Slovenia’s rehabilitation with international investors could be complete in the coming weeks after the sovereign announced its intention to issue its first public euro-denominated bond transaction in three years.
The eurozone member, which is finally on the path to resolving a banking crisis that nearly forced it to seek a bailout, will meet investors throughout Europe from Monday as it plans to issue its first non-private bond in euros since two transactions in the first quarter of 2011, when it sold 10-year and 15-year notes, each for €1.5bn.
“It’s definitely good they are finally contemplating the euro market,” said a banker close to the deal. “It seems like there is interest in meeting them. The initial feedback has been very good.”
“The purpose of the deal is not to do the longest possible but to have a successful transaction and meet investor interest, while having a reasonable cost of funding,” added the banker. “Given that this is their return, they don’t want to do something too funky.”
Although leads say no maturity or size other than benchmark has been decided, market expectations are for the sovereign to seek to raise between €1bn and €1.5bn through a 10-year bond. The Ba1/A–/BBB+ rated country has a €1.5bn bond due to mature in April.
While the crisis in Crimea has cast a shadow over CEEMEA bond issuance over the past few weeks, market technicals are strong. Order books have been big for a number of recent euro deals, particularly from corporates.
Other Central and Eastern European sovereigns, including Latvia, Lithuania, Poland and Slovakia, have also been active in euros this year, showing there is a firm bid from European accounts for emerging markets risk.
“The purpose of the deal is not to do the longest possible but to have a successful transaction and meet investor interest”
An added attraction is Slovenia’s relative value. At 204bp, the Z-spread on its outstanding 2024 euro-denominated note is about 120bp more than higher-rated Poland (A2/A–A–), according to Thomson Reuters data, and 50bp wide of Spain, which at Baa2/BBB–/BBB is lower rated by both S&P and Fitch.
“It will definitely offer yield and spread in euros compared with other Central European sovereigns,” said a banker away from the deal.
Another said, however, it was unlikely the deal would price through Slovenia’s dollar curve. “It should be close to flat, but dollars should still be more cost-attractive,” he said.
Slovenia’s February 2024 dollar bonds are trading at a Z-spread of plus 215bp.
Turning to dollars
Slovenia tried to issue in the single currency in 2012, but although it hired banks and went on a roadshow, no deal emerged as the eurozone crisis deepened. It did issue a €1.5bn three-year bond in November but that was a private placement.
Unable to issue coupon-paying bonds in public markets in its own currency, Slovenia has been forced instead to turn to T-Bill auctions and investors in the US dollar market, including emerging markets accounts. The sovereign has issued in dollars on three separate occasions since October 2012, including a US$3.5bn dual-tranche offering this February.
Slovenia’s total external issuance target for the year stood at €4bn, according to RBS analysts, though the government has the capacity to borrow up to €7.7bn to pre-finance 2015–16. As for its refinancing requirements, Slovenia has €3.3bn of debt due in 2014, while another €1bn is needed to cover this year’s budget deficit, added the RBS analysts.
In December, the government identified a hole of €4.8bn in the banking system. The state immediately injected €3.2bn of capital – two-thirds in cash and a third in government bonds – into five banks. A further €441m will come from bailing-in subordinated bondholders. The government also started moving bad loans to a state bad bank.
Analysts are becoming more confident about Slovenia’s economic prospects. “Improving corporate profits and less severe real income adjustments offset the ‘credit diet’ the economy is on, which should permit a return to positive growth this year,” said Raffaella Tenconi, CEE economist at Bank of America Merrill Lynch.
The bank has raised its GDP growth forecast for Slovenia to 0.2% from –1.8% this year and to 0.9% from –1% for 2015.
The new euro bond, which will be sold in Reg S format, will be issued under local law and listed domestically but will be open to international investors.
The lead managers are Barclays, Commerzbank, HSBC, SG CIB and UniCredit.
