Slovenian bond sale scrapped as Moody's cuts sovereign to junk

By bne IntelliNews May 2, 2013

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Slovenia's sovereign credit rating was cut by two notches to drop it below investment grade by Moody's Investors Service on April 30. With the addition of a negative outlook, the move forced the government to delay the sale of its first foreign bond this year, hitting the country's bid to ease its financing crunch and avoid an international bailout.

Slovenia is fighting against following Cypriot footsteps to become the next EU state to slip into crisis, and badly needs to tap the bond markets to plug a $3bn hole in the capital of its banking sector. Some estimates suggest the funding gap is actually much larger, and say the government has badly underestimated the problem.

Moody's said the key factor for the downgrade to Ba1 from Baa2, "is the ongoing turmoil in the country's banking system and the high likelihood that the sovereign will be required to provide further assistance and capital injections." The ratings agency added: "Asset quality at the banks deteriorated considerably in 2012 and has continued to deteriorate since."

Just an hour ahead of the announcement of the move from the ratings agency, the Slovenian finance ministry suddenly pulled the plug on an ongoing offer of up to $3bn in dollar- denominated benchmark bonds. According to Bloomberg, initial pricing on the five- and ten-year papers was around 5% and 6.12%, respectively. Before it was halted, the bond sale was proceeding well, with orders amounting to $6bn, unnamed sources told the Wall Street Journal.

The postponement will hit government plans to inject $1.2bn of new capital into the ailing bank sector, which has been hit hard by rising bad loans on the back of the Eurozone crisis. With the worst hit lenders state owned, Ljubljana also intends to set up a "bad bank" to clean out the non-performing assets, freeing the banks to start lending again in a bid to lift the economy.

Tim Ash of Standard Bank suggested it is "a surprise that Moody's ... went straight to "junk" without passing go, as it were. Two notches is a bit of a blow to the Slovenes." The negative outlook is as damaging perhaps, he says in a note, as it "sends the message that there is more to come."

However, he also notes that, although the message to Slovenia is that it needs to do more to dig itself out of its hole, the ongoing hunt for yield should allow Ljubljana to pick up the baton on its bond issue soon enough. "[T]he Slovenes kind of shot themselves in the foot ... by not providing enough detail on their reform plans ahead of the meeting with the European Commission slated for May 9. The upshot though is that there are plenty of junk bond sovereigns in the region - Croatia, Serbia, Hungary. I would be hard pressed to argue that any of these really has a better credit story than Slovenia, so I guess once the dust settles a bit the Slovenes will push ahead ... [T]hey want to build a cash buffer while markets are still awash with QE related liquidity."

Reflecting the lack of details from Ljubljana, BlackRock Inc., the world's biggest investor, had already publicly asked Slovenia for more information on the bad bank plan ahead of the pull of the debt issue. "We need to see the size of the assets that actually will be transferred," Christopher Allen, a director at BlackRock's Fundamental Euro Fixed Income team, told Bloomberg on April 29. "We have to understand whether the valuations of those loans are really realistic."

Five members of the 17-nation Eurozone are now rated junk by Moody's. Standard & Poor's and Fitch Ratings both assess Slovenia at A-, the fourth-lowest investment grade.

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