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Reform rewarded in Eurobond issue

Despite the success of the recent Slovak government issue of Eurobonds, domestic and foreign analysts are warning the government that it must keep delivering on its fiscal policies to keep what has, over the last 12 months, become a growing interest in Slovakia from investors.
"The government has to deliver to the domestic population to keep the external issues sustainable. It cannot go on raising money from foreign sources forever," said Jaroslav Vitazka, assistant portfolio manager at Schroders in London.
Bearing a 7.35% coupon, the Eurobond saw demand at twice the actual volume of the issue with the spread falling from the expected 220 to 240 basis points above 10 year German Bunds to 217. The figures provided a favourable comparison with last year's first Slovak issue of Eurobonds. The 350 million euro issue of last June carried with it a 4.2% interest yield, almost twice that of this year.


The March 20 sovereign Eurobond issue was deemed by domestic and foreign analysts as a major success for the Slovak government, reflecting an increase in confidence by foreign investors.
photo. Reuters

Despite the success of the recent Slovak government issue of Eurobonds, domestic and foreign analysts are warning the government that it must keep delivering on its fiscal policies to keep what has, over the last 12 months, become a growing interest in Slovakia from investors.

"The government has to deliver to the domestic population to keep the external issues sustainable. It cannot go on raising money from foreign sources forever," said Jaroslav Vitazka, assistant portfolio manager at Schroders in London.

Bearing a 7.35% coupon, the Eurobond saw demand at twice the actual volume of the issue with the spread falling from the expected 220 to 240 basis points above 10 year German Bunds to 217. The figures provided a favourable comparison with last year's first Slovak issue of Eurobonds. The 350 million euro issue of last June carried with it a 4.2% interest yield, almost twice that of this year.

The comparative success of this issue is one of the clearest signals yet that Slovakia is now a positive destination for investors, and that the country has grabbed the interest of foreign investors over the last 12 months, Vitazka said.

"This has been a success. The government managed to raise the money at half the price it did before," the analyst explained. Last year the government twice raised the eurobond issue, by 50 million and then 100 million.

Ivan Chodák, an analyst with CAIB Securities in Bratislava, explained that during the past year since the last issue, the ratings of not just Slovakia, but of the whole emerging market region had risen.

"There is a very different feel from one year ago. Slovakia has a better credit rating already, and there is much more preference [expressed by investors] for the region than last year," Chodák said. "The government was quite young one year ago, and now there is a bit more stability. The market is also still quite attractive with some interesting yields."

Two of the top ratings agencies, Moody's and Standard & Poor's, have raised their outlooks for Slovakia in the last year - an important signal for market investors.

Vitazka, who had attended promotional roadshows both this year and last for potential investors ahead of the bond issues, said that there had been a distinct change in the mood of potential bond buyers.

"Last year there was standing room only [at the roadshow], but this year there weren't that many people. That's not because of a lack of interest, but because investors now knew the story. They were more confident," he said.

He stressed that the government had played an important role in instilling this confidence. "No matter what the government is doing elsewhere, it is following the convergence regulations for the European Union - definitely showing steps in the right direction."

The variety of investors in the buying pool also signalled what analysts pointed to as an encouraging increase in interest in Slovak financial issues from the European Union's biggest members. Germany and Britain provided the lion's share of bond purchases with British investors snapping up 29% of the total issue volume and the Germans 33%. Italian investors took 16%, followed by Austrian buyers (6%) and the remaining 13% going to other investors.

The strong showing of institutional investors, who took 78% of the bonds purchased, was also cause for cheer for the government. "The issue was a definite success for the government and for the country as well," Vitazka said.

The government had worked hard to make the Eurobond issue as attractive as possible to investors. The roadshow had been used to promote the issue, and Finance Minister Brigita Schmögnerová spent the weeks before the issue reassuring potential bond buyers that the political situation in the country was stable.

Political instability has dogged the current four-party ruling coalition, which includes socialists, liberals and free-market reformers. In late January, tensions within the largest government party, the SDK, forced Prime Minister Mikuláš Dzurinda to declare his intention to form a new political party, the Slovak Christian Democratic Union (SDKU), which last week began registering its first members. The opposition Movement for a Democratic Slovakia (HZDS), meanwhile, has been pushing for a referendum on early elections.

But most senior cabinet members have been at pains to convince investors that the coalition tremors were not serious, and that the country's western orientation was its best guarantee of stability. On the eve of the bond issue, Schmögnerová reminded investors that before the year was out, Slovakia would be a member of the Organisation for Economic Cooperation and Development (OECD) - something potential investors have been monitoring closely over the last two years.

"We assured them [the investors]..... that the government is unified in its integration ambitions, as well as in its effort to stay together until the end of its term. The government's common goal is to continue already launched reforms," the minister told journalists then.

The success of this issue has persuaded the government to pencil in another for next year. However, a further issue this year is not likely.

"If there was another one this year, investors might begin to ask why the government needs more money already," said Vitazka.

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