As the most unwilling members of the Soviet Union the three Baltic states - Estonia, Latvia and Lithuania - were consequently the most eager to reassert their independence following the break-up of the USSR.
As a result they have been in the vanguard of the transition from centrally planned to free market economies and have proved enthusiastic users of the international bond markets in their effort to maintain their competitive advantage over their ex-USSR peers.
Sovereign, bank, municipal and corporate borrowers from the region have tapped international investors for funding at ever more competitive rates and ever lengthening maturities.
All three states are set to provide international bond investors with an increasing array of Euromarket product over the coming months, with a number of debut and repeat issuers all mulling international bond offerings. Guy Norton reports.
Estonia's Union Bank of Estonia hit the markets this week with twin issues of Deutschmark subordinated debt and US dollar-denominated senior risk, amply demonstrating the way in which the Baltic region is increasingly the testing ground for structures which are set to be adopted by issues from Russian and CIS issuers at a later date.
Latvia was the first of the Baltic states to tap the international bond markets with a ¥4bn two year Euroyen private placement via Nomura in August 1995 which was the first international bond issue by a former Soviet Union republic.
That issue, priced to yield the equivalent of around 400bp over US Treasuries, was eagerly taken up by emerging market accounts in Japan and Europe.
Latvia was also the first ex-USSR republic to be rated investment grade when Standard & Poor's assigned a BBB rating in January. Although the sovereign has no plans to tap the international fixed income market in the near future the ratings award has nevertheless prompted an ever wider group of investors to look at issuance from the country.
As a result the country's leading bank, Unibanka, was able in August to raise debt offshore for the first time with a $30m three year private placement lead managed by Credit Suisse First Boston with a coupon of 70bp over three month dollar Libor to yield 77bp all-in at the issue/fixed re-offer price of 99.81.
As Ivars Kirsons, Unibanka's chief financial officer explained to Euroweek: "This issue allowed us to raise three year funding, which is unavailable in Latvia, and which will allow us to expand our lending activity to corporate clients within Latvia."
The Unibanka issue is a benchmark for Latvian credits in the dollar market and is thought likely to encourage a number of the country's leading utilities and corporates to tap the international bond markets in 1998.
The bank is looking to return to markets later this year with a debut public Eurobond issue and is also considering establishing a Euro-MTN programme. In the meantime it is planning a GDR issue which will see the Latvian government sell down its 30% stake to around 10%.
Nomura also has a mandate from the Latvian capital Riga for a debut Euromarket transaction, likely to emerge in the coming months. The Japanese securities house advised the city on obtaining its BBB- with positive outlook rating from Standard & Poor's - one notch below the sovereign ceiling - and is viewed as a frontrunner for future bond mandates from the country.
Nomura was also the bookrunner on the first Euromarket issue from Lithuania, a $60m two year Eurodollar transaction for the sovereign which was priced to yield 445bp over the 5.625% November 1997 US Treasury at launch in December 1995.
Some 50% of that issue was placed with emerging market funds and retail accounts in Europe, 40% with Asian banks and funds and the balance with US institutions.
The speed with which investor sentiment towards Lithuania has improved can easily be gauged by the fact that when the country returned to the Euromarkets in August 1996 with a $50m fungible increase to the debut transaction the pricing was almost 200bp tighter, at 249bp over Treasuries.
Shortly afterwards the country became the first former Soviet state to receive an international credit rating when Moody's Investors Service awarded it a Ba2 rating, followed this January by a BB+ rating from IBCA and by an investment grade BBB- rating from Standard & Poor's in June.
JP Morgan acted as the country's adviser for the S&P award and the US investment bank was the lead manager on the country's first benchmark transaction - a $200m five year Euro/144A offering which is destined to be the pricing guide for future Euromarket issuance from the Baltic states.
With a 7.125% coupon the landmark issue was priced to yield 105bp over the 6.25% June 2002 US Treasury at the issue/fixed re-offer price of 99.25.
JP Morgan reported that geographical placement was split 50% US, 28% Europe and 22% Asia. In terms of demand by investor type, funds took 66% of the lead's bonds, banks 27% and retail 10%. Over 50 accounts participated in the deal.
Commented a JP Morgan spokesman: "Before we started marketing this deal the perception was that fair value for the credit was around 130bp-140bp over Treasuries.
"However, the Lithuanian finance officials did a great job of promoting the country and once people recognised the excellent economic numbers and the fact that there is a lack of paper from Lithuania, we were able to manage the pricing down to the 105bp launch level."
Although investor feedback had indicated that a 100bp launch spread would have been achievable, both the lead and the issuer were conscious of avoiding the fate suffered by the Republic of Croatia earlier this year.
Its $300m 7% five year Euro/144A offering launched in February at 80bp over Treasuries was seen as too aggressively priced and suffered badly as a result - the deal was languishing at 108bp/103bp over when Lithuania launched its deal.
Despite the spread volatility that has hit triple-B rated credits in the wake of the currency turmoil in south east Asia, Lithuania's Eurodollar issue has emerged relatively unscathed, trading at 110bp over Treasuries on the bid side in late September.
Commenting on the future borrowing policy of the country, a Lithuanian government spokesman told Euroweek: "We don't intend to be a frequent issuer - we are only looking to do a couple of deals a year to establish pricing benchmarks so that other Lithuanian borrowers are able to access the international bond markets."
Lithuania's next international bond is expected to be in the Deutschmark sector with an issue of up to DM300m. That transaction is likely to emerge at the end of this year or early in 1998 and should see the country extend its term profile in the Euromarkets to seven years. Following the Euro-DM issue the country is then set to launch a strategic issue in the yen markets.
Lithuania has also been the source of the only corporate issues from the Baltics to date. Credit Suisse First Boston opened up a new asset class with the launch in February of a $40m seven month private placement FRN for Lithuanian oil refinery Mazheikiu Nafta. The debut transaction was priced to yield 300bp over three month dollar Libor at the re-offer price of par. The proceeds were used to buy Russian crude oil - Mazheikiu had in the past suffered from interruptions to its supplies and the refinery was forced to shut down temporarily at the start of 1997 because of a lack of product to process.
Thanks to the fundraising, Mazheikiu - acknowledged as the most modern of the former USSR refineries - was able to return to the Euromarkets to raise $70m via a three year issue with puts and calls in year one. As well as upping the issue size and tenor of the transaction the company was able to rein in pricing with a coupon set at 275bp over Libor.
At the same time the issuer launched two $9.5m Lithuanian government-guaranteed tranches of debt with three year bullet maturities.
As Matt Carter, director of fixed income at CSFB explains: "Second time around we were able to market Mazheikiu as an improving story - in between the first and second issues it had gone from being a loss making to a profit making concern and that made the second deal much easier to place."
As well as rollover money from the debut transaction CSFB was able to attract new investors including banks, fund management groups and leasing companies.
Lithuanian Energy has also tapped the Euromarkets with a Merrill Lynch led $75m three year private placement FRN, intended for working capital purposes. The US investment bank had earlier granted Lithuanian Energy a $50m loan to help it solve a cashflow crisis caused by the failure of its customers - including the Lithuanian government which owed the company Litas776m ($194m) - to pays their bills on time.
Although there has not yet been any sovereign issuance from Estonia, the award this month of Baa1 and BBB ratings by Moody's Investors Service and IBCA respectively has made the country the best rated of the former Soviet states. That award looks set to prompt a rush of issuance from the country's leading banks, whose profitability has been boosted by the booming Estonian economy and which are keen to expand their wholesale and retail lending activities.
The Union Bank of Estonia, which this week launched a DM30m seven year non-call two subordinated debt issue via Nomura and a $10m three year fixed rate dollar private placement via Deutsche Morgan Grenfell, is one of a trio of Estonian banks to have tapped the international bond markets and the first from the Baltic region to establish a Euro-MTN programme - a DM100m facility arranged by Chase Manhattan.
In September 1996 the bank issued DM13.5m of two year floating rate notes, followed by a DM15m three year FRN in December which was increased by DM10m in March 1997. All those transactions were lead managed by Chase.
After those private placements UBE activated its Euro-MTN programme in early June with its first public issue - a DM30m three year issue via Chase with a coupon set at 80bp over DM Libor to yield 97bp all-in at the issue/fixed re-offer price of 99.53
Commenting on the bank's decision to set up a Euro-MTN programme UBE's vice president for capital markets and treasury Margus Schults explained: "There is an increasing need for corporate, mortgage and consumer loans in Estonia, which even the fast growth in customer deposits at the bank can't keep pace with. Also, by their very nature, such deposits tend to be short term in nature and the longer dated issuance off this programme will enable us to extend our term profile of our lending activities."
He added that with the first issue off the programme, UBE had already been able to make considerable cost savings compared with its first Euromarket offering - the bank's DM13.5m two year FRN private placement in September was priced to yield 225bp over three month DM Libor.
Chase, which kept DM18m of the latest transaction, reported that it would be sold to institutional accounts which had not bought UBE paper before, thus expanding the bank's investment profile and investor base. In August UBE returned to the markets with a DM15m five year FRN via Merrill Lynch with a coupon set at 125bp over three month over Libor
The driving force behind this week's subordinated debt issue is the implementation by the Estonian central bank of BIS capital adequacy ratios requirements of 10% as from October 1.
The proceeds of the issue will boost UBE's ratio from the currently required 8% level. The issue was priced with a coupon to the call in year five of 150bp over three month DM Libor -175bp all in at the issue fixed re-offer price of 99.50 - and 350bp over thereafter.
Nomura reported that the issue had been well received by DM based institutions and funds attracted by the yield pick-up the issue offered over the bank's senior debt.
It was also UBE's first rated transaction - earlier this month IBCA awarded the bank a BBB- rating for senior debt and a BB+ rating for subordinated debt.
Earlier, in July, Hoiupank became the first Estonian bank - and the first issuer from the former Soviet Union - to test the appetite for subordinated debt with the launch of a CSFB-led DM10m seven year private placement with calls in year two and five.
For the first two years the deal pays a coupon of 135bp over Libor, stepping up to 285bp thereafter. The subordinated tranche was launched in conjunction with a DM50m three year senior element paying 75bp over Libor.
"The proceeds of the issue be used to fund the expansion of our loan portfolio and will allow us to extend the average term profile of our consumer and corporate lending," said Hassar Kipp, head of money and capital markets at Hoiupank.
The third Estonian bank to issue offshore debt is the country's long term financing institution, Estonian Investment Bank (ESTIB), which first tapped the market in December 1995 with a DM20m three year FRN private placement via Chase Manhattan with a coupon set at 150bp over Libor. The deal was increased by DM10m in June 1996.
In January 1997 ESTIB returned to the Euromarkets with a DM30m three year floating rate note private placement via Salomon Brothers which featured a coupon set at 100bp over three month DM Libor to give a discounted margin of 113bp at the issue price of 99.63.
In early December ESTIB had launched a DM30m five year non call three FRN issue featuring a step-up structure whereby the coupon to December 20, 1999 was set at 80bp over three month DM Libor, rising to 150bp over thereafter.
There was also a call option at par on December 20, 1999 and a put option at par at any time up to December 20, 1999 if ownership of the total outstanding share capital of ESTIB by current shareholders or new shareholders having a rating of at least a Aa2 or AA rating fell below 51%.
However, shortly before the December 20 settlement date Salomon Brothers was forced to cancel the issue having failed to secure the necessary maintenance of shareholding agreements from the bank's shareholders. The Estonian central bank, Eesti Pank, and the European Bank for Reconstruction and Development each own a third of the bank's capital, with SwedFund, FinnFund and DEG holding the balance.
The revised issue was structured as a straight bullet issue representing pure ESTIB risk, hence the slightly higher margin and the shorter maturity.
The issue was placed predominantly with European institutional accounts which the lead manager said were attracted by the opportunity of gaining exposure to the Estonia's strong economic fundamentals through an issue by a well regarded financial institution with a strong ownership structure.
Commenting on the issue, ESTIB treasurer Priit Perens said: "The Euro-DM sector is a natural funding choice for Estonian issuers because the Estonian kroon is pegged to the Deutschmark and so there is little foreign exchange risk involved with such a transaction."
In the short term ESTIB invested the proceeds in Deutschmark-denominated FRNs rated at least single-A, before providing short and medium term DM loans to export oriented Estonian companies.
In mid-July Deutsche Morgan Grenfell ran the books on a DM55m floating rate note issue for ESTIB. The issue was split into two tranches comprising DM40m of five year non-call three senior notes and DM15m of seven year non-call two subordinated debt.
At the issue price of 99.643 the unsubordinated portion was priced to yield 62.5bp over three month DM Libor to July 2002 and 162.5bp over Libor if not called at par.
At the issue price of 99.808 the junior element was priced to yield 175bp over three month DM Libor to July 28, 1999 and 475bp over Libor if not called at par.
Deutsche reported that the issue had been placed with European bank investors in both DM and non-DM bloc countries.
Separately, Estonia's leading financial institution, Hansabank, is to launch its debut offering in the Euromarkets in the fourth quarter. The bank, which controls just over 25% of the Estonian banking market, has mandated Chase Manhattan to arrange a Euro-MTN programme. The US bank will also run the books on a expected three year fixed rate dollar Eurobond, likely to emerge towards the end of October.
"We are seeing quite substantial borrowing requirements across the entire Hansabank group," said Erkki Raasuke, head of interest rate products at Hansabank. "Hence the need for the establishment of a multi-borrower facility which will allow us to diversify our funding sources away from the European banking community."
Entities to be documented under the MTN programme include Hansabank, Hansabank Latvia and Hansa Liising.
Merrill Lynch is advising the bank on securing its first international credit rating - from Moody's Investors Service - which is likely to be announced in the next few days.
In April 1996 Hansabank became the first Estonian borrower to tap the international loan markets, raising a $25m three year term loan at 200bp over Libor. Since then, on a group level, it has raised a total of DM150m via two further three year term loans with pricing on the latest credit falling to 60bp over Libor.
Also looking to tap the Euromarkets later this year is the city of Tallinn which recently solicited bids for the lead management role on a DM30m five year floating rate note. In April 1996 the Estonian capital issued a DM60m 6% three year Eurobond via Nomura priced to yield 221bp over German government bonds at launch but now trading at 65bp over. Unofficial price talk on the forthcoming issue is in the region of 75bp-85bp over Bunds.
As with its Baltic peers, Estonia is also likely to be the source of a number of mandates from utilities and corporates looking to raise offshore funding for restructuring and investment programmes.