST WITH CONFIDENCE, and the bighorn sheep design are, collectively and/or apart, trademarks or registered trademarks of T. Rowe Price Group, Inc. 201904-802909

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