Estonia’s latest eurobond issuance attracts newcomers

Estonia issued its first eurobond 20 years ago, raising €100m. At the beginning of 2011, the country switched its currency to the euro and it remained the only eurozone member without an outstanding government bond until 2020, when it raised €1.5bn after government finances were affected by the Covid-19 pandemic.

The Estonian government did not wait another 18 years to return to international capital markets. In October 2022, it raised another €1bn from a 10-year sovereign bond issue.

Sven Kirsipuu, deputy secretary-general at the Estonian Ministry of Finance, explains that the preparation for last year’s issue was helped by the country’s return to the bond markets in 2020. However, market conditions were far more fragile last year, so the government’s biggest concerns were volatility and finding a good window for the deal.

Tough market

When preparations started in June 2022, there had not been many successful bond deals in the market since the war in Ukraine, according to Mr Kirsipuu. The Estonian government began by choosing the banking syndicate and legal counsel because it wanted to be ready to announce the deal as soon as the budget was approved at the end of September.

He says: “We selected experienced global banks to make sure we would have the best possible outcome for the issue in such difficult conditions and the proposals from Citibank, Goldman Sachs and Société Générale stood out for our credit story and incisive thinking on the sales and marketing strategy.”

The credit story involved Estonia’s strong fiscal discipline, low debt levels, and a stable and well-capitalised banking sector, which are reflected in its high credit rating, according to Mr Kirsipuu. In August 2022, Fitch Ratings affirmed Estonia’s long-term foreign currency issuer default rating at AA–. However, he adds that the risks relate to the broader geopolitical situation in Europe and the weaknesses commonly found in developed countries, which are ageing societies and declining populations.

Last year’s bond issue attracted demand of €1.9bn from 109 international investors, including central banks and investment managers. Most of the funds were allocated proportionally with the majority (around 60%) placed with asset managers. The final size of the issue was set at €1bn in order to meet the forecasted government budget deficit for 2022/23.

The maturity of 10 years was optimal to manage the refinancing risk and the possibility of deficits continuing in the medium term. Mr Kirsipuu adds that a 10-year bond also attracts a large investor pool; the yield curve was flat, so the trade-off between 10- and five-year bonds was small.

“We were pleased to have achieved a good outcome and our partners assured us that the interest rate of 4% was the best possible result at that time,” he says.

Many investors who bought last year’s bond were also in the 2020 deal, but the second sale also attracted newcomers, which Mr Kirsipuu describes as a “pleasure”, due to the difficult market conditions and the fact that some investors cannot currently invest in central or eastern European countries due to the high geopolitical risks.

“We are still relatively unknown to international bond investors, so there is probably room to widen our investor base,” Mr Kirsipuu adds.

Wider interest

Estonia could attract more investors in further issues, as the government presented a supplementary budget in 2022 and is forecasting quite large deficits for the coming years. The money received from the bond sale is being used to cover the general state budget deficit and supplement the liquidity reserve. However, Mr Kirsipuu notes that the position was more favourable than expected during last year’s summer months, with the budget close to balancing, so there is a lot of uncertainty in the forecast.

The change in Estonia’s fiscal stance led to Fitch revising its outlook from stable to negative last August. The rating agency said this reflects exogenous shocks, such as increased spending in response to the Russian invasion of Ukraine. In contrast, the general government fiscal balance before the pandemic had been, on average, in surplus of 0.4% of gross domestic product between 2000 and 2019.

Estonia also has a high World Bank Worldwide Governance Indicators ranking, at the 87th percentile, which is highly weighted in Fitch’s proprietary sovereign rating model. The agency said this ranking reflected the country’s well-established rights for participation in the political process, strong institutional capacity, effective rule of law, low level of corruption and long record of stable and peaceful political transitions.

Another political transition will take place when elections are held in March this year. Mr Kirsipuu says a new medium-term framework will be in place by April, when the new government will look at spending requirements and cash flow forecasts. It may consider issuing another eurobond, alongside other instruments.

“It is most likely that we will have a new bond issue in the second half of this year or in 2024,” he adds.

• Read more from The Banker's Issuer column here.