Over the past couple of years Icelandic borrowers have been raising unprecedented amounts of debt in the international capital markets. Duncan Kerr reports on the increased flows that have funded international expansion and galvanised the investment community.
Kaupthing Bunadarbanki's Dkr7.1bn ($1.56bn) acquisition of Swedbank's Danish lending business FIH Holding in June this year encapsulated Icelandic banks' ferocious appetite for international expansion.
The acquisition ? funded through a two-tranche Eu450m subordinated bond issue in June and a pre-emptive rights issue that raised Ikr39.65bn from 110m new shares offered ? more than doubled the bank's total assets to Ikr1.47tr from Ikr601bn and marked the latest and largest of its acquisitions since the bank's merger with former state owned Bunadarbanki in May last year.
?The acquisition brings us closer to our goal of becoming a leading investment bank in the Nordic region,? Sigurdur Einarsson, executive chairman at Kaupthing Bunadarbanki in Reykjavik, said on announcing the takeover. ?We are quite an opportunistic bank. If we see a good target or an opportunity we take that opportunity.?
Moody's upgraded the bank's ratings last December from A3/P-1/C+ to A2/P-1/C+, which the agency said ?reflects the successful merger.? The bank is not rated by Standard & Poor's.
Shareholders representing 96.38% of share capital in Kaupthing Bunadarbanki exercised their pre-emptive rights in the rights issue and the remaining shares were placed with investors who subscribed for more than their entitlement.
The bank's Baal rated subordinated issue, which was the first euro denominated transaction of its kind out of Iceland, was lead managed by Deutsche Bank and launched on June 18. The first tranche ? a Eu300m 10 year lower tier two capital issue ? came off the bank's Eu2bn EuroMTN programme. The second tranche ? a perpetual Eu150m tier one capital issue ? was issued under special documentation.
Since the merger in May last year, Kaupthing Bunadarbanki has been on the prowl outside its own domestic market, buying up Norwegian asset manager Tyren Holding last September and in the same month stake-building in Finnish investment firm Norvestia. The real eye opener, however, came in February when the bank increased its stake in the UK investment bank Singer & Friedlander to around 19.53% from 9.5% ? a move viewed by bankers in London as a prelude to a take over.
Kaupthing bought 19,385,994 shares, 10% of the issued share capital of Singer & Friedlander. In aggregate, Kaupthing now owns 37,866,694 shares. Deutsche Bank acted as broker.
Kaupthing Bunadarbanki's appetite for international growth, though impressive, is not exclusive. Over the past couple of years the bank's domestic peers ? Islandsbanki, and Landsbanki Islands ? and Icelandic companies such as retailer Baugur and pharmaceuticals company Pharmaco have also shown strong appetites.
International growth buoys equities
That growth has not gone unnoticed in the equity markets, where those companies that have been on the acquisition trail abroad have often been among the best performing and most actively traded shares on the Reykjavik bourse.
The Icelandic ICEX-15 index has performed remarkably well against the major foreign indices over the past few years. From the beginning of 2004 to the end of May the index rose by 27%, recording a 90% increase in the 12 months from May 2003, according to the Icelandic Ministry of Finance. In comparison, from January to May this year the FTSE index rose by 1.7%, the Morgan Stanley World Index by 0.5%, the Swedish OMX-index by 8% and the Nasdaq index declined by 3%.
?Companies that have successfully forged a stake in overseas markets also enjoy substantial equity turnover, seemingly in correlation with the ratio of foreign denominated revenues against domestic ones,? says a research analyst at an Icelandic investment bank. ?This seems to be a rational approach by the market, as a distribution of revenues in several markets would tend to decrease the operational risk of such companies, which might in turn be reflected in a lower required return on equity.?
While the shares of those companies that have international revenues have performed well and are heavily traded, the shares of those companies that are more dependent on domestic revenues have fared less well and are increasingly illiquid.
?There are limited opportunities for companies to grow in Iceland and this has led them looking abroad,? says Sigurdur Erlingsson, deputy managing director, international banking at Landsbanki in Reykjavik.
One of the issues has been the fact that Icelandic credit still does not appear on the radar screens of many of the major international investors. And part of the problem is the lack of liquidity.
?There are attractive investment opportunities here in Iceland, but major institutional investors want liquidity,? says Erlingsson. ?Higher foreign investor portfolio flows would help stabilise the krona and improve the general level of sophistication in the capital markets.?
Debt issuance surges
The remarkable growth in the country's equity market is not, however, the only success story to come from Iceland over the past couple of years. The combination of privatisation in the banking sector and international expansion has meant that Icelandic borrowing in the international capital markets has stepped up a gear in volume and scope.
?Our story is more about consolidation this year but last year was the first year when Icelandic borrowers made a sizeable impact on the capital markets,? says William Symington, a treasury and risk management official at Islandsbanki in London.
?Given the combination of privatisation and mergers and acquisitions activity in Iceland there are now lots of opportunities for more issuance and investor interest in Icelandic credits has moved up a notch as a result,? says Symington. ?The volume of Icelandic bank paper has tripled from Eu1bn to well over Eu3bn in loans and bonds and that has been comfortably absorbed as a result of the strength of the bid in the market and also because of an expansion in banks' funding needs.?
Landsbanki, Iceland's second biggest bank by assets, was the first of the Icelandic banks to issue a benchmark deal in the bond markets this year when it issued a Eu400m five year floating rate note in February. The bond ? issued off Landsbanki's Eu3.5bn EuroMTN programme ? was issued at 99.888 and pays a coupon of 25bp over three month Euribor. Bank of America, Credit Suisse First Boston and Deutsche Bank managed the deal.
?Three years ago it would have been very difficult for us and other borrowers to raise five years and particularly in the size that we did,? says Matthias Einarsson, senior funding manager in international banking at Landsbanki. ?This shows you that the profile of the Icelandic banks is getting higher and the credit lines are in place from investors because of the increased flow and improved comfort with Icelandic credit.?
Aside from the benchmark deal, Landsbanki has been particularly active in issuing smaller deals in the EuroMTN market in recent months, printing five deals of more than $330m equivalent across dollars, euros and yen.
?We have between Eu300-Eu400m left to do up until the end of the year,? says Einarsson. ?That could be raised either through block trades or private placements alone, but it is really a case of just keeping our options open. Liquidity is strong in the market and there has been plenty of interest from dealers which has come as a result of investors seeing that the flow from the country has tripled and so it has become a market worth looking at.?
In June 2003, Kaupthing Bunardabanki issued what was at the time the biggest bond from an Icelandic borrower when it launched a Eu500m two year deal through joint leads Handelsbanken and Barclays Capital.
However Kaupthing trumped that deal in May this year when it issued a Eu600m five year FRN ? still the biggest bond to date out of Iceland. The issue, which had Barclays Capital and Credit Suisse First Boston as joint books, was priced at 99.888 and pays a coupon of 20bp over three month Euribor.
Altogether, 55 individual accounts from over 19 different countries bought into the transaction with one ticket being sold into Asia ? a tremendous geographical split for an Icelandic bank issuing in the capital markets. Roughly 44% of the paper went to Germany, 20% to the UK and Ireland, Scandinavia 10%, and 7% to the Benelux countries and southern Europe. About 70% of the deal went to banks, with 25% going to asset managers and insurance companies.
?The bond went well and we were really pleased with it,? says Kristin Pétursdóttir, managing director in the treasury at Kaupthing Bunadarbanki in Reykjavik. ?We saw strong demand and the deal met both our objectives, namely to lengthen the maturity of our funding and to garner a wider distribution base.
?Our aim is to do at least two public issues per year and so far we have only come in euros, but you could say our next step would be to build dollar and sterling curves as we have natural needs in those currencies.?
For its part Islandsbanki, the biggest bank in Iceland before the merger between Kaupthing and Bunadarbanki, is some way ahead of its rivals on innovation and currency diversification.
Last February the A1/P1 rated bank launched its first dollar benchmark since it was formed in June 2000 from the merger of commercial bank Islandsbanki with investment bank FBA. The $250m three year deal, lead managed by BNP Paribas and Credit Suisse First Boston, was priced with a coupon of 25bp over three month Libor, in line with price guidance of 24bp-26bp over.
That issue was notable for being the first Icelandic transaction ever to be roadshowed in Asia, with the bank hosting a series of investor presentations in mainland China, Hong Kong and Singapore. Roughly a quarter of the issue was eventually placed in Asia. The balance was sold into Europe.
Historically, German banks have been the traditional investors in Icelandic bank issues, but since its creation in 2000 Islandsbanki has courted new buyers. As a result, less than 30% of the bank's debt is held by German accounts, with the UK, France and Italy in particular emerging as important centres of demand.
Having established a new pricing reference in the dollar market in February 2003, Islandsbanki turned its attention in May last year to the euro market where it launched a Eu350m two year issue via Barclays Capital, CDC Ixis Capital Markets and Deutsche Bank. Boosted by its upgrade to A1 from A2 by Moody's in April, Islandsbanki garnered over Eu800m of orders which enabled it to price the issue at an all-in level of 19bp over ? inside pre-launch price talk of 20bp over.
With around Eu1.3bn to fund this year Islandsbanki extended its maturity profile with a Eu350m three year FRN through CSFB and Daiwa in January, and a Eu150m four year through San Paolo IMI in June that was principally sold to Italian accounts. Symington says that the bank looks to do one or two benchmark size deals a year with the remainder in the private EuroMTN market.
?Next year our funding requirement is similar to this year with the main focus on the private placement market, but we will look at one or two benchmark size transactions ? though the details have yet to be decided,? he says. ?A five year public deal is the logical next step, and as we haven't done a dollar deal since the three year in January 2003 ? a five year dollar deal is therefore not unlikely. However, that said, a euro deal is just as likely.?