5 MIN. DE LECTURA
* Huge demand for sovereign's bond deal
* Slovenia still offers value
* Investors hail banking reforms
By Sudip Roy
LONDON, Feb 12 (IFR) - Slovenia showed that fears that investors are abandoning emerging markets assets are nonsense after generating more than USD16bn of orders for a dual-tranche US dollar bond deal on Monday.
While recent headlines have screamed about crises in Turkey, Ukraine and Argentina, Slovenia showed that not all emerging markets should be placed in the same bracket after recording an order book that was almost half the size of its GDP.
The peak level of demand hit USD18.5bn despite this being the Balkan country's third multi-billion dollar transaction in less than 18 months - an illustration of how much cash investors in the dollar market are able to deploy. While retail funds and some hedge funds are struggling with redemptions, most real-money accounts have excess liquidity and are more than willing to invest in the right credit.
The USD3.5bn offering raised through new five- and 10-year notes also demonstrated the continued resurgence of peripheral eurozone sovereigns, led by Spain and Italy, which have both seen their 10-year bond yields compress by more than 50bp since the turn of the year.
Patience was the key for Slovenia, which waited more than a week after completing investor meetings in the US and Europe before going ahead with the transaction.
Events in Turkey, where the central bank was forced to make emergency rate hikes, as well as the US Federal Reserve's decision to further cut its bond purchases last month, had driven market volatility to it highest level since December 2012 as the Vix index hit 21.44 points.
But with Slovenia, rated Ba1/A-/BBB+, under no timing pressure, the sovereign was able to sit on the sidelines, keep investors updated and wait for calm to be restored.
"We wanted to see a sustained performance of the overall market before going ahead," said Neil Slee, executive director at Goldman Sachs, which led the deal with Barclays and JP Morgan.
With the backdrop more supportive at the beginning of the week - the Vix had fallen to around 15 points - the leads put out guidance of 300-312.5bp over US Treasuries for both notes.
At those levels, the sovereign was offering a new issue premium of 20-30bp with the leads quoting the outstanding May 2018s at a G-spread of 281bp and the May 2023s at plus 283bp.
As demand grew, the leads were able to cut guidance first to 287.5bp area over Treasuries before pricing both notes at plus 280bp - flat to marginally inside Slovenia's secondary levels, though the whole curve tightened as a consequence of the deal.
"We expected the deal to re-price the secondary curve and that's what happened," said Diliana Deltcheva, emerging markets portfolio manager at F&C Investments. "Slovenia is still an undervalued credit."
The USD1.5bn 4.125% five-year priced at 99.331 to yield 4.275%, while the USD2bn 5.25% 10-year came at 98.247 to yield 5.48%. Both notes traded up on the break, with the 2019s quoted at 100.50 and the 2024s at 99.50.
Buyers were a combination of dedicated emerging markets accounts and rates funds. "This is a deal that touches global macro funds, global EM funds and rates funds," said Slee.
Investors are convinced that Slovenia is finally on the right path to resolving its banking problems. In December the government identified a hole of EUR4.8bn in the system.
The state immediately injected EUR3.2bn of capital - two-thirds in cash and a third in government bonds - to five banks. A further EUR441m will come from bailing in subordinated bondholders. It also started moving bad loans to a state bad bank.
"The government has taken the right steps to reform and restructure the problematic banking sector," said Deltcheva.
Still, analysts point out that more needs to be done, including a thorough clean-up of banks' balance sheets, if the country is to achieve sustainable economic growth. Slovenia's economy remains in recession.
Total financing needs for this year are put at EUR3.5bn, though the government has the capacity to borrow up to EUR7.7bn to pre-finance 2015-2016. As well as the cost of the bank recapitalisation and the need to cover its budget deficit, which the government estimates at EUR1bn this year, Slovenia has a EUR1.5bn redemption due in April.
The next test for the sovereign will be its return to the euro market from which it has been absent since 2011, though it sold a EUR1.5bn three-year deal privately late last year. Bankers and investors, however, are confident that it should have no problems. There are rumours the sovereign is eyeing a euro mandate, though nothing official has been announced.
Reporting by Sudip Roy; Editing by Julian Baker and Philip Wright