GOVERNMENT DEBT MANAGEMENT Kalkofnsvegi 1 150 Reykjavik Iceland phone: 569 9600 fax: 569 9604 email: lanamal@lanamal.is internet: http://www.lanamal.is To newspapers, newsrooms, Press release and financial institutions 30 December 2015 Government Debt Management Prospect 2016 Planned Treasury bond issuance for 2016 totals 50 b.kr. market value. Net issuance of benchmark Treasury bonds will be negative by an estimated 20 b.kr. during the year. The balance of outstanding Treasury bills is estimated to decline by 9 b.kr., and be 20 b.kr. at the end of 2016. The Central Bank of Iceland bond will be paid off before mid-year. The aim is to refinance foreign debt in the amount of USD 503 million if market conditions are favourable. Introduction Net domestic borrowing is estimated to be negative by 194 b.kr. in 2016. In October, series RIKB 16 1013 will mature in the amount of 70 b.kr. In coming months, Treasury bills will mature in the amount of 29 b.kr. Other payments for the year total 165 b.kr., including 90 b.kr. to retire the loan issued by the Treasury to recapitalise the Central Bank of Iceland. Furthermore, it is planned to use the proceeds from the sale of a 30% stake in Landsbankinn to pay RIKH 18 1009 down in the amount of 71 b.kr. There will also be a 2 b.kr. payment on the bond issued by the Treasury for the purchase of share in Landsvirkjun from City of Reykjavik and Akureyri. Another 2 b.kr. will be used to make payments on transferred Treasury guarantees due to the collapse of the banks, as well as on other loans. The borrowing need will be met with Treasury bond issuance totalling about 50 b.kr. market value 1 and Treasury bill issuance totalling about 20 b.kr. The difference, in the amount of 194 b.kr., will be met partly with Treasury revenues from stability contributions from the failed banks, operating surpluses, and by reducing the Treasury s cash position. Net Treasury bond issuance is therefore estimated to be negative by about 20 b.kr. and net Treasury bill issuance by 9 b.kr. 1 The sale price or market value refers to the clean price, net of accrued interest.
Net domestic funding need 2016 Amounts in b.kr. Net domestic funding need -194 Redemption and instalments Treasury bills 29 Treasury bonds 70 Retirement of Central Bank bond 90 Partial payment, RIKH 18 1009 71 Other loans and buybacks 4 Domestic funding need 264 Borrowings 70 Treasury bills 20 Treasury bonds 50 The issuance calendar for each quarter will be published on the last business day of the preceding quarter. Each quarterly calendar (Quarterly Government Debt Management Prospect) contains information on estimated total issuance, the series to be offered, and the estimated maximum issuance in each series. The quarterly issuance calendar for Q1/2016 is published concurrent with the Government Debt Management Prospect for the year 2016. Medium-Term Debt Management Strategy The Medium-Term Debt Management Strategy for 2015-2018 was published by the Ministry of Finance and Economic Affairs on 1 April 2015. The strategy sets forth the authorities plans for credit financing during the specified period. Its principal objectives are to ensure that the Treasury s medium- to long-term financing needs and financial obligations are met at the lowest possible cost that is consistent with a prudent degree of risk. Another objective is to encourage further development of efficient primary and secondary markets for domestic Government securities. Issuance and payments in 2015 Treasury bond issuance was successful in 2015, and targets were met. The issuance of Treasury bonds with a market value of 55 b.kr. was announced at the beginning of the year. Also announced at that time was the issuance of a new nominal bond maturing in 2017.
Treasury bonds with a market value of 55 b.kr. were issued in 2015. All sales took place through conventional public auctions, apart from 0.5 b.kr. sold through Central Bank of Iceland foreign currency auctions. In the public auctions, bonds were issued in RIKB 31 0124 (10 b.kr.), RIKB 25 0612 (about 11 b.kr.), RIKB 20 0205 (about 11 b.kr.), and the new RIKB 17 0206 (about 22 b.kr.). RIKB 15 0408 matured during the year, in the amount of 23 b.kr. The weighted average maturity of the domestic and foreign debt portfolio was 6.7 years at the end of 2015, as opposed to 7.3 years at year-end 2014. The aim at the beginning of the year was to increase the outstanding Treasury bill balance by 5 b.kr., to a year-end total of 30 b.kr. This target was very nearly met, as the year-end Treasury bill balance was 29 b.kr. At the end of May, the Republic of Iceland prepaid in full the loan taken from Poland in 2009, in connection with the Stand-By Arrangement with the International Monetary Fund (IMF) following the collapse of the Icelandic financial system. The prepayment totalled 204 million złotys, or the equivalent of about 7.3 b.kr. In mid-july, the Treasury paid off the outstanding balance of the so-called Avens loan, in the amount of 192 million euros, or about 28 b.kr. The original nominal amount of the bond at the time of issuance (in 2010) was 402 million euros. The loan was an amortisation bond bearing variable interest and maturing in 2025. It was granted in order to finance the purchase of bonds owned by Landsbanki Luxembourg and pledged as collateral to the European Central Bank (ECB) in Luxembourg. During the year, the Treasury bought back some of its own bonds issued in US dollars in 2011 and maturing in June 2016, so as to reduce its refinancing risk. The original size of the bond was USD 1,000 million, and the year-end 2015 balance was USD 503 million. Nominal Treasury bond issuance On 13 October 2016, the nominal RIKB 16 1013 Treasury bond matures in the amount of 70 b.kr. Bonds in the series were first issued in 2010. According to the medium-term debt management strategy, primary emphasis will be placed on sales of two-, five-, and 10-year benchmark bonds and on building up new series to be issued on an irregular basis. According to the established pattern, a new two-year bond maturing in 2018 should be issued. Given that two very large bonds are scheduled to mature in October 2018 and February 2019, it has been decided not to issue a new two-year bond in 2016 but to continue the issuance in RIKB 17 0206, which is now 22 b.kr. in size. RIKB 20 0205, currently 39 b.kr. in size, will continue to be expanded as a five-year bond and will later be used as a two-year benchmark bond. The 10-year benchmark bond RIKB 25 0612, currently 97 b.kr. in size, is approaching the upper issuance limit of 100 b.kr.; therefore, there is little scope to sell more bonds in the series. The same applies for RIKB 31 0124, which is 89 b.kr. in size.
Indexed Treasury bond issuance RIKS 21 0414 is the only indexed Treasury bond series with market making. The series now has a nominal value of 73 b.kr., including accrued indexation, and there is the possibility of further expansion. The aim is to begin general sales of bonds in the RIKS 30 0701 series, as well as making it a benchmark bond with market making. This is in line with the Government debt management strategy announced when the series was first issued in connection with capital control liberalisation in summer 2011. The series now has a nominal value of about 71 b.kr., including accrued indexation. Treasury bill issuance Treasury bill issuance will be structured in the same manner as in recent years. Each month, a new six-month Treasury bill will be issued, with the possibility of expansion after three months. It is important to be flexible in Treasury bill issuance so as to meet temporary intra-year fluctuations in revenues and expenditures. Thus it cannot be ruled out that bills with other maturities will be issued during the year. The objective is to reduce the outstanding balance of Treasury bills by 9 b.kr., to a year-end total of 20 b.kr.; however, auction terms and market conditions could cause this to change. Buybacks exchange auctions It is possible that one or more exchange auctions will be held, in which Treasury bond owners will be invited to swap their bonds for benchmark bonds. It is also possible that buybacks and exchange auctions will be held for non-marketable bonds. Central Bank bond In 2008, the Treasury issued a bond to recapitalise the Central Bank of Iceland after the collapse of the banks. The bond is an amortisation bond maturing in 2043, and interest is based on Central Bank deposit rates. In 2015, the Treasury prepaid about 55 b.kr., leaving the outstanding balance at about 90 b.kr. as of the year-end. The Treasury plans to pay the bond off in full in 2016. RIKH 18 1001 RIKH 18 1001 was issued in order to finance the Treasury s capital contributions to financial institutions in the wake of the 2008 financial collapse. The bond matures in 2018, and the outstanding amount is currently 213 b.kr. It is important to reduce the size of the bond in coming years so as to reduce the Treasury s refinancing need in 2018. It is planned to sell 30% Treasury s stake in Landsbankinn, for 71 b.kr. and use the proceeds to pay down the bond. Treasury deposits with the Central Bank At the end of November, the balance on the Treasury s current account with the Central Bank of Iceland was approximately 96 b.kr., reflecting strong liquidity. The objective is to maintain an average balance of about 60-70 b.kr. In addition, the Treasury holds about 285 b.kr. in foreign currency accounts with the Central Bank. The above deposits suffice to finance roughly 28% of the Treasury s outstanding debt. The Treasury s cash position as of end-2016 is estimated at 60 b.kr.
Foreign debt The USD 503 million still outstanding on the USD 1,000 million loan taken in 2011 is scheduled to mature in June 2016. The Treasury s foreign currency position is good, providing the scope to pay off the loan. The intention is to refinance the loan in the market if borrowing terms are favourable. Timing of funding activities and further information Treasury bond auctions will be held on predetermined dates, according to the Government Debt Management auction calendar. Days are reserved once or twice a month for Treasury bond auctions and once a month for Treasury bill auctions. These days are indicated on the Government Debt Management auction calendar and on the website www.lanamal.is. Government Debt Management reserves the right to cancel auctions; e.g., in view of market conditions. The monthly publication Market Information, the Bloomberg <ICDO> pages, and the websites www.lanamal.is and www.bonds.is will continue to be the main channels for communication. Capital account liberalisation In recent years, the sale of Treasury bonds in foreign currency auctions has reduced the sale of Treasury bonds in regular public auctions by a corresponding amount. Decisions made by the authorities in connection with the disposal of stability contributions and upcoming steps in capital account liberalisation could affect the plans laid down in this Prospect, but separate notifications will be issued if this proves to be the case. Arion banki hf. Íslandsbanki hf. Kvika banki hf. Landsbankinn hf Primary dealers in Government securities Further information can be obtained from Esther Finnbogadóttir at the Ministry of Finance and Economic Affairs, at tel +354 545 9200, and from Björgvin Sighvatsson at Government Debt Management, at tel +354 569 9600.