Moldova and Romania successfully rode the central and Eastern
European wave of 1996 and 1997 to launch debut and repeat
financings at ever tighter spreads. That trickle of issuance
looked set to broaden out with the planned advent of corporate and
But since then a lack of reform has combined with worsening
economic fundamentals to cause agencies to revise their
outlook on the two countries.
Much more remains to be done if momentum is to be regained and
Moldova and Romania are once again to have much needed access to
international capital markets.
MOLDOVA AND ROMANIA NOT ONLY share strong historical and
cultural links, but also many of the same economic and political
challenges. While both countries were tipped as potential economic
stars in 1997, they ultimately flattered to deceive in terms of
Much of the blame can be laid squarely at the feet of the two countries' political regimes which, while promising much in reform terms, have ultimately delivered little.
In Moldova and Romania the pro-reform spirit may be willing but the body politic is weak. As a result both countries have found that their credit ratings and their economic track records are coming under increased scrutiny.
In November 1997 Moody's Investors Service said the outlook for its Ba2 sovereign rating for Moldova was deteriorating, citing high current account and fiscal deficits and the slow pace of structural reform and privatisation. And in January Standard & Poor's put its BB- sovereign rating for Romania on review for possible downgrade, similarly expressing concerns about the pace of economic restructuring and privatisation.
Consequently, the issuance environment for international bonds from Moldova and Romania is far less favourable now than it was in 1997, when both countries were able to ride the wave of positive sentiment towards central and eastern European and establish important benchmarks in the Euromarkets.
Moldova's central bank governor, Leonid Talmaci, said in March that he expects the country to launch a $100m 10 year Eurobond later in 1998 to help to repay foreign debt. Such a long dated issue, if it emerges, would certainly prove a stern test of investor sentiment towards the country.
Analysts say a successful financing would only be possible if the Moldovan authorities can point to a concrete improvement in the country's reform programme.
Meanwhile, Austria's Raiffeisen Zentralbank Österreich is preparing for the launch of a $60m five year callable floating rate note issue for one of Romania's leading corporates, chemical producer Oltchim. Price talk is 600bp-650bp over six month dollar Libor to an embedded two year put and call.
That level is a far cry from last year when Romanian credits were able to source funds at less than half that spread. In late February 1997 Romania's electricity authority Renel was able to secure pricing of 275bp over Libor on a Merrill Lynch-led $135m five year floating rate private placement, featuring puts and calls in years three and four.
The dollar funds were raised as part of a twin tranche financing - the other element was a ¥1.35bn fixed rate portion, with a 3.9% coupon and three year bullet maturity - which raised the equivalent of $150m equivalent for the borrower, or more than double the targeted amount.
Shortly after, Merrill Lynch led a successful debut Eurobond for Romanian Commercial Bank (RCB). Strong international demand for scare Romanian credits enabled the three year Euro/144A offering to be launched at the top end of the $60m-$75m indicative size range.
Featuring a coupon of 9.125%, the Ba3/BB- rated RCB transaction was priced to yield 300bp over the 5.875% February 2000 Treasury at the issue/fixed re-offer price of 99.857.
This represented a 75bp pick-up over the National Bank of Romania's $225m 9.75% three year transaction launched in June 1996 via Merrill Lynch, which had traded in to 230bp from 305bp.
Bank and emerging market funds in Europe and the US as well as European retail all bought in to the deal, which represented the first opportunity for investors to gain exposure to the country's commercial banking sector.
With investor sentiment towards the country fast improving in the first half of 1997 the Republic of Romania was able to secure a blow-out reception for a DM600m five year Eurobond via Credit Suisse First Boston and Deutsche Morgan Grenfell in early June.
Launched for DM500m - at the top end of the DM300m-DM500m indicative size range - demand for the issue was such that the leads were able to up the issue by DM100m.
The positive market reaction to the issue was seen as a resounding vote of confidence by the international investor community in the reformist economic policies then being successfully implemented by Romania's centre-right administration, which had come to power six months ago.
Not only was the issue the country's first venture into the Euro-DM sector, but it also marked the first occasion on which the Republic of Romania had tapped the international bond markets - previous outings in the yen and dollar markets had been carried out by the National Bank of Romania in its former capacity as the country's fiscal agent.
With a 7.75% coupon the bond offered a yield of 300bp over the 8% January 21, 2002 unity bond on a fixed re-offer price of par. This was considered generous compared with the 250bp margin on the B1/B rated Republic of Turkey's DM1bn 7.25% five year issue launched the same day.
Unlike Turkey's issue, which was driven by demand from retail accounts, much of the positive momentum behind the Romania transaction was provided by the bid from institutional investors keen to gain first time exposure to the country in Deutschmarks. Strong demand from European, offshore US and Asian accounts enabled the issue to quickly trade at a sub-300bp spread, the issue closing the first week's trading at 288bp.
Three days after Romania's triumph, the Republic of Moldova scored a similar blow-out success with a heavily oversubscribed $75m five year Euro/144A offering via Merrill Lynch. The fixed rate public issue was designed as a follow up to the $30m three year non-call two floating rate private placement the US investment bank had completed for the country in December 1996.
Thanks to the bullish attitude toward central and eastern Europe, the country was able to extract far tighter pricing than even the lead manager had earlier thought possible.
A Merrill Lynch spokesman said: "A month before launch we were thinking about a range of 375bp-400bp but an extensive roadshow in Europe and the US, and improving sentiment towards emerging market credits, meant we were able to manage this down to a 350bp-375bp range.
"We were eventually even able to better that, thanks to the strong orderbook we had built."
As a result the 9.875% Moldova issue was priced to yield just 340bp over the 6.5% May 2002 US Treasury on an issue/fixed re-offer price of 99.826.
As a Moldovan government spokeswoman told Euroweek, the 340bp re-offer yield represented a small but significant psychological boost for the country.
She said: "We felt the 340bp launch spread represented a proper level of pricing for our first Eurobond and we were especially pleased that we bettered the 345bp launch spread on the Russian Federation's debut Eurodollar issue."
But even at the tighter than expected launch spread, the issue was still acknowledged by syndicate members as offering good value relative to outstanding five year dollar supply from the regions - issues for the Ba2/BB- rated Russian Federation and the BB-/BB+ rated City of St Petersburg were trading at 282bp and 287bp respectively.
Furthermore, by the end of the week's trading, the issue had priced up sharply to 101.875/102.25, with the spread narrowing to 305bp/299bp over on a bid/offer basis.
While Romania's Euro-DM and Moldova's Eurodollar tightened in further over the summer - to lows of 227bp and 289bp respectively - both have been hard hit by the Asian crisis and the negative rating news.
Romania's Euro-DM hit 527bp at the height of the emerging market sell-off over the winter before recovering to 321bp by the end of April. The RCB transaction peaked at 691bp before trending down to around 540bp by the end of April.
Meanwhile, Moldova's Eurodollar hit 750bp at its worst before recovering to 560bp.
What the future holds for both countries in terms of international bond issuance is difficult to predict. The Romanian government may be forced to re-enter the market, regardless of prevailing investor sentiment in the emerging market sector, in order to raise funds to boost dwindling foreign exchange reserves. In the wake of the Asian crisis the Romanian leu has come under speculative pressure and reserves have fallen to around $2.4bn or 21/2 months of estimated imports which Standard & Poor's has described as "well short of best international practices."
Planned $150m three year Eurobond issues from Romanian municipalities Bucharest (via Merrill Lynch) and Constanta and Brasov (via Salomon Smith Barney) may also emerge if the Romanian authorities relax overseas borrowing restrictions.
On the corporate front, the market reception to the planned dollar private placement by Oltchim in May is likely to have a major influence on whether steelmaker Sidex and oil and gas exploration company Petrom continue to consider plans for public Eurobonds later this year.
In Moldova the field of potential issuers is even smaller, with just the sovereign and Telecom Moldova thought likely to brave the post-Asian crisis Euromarkets. EW