beyondbrics

A fascinating insight into central and eastern European markets on Friday: Slovakia has issued a bond denominated in Czech crowns in a private placement to tap demand from across the (formerly non-existent)  border.

Slovakia sold 12.5bn crowns (€500m) of a floating rate bond priced at six-month Pribor – the Czech interbank rate, currently 1.5 per cent a year – plus 150 basis points. That’s comparable with similar, Slovak, euro-denominated bonds. So what’s the appeal?

The appeal is, well, Czech-Slovak. On one side are Czech investors wanting to extend their portfolios beyond their own healthy but limited capital markets. On the other is the Slovak Republic, keen to tap a broader market and build its yield curve.

Czech investors – in this case insurance companies, banks and some private individuals – can of course invest in euro assets. But there may be limits on those investments and there is always – and especially in these volatile times – foreign exchange risk.

So, a group of Czech institutions seems to have got together and said to the Slovaks, “How about it?”

“We did the issue like this because there were investors in the Czech Republic who wanted to have a Slovak credit but not in the euro,” Tamas Kapusta, head of Ardal, the Slovak government’s debt management agency, told beyondbrics. “It was between a private placement and a syndication [driven by] demand from those investors.”

Slovakia had intended to sell at least €300m of the debt but increased the issue to €500m after it was announced.

Marek Gábriš of Československa Obchodna Banka (ČSOB), which managed the issue alongside Slovenska Sporitelna and Komercni Banka, wrote in an email to beyondbrics:

Regarding the coupon: it is similar to other issues of Slovak bonds on the secondary market. [The floating rate notes] bear a coupon Pribor6M + 150 bps and were priced at 98.97% of the face value leading to a discount rate of 180 bps. It’s in line with the result of the earlier auction of similar FRNs this week but in a much lower amount. Or similar to FRNs with similar maturity issued earlier and traded on the secondary market. In our view, the price is more or less in line with the current bond curve and reflects the fact that Ardal is gradually, step by step, building the yield curve.

And what of the timing of the issue, given the volatility of the euro? Says Gábriš: “I think it was well done.”

Kapusta said the bond did not cost Slovakia any more than other debt.

“There may have been a very small premium but it’s hard to say. Because we were not previously on the Czech market and because of the scarcity, let’s say the non availability, of this credit, there was no new issue premium.”

Vladimír Polhorský of Slovenska Sporitelna wrote to beyondbrics:

The transaction for the Slovak Republic was structured as a private placement generated by an interest of the investors in the Czech Republic. As both countries used to be a part of the federal state until 1993, the Czech investors follow up on the economic development in the Slovak Republic and know this credit well.

So everybody’s happy.

This is the first foreign currency bond issued by Slovakia since it joined the eurozone on January 1, 2009 – and indeed its first foreign bond since 2000, Kapusta says, not counting a euro-denominated bond it issued just before joining the zone.

The republic now plans to issue a dollar-denominated bond during the second quarter – though this issue doesn’t appear to have been put together by US investors hungry for Slovak credits. “I cannot say what investors it’s aimed at as we don’t know the market yet,” Kapusta said. “We will see when we make the offer.”

And, in case you’re wondering, Slovakia hasn’t given up on its own currency. Euro-denominated issuance continues as normal. Although it’s not hard to see why the Slovak Republic is looking around for opportunities to issue in what Gábriš at ČSOB describes as “low-yielding” currencies.

Related reading:
CEE: Czechs in recession, beyondbrics
Polkomtel connects with debt market, beyondbrics
Croatians vote Yes to join EU, FT
Slovenia’s bond yields hit 7%, beyondbrics