Slovenia is a well-known name in the euromarket, but the sovereign last tapped this market in March 2011. When the country tried to launch a benchmark deal in the first half of 2012, investors were less than responsive. Tensions were running high in Greece, the situation in Spain and Cyprus was deteriorating rapidly, and there were mounting concerns about Slovenia’s own financial position.
“We wanted to issue a benchmark bond, but investors in Europe were signalling they would only be interested in a deal with a 7% yield, so effectively that market was closed to us,” says Dr Dejan Krušec, secretary of state at the Slovenian ministry of finance.
Understandable reluctance
Investor reluctance was understandable. Slovenia’s economy has been severely weakened by the eurozone crisis, its banking sector is under-capitalised and three of its banks – accounting for half the banking sector – are state-owned.
In May 2012, the government announced an ambitious reform programme to curb its budget deficit, privatise state-owned enterprises and improve the financial position of its banks. Still European investors shied away from the credit and in July the euro-mandate was officially postponed. At about the same time, Slovenia began to consider the US market.
“Our bank advisers told us that a disconnect was emerging between US and European investors. US investors seemed to be more positive about Europe than their European peers and they were also more willing to balance risk with reward. We had only tapped the US market once in the past with a much smaller $325m deal back in 1996 when economic conditions were very different. But other central European countries had been successful earlier in 2012, so we knew it could be done,” says Mr Krušec.
The ministry of finance began working on a dollar issue in July, with bookrunners BNP Paribas, Deutsche Bank and JPMorgan. At the end of that month, European Central Bank (ECB) president Mario Draghi effectively pledged to do whatever was necessary to ensure the survival of the euro and sentiment took a distinct turn for the better.
Warm welcome on the road
Nonetheless, there was no room for complacency. In August, Moody’s and Standard & Poor’s both downgraded their ratings on Slovenia, citing economic weakness, soaring funding costs, the beleaguered banking sector and risks related to the country’s reform programme.
The Slovenians persevered, however, and by September 2012 they were ready. During that month, further reforms were undertaken to try to improve the country’s credit position. In early October, Mr Krušec, who previously worked at the ECB devising the financial system restructuring plans for Ireland and Portugal, set off with his colleagues for the International Monetary Fund meeting in Tokyo, hoping to build momentum for their debut in the US market. The team went straight from Tokyo to San Francisco for the start of an intense five-day roadshow, which took in Los Angeles, Boston, New York and London.
“We saw between 25 and 30 investors that week, and they seemed to think our story was credible. We did not hide the risks involved in executing our plans and I think they appreciated our honesty. We also made clear that we had a comprehensive programme for reform and we were determined to pursue it,” says Mr Krušec.
During the roadshow, investor questions centred on Slovenia’s banking sector, pension reform, labour market reforms and privatisation plans. Overall, reactions were positive and anchor investors were secured early on in the process.
“US investors appeared different from European institutions in several ways. They were less susceptible to the general mood about the eurozone and were more focused on our plans for reform. They also thought of Slovenia as part of central Europe as well as being a member of the eurozone and that worked in our favour,” says Mr Krušec. “The US market is also extremely liquid and investors seem drawn to longer maturities, like 10 years or more, whereas euro-investors prefer five years or less.”
Exceeding expectations
As soon as the roadshow was over, the Slovenia deal was launched. The sovereign wanted to raise between $1bn and $1.5bn, and initial pricing guidance from bookrunners suggested a yield of a little over 6%. Over the following 12 hours, however, orders piled in, swelling the book to more than $11bn. The pricing was tightened to 5.875% and, after further discussions with investors, the deal size was increased to $2.25bn and the transaction was priced at 5.7%.
“Our lead managers did a great job and we were really pleased. We had not tapped the market for a year and a half, so this was an important transaction for us. As we had not accessed the US market for more than a decade, we did not want to be too aggressive in our pricing, but the extent of the oversubscription allowed us to tighten the terms. The deal’s success even saw demand spilling into Europe,” says Mr Krušec.
He adds that the deal provided important lessons in the benefits of currency and investor diversification, with a good cross-currency swap price helping to lower all-in costs.
“We now have no immediate need for funds, but we will definitely consider returning to the US market, especially if sentiment in Europe is downbeat,” says Mr Krušec.
