The Slovak Republic may not have the largest borrowing requirements of the new EU members, but it knows how to draw attention to itself ? pricing its first ever Eu1bn benchmark Eurobond less than three weeks after joining the EU in May. Kathryn Wells reports on the country's efforts to boost the liquidity of its debt and increase its investor base.
EU membership on May 1 has dominated Slovakia's year so far. Ardal, the republic's debt and liquidity management agency, took advantage of this, choosing to issue a Eu1bn 10 year benchmark Eurobond less than three weeks after Slovakia joined the EU.
The timing of the deal took advantage of added investor warmth towards the new members as well as increased name recognition. Ardal, which was set up in February 2003, formally took over all responsibility for debt management at the beginning of 2004.
Previously, responsibility for debt and liquidity management lay in the hands of the ministry of finance, which carried out only the most basic financial operations. On January 1 of this year, the treasury took over all operations relating to budgeted and public finance cashflows, as well as operating as the bank for budget organisations.
Slovakia was the first of the region's new members to issue Eurobonds after May 1 and was able to price its transaction ? its first benchmark issue ? well inside fellow EU new kids on the block Poland and Hungary. ?Our Eu1bn benchmark was priced at 18bp over mid-swaps and has tightened in to 11bp over,? says Daniel Bytcanek, director of Ardal in Bratislava. ?We are very pleased with this performance. We do not think there is space for much further tightening at the moment, with sovereigns like Greece trading around 9bp over.?
Having achieved such tight pricing, moving away from its traditional investor base in Germany and Austria is paramount. This is symptomatic of many of central Europe's smaller borrowers, particularly as they approach eurozone membership from 2007 onwards.
?Diversifying our investor base is our most important target,? Bytcanek admits. ?When our local banks implement Basle 2, they will have less motivation to buy our domestic debt. We have already seen demand for our local debt decreasing. Traditionally, our most active investors have come from Germany and Austria. They are very well acquainted with our story, and many of their banks now own ours. In the future, it is important to diversify further into countries such as France, Spain, Greece, Benelux, UK etc.?
Its euro benchmark, lead managed by ABN Amro, Dresdner Kleinwort Wasserstein and Morgan Stanley, was distributed: 50% Germany, 15% Benelux, 10% UK, 7% Iberia, 6% other, including Asia, 5% Austria, 4% Greece and 3% Italy ? evidence that Ardal's work is starting to pay off, although there is still much to be done. Banks and central banks took 75%, funds 10%, insurance companies 7%, pension funds 5% and retail investors 3%.
In the past, Slovakia has issued fairly small bonds both domestically and internationally, which have had poor liquditity in the secondary market. Slovakia had trouble reaching domestic sales targets in 2003, and its domestic paper has little attraction for foreign investors.
Since its inception, Ardal has made boosting liquidity a priority, says Bytcanek. ?Our secondary market liquidity has improved,? he says. ?This year was the first time that we have issued a Eu1bn transaction, making it eligible for trading on the New Europe MTS. We have a similar policy with our local issuance ? every issue is for Eu1bn equivalent. We believe that bigger sized issues will support liquidity on the secondary market.?
One of the republic's targets in the run-up to euro membership, which the Slovak government is aiming for on January 1 2009, is rejigging the balance between its international and domestic funding. ?In 2003, we raised 18% of our debt internationally and the remainder on the domestic markets,? says Bytcanek. ?This year the figure has risen to 25%, and next year it will be roughly 30%. By the year before euro membership, this should be split 50-50. Once the liabilities of our banks are in euros, they will buy international euros bonds and will have no strong motivation to buy Slovak debt. They will go east, to countries such as Bulgaria and Romania, where they can find higher yielding paper, and they are also interested in structured asset products.?
Slovakia needs to raise around Sk140bn, or Eu3.5bn, in 2005. It has redemptions of around Eu750m internationally and plans another Eu1bn benchmark. The euro will remain Slovakia's issuance currency of choice next year, although the republic may look to other currencies in 2006-2007. ?It is important to keep our name known in the US and Japanese markets,? say Bytcanek. ?Once we join the euro, we will be one small part of a big market and so it will be harder to motivate investors to buy Slovak debt. We believe it is important not only to go to the US market when we have a real need, but also to go before, to make ourselves known to banks and investors.?
Hungary, Poland and Croatia have all issued Samurais over the last 18 months, and this is an option that Slovakia is also interested in, Bytcanek says. ?The Japanese or Asian market is another story ? our motivation for issuing there would be the low cost and the possibility of issuing debt longer than 20 years,? he explains. ?The European market is not prepared for such long maturities ? the maximum there would be 15 or 20 years for Slovakia. One of our aims is to diversify and extend our maturity profile. One disadvantage would be FX risk, but we can mitigate this with hedging and derivatives instruments.?