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Central & eastern EuropeDecember 23 2010

Albania times Eurobond debut to perfection

Despite its close proximity to crisis-hit Greece, Albania made its first foray into the Eurobond market last year. After agonising over when to issue the deal in such a volatile market, it would seem that the timing of the launch was just right. Writer Joanne Hart
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Albania times Eurobond debut to perfectionXhentil Demiraj, debt director, Albanian Ministry of Finance

Xhentil Demiraj, debt director at the Albanian Ministry of Finance Xhentil Demiraj, debt director at the Albanian Ministry of Finance Albania is a small, relatively unknown country in south-east Europe. It has a population of little more than 3 million and a gross domestic product of less than €10bn. But the economy is growing, expanding by an average of 6% annually between 2001 and 2008. Albania was also one of the very few countries in Europe that avoided recession last year and did not need to rescue its banks in the wake of the financial crisis.

But economic growth requires capital so, two years ago, Albania began to think about accessing the capital markets.

"We started to consider a bond issue as early as 2008, but the recurring financial and debt crises stopped us from proceeding," says Xhentil Demiraj, debt director at the Albanian Ministry of Finance.

In 2009, the country turned to the loan market instead, issuing a €200m syndicated transaction, led by Deutsche Bank, to cover its immediate financing needs. But the government always intended to refinance this deal in the bond markets and, early in 2010, conditions began to look more promising.

"We announced an international bid for a €300m to €500m issue in January of this year. After two rounds of selections, finalised by interviews with the shortlisted banks, we mandated JPMorgan and Deutsche Bank in March to jointly manage the transaction. Roadshows were held in London, Frankfurt, Munich and Vienna in April, and the reception was solid. However, the Greek debt crisis meant market sentiment deteriorated rapidly, exactly at the time when we were roadshowing," says Mr Demiraj.

Neighbourhood watch

As a neighbour of Greece, Albania was particularly sensitive to concerns about the Greek financial position, and many questions were asked by investors about the trading relationship between the two regions. In fact, Italy is Albania's closest trading partner but Greece did account for 16% of imports and 7% of exports in 2009, so its financial situation could not be dismissed lightly.

Albania withdrew from the fray. The €200m loan from 2009 meant it did not need the money and, as a debut issuer with a B1/B+ credit rating, it wanted to be sure conditions were right before making its first appearance on the Eurobond stage.
"After a gradual improvement of sentiment in the markets in early autumn, especially for emerging sovereigns, and under the advice of our two joint lead managers, we decided to re-engage with investors in October," says Mr Demiraj.

A done deal

Albania launched its deal at the end of that month, a €300m, five-year issue, priced at 99.5% and with a coupon of 7.5%, to yield 7.625%. The country was considering a larger issue earlier in the year but ultimately chose an amount that most closely correlated with investor demand, particularly as the prime objective was to refinance a smaller, more expensive syndicated loan.

The decision was certainly a wise one.

"We were dealing with a market that had produced rates swings of unprecedented magnitude and speed during the past three years, especially in 2010," says Mr Demiraj.

"We were rather nervous during the book-build but very happy with the composition of the book. Investors came from 25 countries, with banks and fund managers accounting for 85% of the book. The rest were retail and insurance investors, and hedge funds had only a miniscule part.

"Pricing was a carefully made decision and I am confident that in the context we had to price, the way we did it was optimal," he adds.

Albania took comfort from the fact that its neighbour, BB rated Montenegro, issued a €200m bond in September at a coupon rate of seven and five-eighths per cent. The government was also relieved by the timing of the deal, particularly as overall market conditions deteriorated again in November.

Looking back, Mr Demiraj believes Albania has learnt valuable lessons.

"This has a been a great opportunity for us to learn how capital markets operate and how important it is to have the right team of managers to lead the transaction. The transaction also revealed to me how valuable it is for us to have maximum flexibility to enter the markets at short notice," he says.

Albania's transaction was the first single B rated sovereign deal to hit the markets since 2005, testament to the country's conscientious approach to the book-build process, its underlying economic and financial story, hard work from the lead managers and serious research from investors themselves.

The experience was testing for the Ministry of Finance but also rewarding.

"We will certainly come back to the markets again, though I can't say when. The 2011 Budget does not explicitly envision another issue in the year," says Mr Demiraj.

"At least not for the first half."

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