As Iceland comes back from financial collapse with the help of a savage austerity programme and support from the International Monetary Fund, it is now looking to return to the international capital markets with a $1bn, five-year benchmark transaction. 

In 2006, Iceland tapped the Eurobond market with a €1bn, five-year deal, priced at one basis point below Euribor. At the time, the country had an AAA rating and was feted by bankers and investors worldwide.

Fast-forward to today and the situation is rather different. Iceland is rated BBB- and it is in the middle of a four-year support programme from the International Monetary Fund (IMF). The country’s fortunes nose-dived in 2008, when its three largest banks collapsed, its currency plummeted and the government was forced to seek help from the IMF and fellow Scandinavians.

Drastic times

Drastic action was required and drastic action was taken. The banks were restructured and Iceland embarked on a savage austerity programme. Two and a half years later, its labours are beginning to pay off.

In June, the country returned to the international capital markets with a $1bn, five-year benchmark transaction, yielding 4.993% or mid-swaps plus 320 basis points. The deal, increased from $750m, was an important step in Iceland’s rehabilitation programme, so Iceland's Ministry of Finance was keen to do everything in its power to ensure a successful outcome.

“We started to talk to our banks about re-entering the international markets in the second half of last year. We knew it was important to come out with a deal that would set a benchmark not just for us but also for other Icelandic issuers, such as the banks and energy companies,” says Ingvar Ragnarsson, head of funding and debt management for Iceland's Ministry of Finance.

“One of our challenges was the lack of a benchmark. Given what had happened since the onset of the financial crisis in 2008, we knew our investor base would be very different so we had to map out a new investor base with our bankers,” he adds.
With this in mind, Iceland began talking to investors on a non-deal basis in the fourth quarter of 2010, a full six months before launching its benchmark deal. “We needed to tell our story, especially as investors are placing more emphasis on their own analysis than ever before. We visited a number of institutions and we started to watch the market very carefully, looking at lower-rated issues inside and outside the eurozone,” says Mr Ragnarsson.

Confidence building

Investors sought comfort on four key issues: Iceland’s macroeconomic and fiscal position; the status and leverage of its banks; the progress on exchange controls imposed after the financial crisis; and Icesave, the Landesbanki savings brand. The first three were relatively straightforward as Iceland was doing all the right things and could prove it with solid facts and figures. Icesave was more challenging.

When Landesbanki collapsed, hundreds of thousands of UK and Dutch savers faced ruin and had to be rescued by their respective governments, who have been trying repeatedly to regain $5bn from the Icelandic authorities. Iceland has held two referenda on the issue, one last year and one in April. On both occasions, Icelandic voters vetoed the proposal that the UK and the Netherlands be paid from Iceland's deposit guarantee fund.

“Certain issues had to be resolved before we could go to market. We were waiting for the outcome of the Icesave referendum in April, we were waiting for the IMF response and we were waiting for the credit rating agencies to reaffirm our ratings,” says Mr Ragnarsson.

“According to the latest estimate, the asset recovery at the Landsbanki's estate should provide the UK and Dutch authorities with [the] bulk of the priority claims. And after the April 'no' vote, the IMF confirmed our economic reform programme was on track, bilateral loans with other Nordic countries remained open for drawdown and the ratings agencies left our ratings unchanged,” he adds. All of which paved the way for a summer issue. 

Eliminating uncertainty

“We knew the markets were volatile so we wanted to eliminate as much uncertainty as we could. We saw close to 90 investors during a six-day roadshow – three days in London and three days in the US, including two group presentations and many one-on-one and two-on-one meetings,” says Mr Ragnarsson.

The roadshow took place between June 1 and June 8. Book-building started on June 8 and the deal was priced on June 9.

“We always had some uncertainty over pricing so it was driven largely by investor feedback during the roadshow, as well as advice from our bankers. We knew we would have to pay a bit of a new issue premium but we were overall satisfied with the outcome, particularly as the deal was twice oversubscribed and the quality of our orderbook was very high,” says Mr Ragnarsson.

Two-thirds of the investors were US-based and more than 80% were asset managers, pension funds and insurers. “I think investors are looking for turnaround stories, but in hindsight we were fortunate with our timing. A week after we issued, the markets closed when Greece was downgraded. Since then, even though secondary markets have been weak, our price has held up and spreads have even tightened,” says Mr Ragnarsson.

Iceland will be returning to the markets as it repays IMF and bilateral borrowings, but Mr Ragnarsson believes the country has learnt an important lesson. “It is really important to maintain regular contact with investors, not just in the run-up to transactions but throughout the year. Investor education is paramount,” he says.


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