When Landsbanki was criticised for its short-term financing risk, it decided to win back its reputation with two bond issues in the US. Edward Russell-Walling reports on an Icelandic success story.

Sometimes an issuer comes to the international debt markets, not for the sake of its balance sheet, but just to show that it can. That was the position in which Iceland’s Landsbanki found itself this summer, when it raised $2.25bn by issuing two inaugural, and very successful, Yankee bonds.

Iceland has had a rough press since February, when rating agency Fitch revised its outlook on the country’s foreign and local currency ratings from stable to negative. The agency cited an “unsustainable” current account deficit and rising net external debt.

This put the frighteners on investors as far as Icelandic borrowers were concerned, even though Standard & Poor’s and Moody’s subsequently issued stable outlooks. Other observers also point out that the current account deficit has spiked, thanks to the construction of new aluminium smelting facilities, and that, when these are completed next year, the gap will narrow.

The Icelandic economy has grown strongly for most of the past decade – too strongly perhaps, since rising inflation has forced the central bank to raise its policy interest rate to 13.5%. Rising rates have unsettled investors further, even though they directly affect only about 30% of the loan market, since mortgages and much other lending are structured as indexed bonds.

Market sentiment

Right or wrong, the market’s misgivings were felt at A2-rated Landsbanki, Iceland’s third largest bank, as investors expressed concern over its short-term refinancing risk. “Our CDS spreads had gone too high for the quality of borrower we like to think we are,” says Brynjólfur Helgason, Landsbanki’s managing director, international banking.

The bank already had its eye on the US market, where it had concluded a $300m private placement of three- and five-year paper in March 2006, at the height of the Icelandic turbulence. “It was clear that if we wanted to go to the US, we needed a medium-term note programme,” says Mr Helgason.

Landsbanki already had an €11bn European medium-term note (EMTN) programme. With the help of Citibank, it set up a 144A programme and launched an extensive US roadshow in August. With Bank of America, Citibank and Deutsche Bank as advisers, two teams covered the east and west coast respectively, in three days. “At the end of the roadshow we had to decide whether to structure a deal immediately, and whether we wanted to do senior or subordinated,” Mr Helgason says. “We don’t need subordinated debt right now, and felt it was important to look at the senior market.”

After assessing feedback from the roadshow, it was decided to press on immediately, and to structure a transaction in two benchmark tranches – a three-year floating rate note and a five-year fixed rate issue. The bank was looking at raising a maximum of, say, $1bn.

The response was extraordinary. The deal attracted offers worth more than $3.6bn. While this was due in some measure to the generous pricing, it confirmed that good Icelandic credits were not off-limits for debt investors.

The size was increased to a total of $2.25bn, made up of $1.5bn in five-year fixed-rate notes priced at Treasuries plus 135 basis points (bp) and $750m in three-year floating-rate notes at swaps plus 70bp.

“The pricing is high, compared to the risk, in our view,” notes Mr Helgason. “But the flexibility we faced on price was relatively limited. And it was worthwhile, even at that relatively high price, since we were able to calm concerns over our debt payments next year.”

With the proceeds of the Yankee issues, the bank has fully refinanced its €1.2bn funding needs for the current year, as well as prefunding 85% of its €2.6bn needs for 2007. “In 2008 there will be a much lower figure to refinance; about €750m,” Mr Helgason adds.

Will Landsbanki be raising any more funds this year? “We don’t need to,” Mr Helgason says. “But if the right opportunity comes along, we might do a further transaction. There are a number of growth opportunities.”

These opportunities include building on the bank’s international expansion. In recent years it has acquired London stockbroker Teather & Greenwood and French broker Kepler Equities. It has bought 50% of Irish broker Merrion Capital, while also owning a private bank in Luxembourg and the specialist Heritable Bank in the UK along with its London branch operations.

“That gives us a platform to export our model of corporate banking for small-to-medium corporates,” Mr Helgason explains. “We have been following Icelandic corporates as they do business outside Iceland, and now we are offering our services to the companies that do business with our recently acquired foreign operations.”


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