Published: June 13, 2016
Daniel Bytcanek, head of Slovakia's ARDAL, maps out the country's external borrowing.
A better borrower
Along with Poland, Slovakia was one of the first CEE countries this year to issue a sovereign bond. Daniel Bytcanek, head of the Slovak debt agency ARDAL, tells EMEA Finance about foreign buyers’ appetite for investment and his expectations for the economy.
On 14 January, the Slovak Republic priced a new 15-year €1bn transaction. The country’s first 15-year issuance since January 2014, this came at a time of surging investor confidence in the Slovakian economy, evincing a solid appetite for bonds despite a challenging market backdrop.
The deal was overseen by the Debt and Liquidity Management Agency (ARDAL), which was established in 2003 as part of the country’s public finance infrastructure reform. Over the last 13 years, ARDAL has worked to improve efficiency and decrease risk, helping Slovakia enter the Eurozone in 2009 and gradually bringing down the budget deficit.
Today, Slovakia maintains debt levels well below the EU average. According to its finance ministry, public debt is expected to fall to 52.1% of GDP in 2016 from 52.8% last year. If further targets are reached – 51.3% in 2017 and 48.9% in 2018 – the country will achieve one of the lowest national deficits in the Eurozone. This is spurred in part by a law, implemented at the height of the Eurozone debt crisis, which capped levels of state debt at 57% of GDP.
Prime Minister Robert Fico, who was re-elected and formed a four party coalition in mid-March had said even before the election that Slovakia should take advantage of low yields on its sovereign debt to invest more heavily in infrastructure.
“If we enjoy such tremendous trust in the financial markets, why not gather huge financial means and start carrying out the tasks that await us?” he said in a pre-election speech at his Smer party convention.
In a time of falling interest rates, it is no surprise that the latest issuance carries a yield of just 1.633% per annum. (This follows auctions in October and November 2015, when three-year government bonds were sold with a mildly negative yield for the first time). Its coupon, which stands at 1.625% per annum, is a full two percentage points lower than last time round, demonstrating a growing ability to access the market at the long end of the curve.
When the transaction was announced, on 13 January, the primary market dynamics worked in its favour. By the next morning, initial indications of interest reached €800mn, surging to €1.2bn that afternoon. Ultimately the deal was priced at a spread of MS + 38bps, with a size of €1bn, reflecting the high quality of the accounts in the order-book.
Mother knows best
While demand was somewhat lower than is typical for Slovak government bonds, this was to be expected for a long-term transaction of this kind, which is not currently the preferred choice for the market. According to Daniel Bytcanek, head of ARDAL, the country has strong grounds to be content with the deal.
“Transactions with this maturity aren’t easy, but our government strategy was to be present in the 15-year market,” he tells EMEA Finance. “In general we are satisfied with the outcome of the transaction – the total cost of the transaction was the lowest for Central and Eastern European credit ever – even though the market was crowded with many issuers coming from our peer group.”
Bytcanek concedes that long-term transactions can be difficult to price, both by the issuer and by the secondary market. However, he says Belgium provided an important benchmark – while Belgium’s credit rating, at AA/Aa3/AA, is slightly higher than Slovakia’s, the country is still a valid point of contrast.
Like Slovakia, Belgium priced a long-term bond deal in January: its OLO77 benchmark issue, maturing in June 2026, was valued at US$5bn. Within Central and Eastern Europe, Poland was the first to tap the markets in 2016 – it issued two Eurobonds with 10 and 20-year maturities, priced at €1bn and €750mn respectively.
Slovakia’s deal was managed by Barclays, Natixis and Slovenská sporiteľňa, who acted as Joint-Lead Managers and Bookrunners. Set to reach maturity on January 21, 2031, it benefited from a granular order book, attracting an impressive quantity of foreign investment.
Just 22% of the orders came from Slovakia itself, with the rest of them originating elsewhere in Europe. Thirty-four percent were from Germany/Austria, 19% from the UK/ Ireland, 7% from the Nordic countries, 5% from Italy, 5% from France/Benelux and 8% from other countries. This kind of breakdown is not uncommon for Slovakia, where the share of non-residents in its bond portfolio reached 42% last year.
“German and Austrian investors know Slovakia and Slovakian credit very well, and they are willing to buy the Slovak risk with a high-risk spread,” says Bytcanek. “This type of transaction is not very common in the bond market, so logically they were the biggest part of the investor base. For other investors in countries like France or Italy, our spread is too tight and our secondaries are squeezed. So demand was not huge there – our mother investor base is Germany and Austria.”
Investors participating in the issuance included: asset managers (42%), banks (37%), insurance companies (11%), and other financial investors.
AA credit rating aspirations
Over the last few years, Slovakia has come to be seen as particularly creditworthy, due in no small part to its high ratings. Currently rated A2 by Moody’s and A+ by Fitch (both stable) it was upgraded to A+ (stable) by Standard & Poor in July 2015. This rating, the fifth from the top, places Slovakia on a par with Israel, Ireland and Japan, and gives it the joint ninth best rating among the 19 Eurozone countries.
“We expect growth in the Slovak Republic will accelerate further in 2015, supported by favourable external and domestic factors,” said S&P analyst Felix Winnekens in a statement last summer. “Policy makers will continue to gradually consolidate government finances and lower the debt burden.”