Slovakia touts EU credentials with bond

Slovakia launched its first euro-denominated bond on June 9, touting a turnaround economy and the pro-European Union policies of its new reform-minded government.
Slovakia, which hopes to rejoin a group of frontrunners for European Union membership by the end of the year, issued 350 million euros ($366.3 million) of five-year bonds, larger than the 300 million euro deal expected.
As Slovakia's first foray into international markets since losing investment grade status last year, the bond was seen as a key test of sentiment towards the pro-Western, pro-reform coalition government of Prime Minister Mikuláš Dzurinda which took power last October.


Finance Minister Brigita Schmögnerová (left) was pleased by the response but concerned by the spreads.
photo: TASR

Slovakia launched its first euro-denominated bond on June 9, touting a turnaround economy and the pro-European Union policies of its new reform-minded government.

Slovakia, which hopes to rejoin a group of frontrunners for European Union membership by the end of the year, issued 350 million euros ($366.3 million) of five-year bonds, larger than the 300 million euro deal expected.

As Slovakia's first foray into international markets since losing investment grade status last year, the bond was seen as a key test of sentiment towards the pro-Western, pro-reform coalition government of Prime Minister Mikuláš Dzurinda which took power last October.

The authoritarian behaviour of former Prime Minister Vladimír Mečiar led to Slovakia's being demoted from the first wave of EU applicant countries in 1997, despite fulfilling the economic criteria.

"This deal is a strong vote of confidence in Slovakia's new government and a measure of the success of its stabilisation programme," said Peter Malik, co-head of emerging Europe capital markets at Credit Suisse First Boston, joint underwriter with J.P. Morgan.

"Strong investor interest allowed us to increase the deal and to place over 80% of the bonds with quality institutional investors."

Hefty premium

The bond - which will set a benchmark for Slovak companies raising funds in the international markets - was priced with a 7.5% coupon at a spread, or premium, of 420 basis points (4.2 percentage points) over German Bunds.

Slovakia is forced to pay a hefty premium over the Czech Republic - its former federation partner - and neighbouring Hungary and Poland, all of which are among a group of front-runners hoping to join the EU early next century. "Slovakia's whopping borrowing premium could be cut in half if, as it hopes, it is admitted to accession talks at the Helsinki summit in December," said one participant in the bond selling group.

Deputy Prime Minister for Economy Ivan Mikloš confirmed this view in an interview published in the Sme daily newspaper on June 10. "The price [spread] is always a matter of demand and offer. But if we compare with the price of Hungarian eurobonds, our price reflects principally the fact that Slovakia is not yet a member of the first group of countries for aceptance into the EU, nor a member of the OECD. Besides that, we have high macroeconomic imbalances and several risks left over from the previous government."

The EU began talks with the Czech Republic, Estonia, Hungary, Poland, Slovenia and Cyprus last year, sending borrowing costs for these countries tumbling as investors bet on their eventual participation in Europe's single currency.

Hungary last week launched a 500 million euro five-year bond at a spread of 71 basis points over the benchmark, while the City of Prague, capital of the Czech Republic, sold 200 million euros of 10-year bonds at a spread of 105 basis points over Bunds.

Hungary's five-year euro bond, which was criticised at the time for being ambitiously priced, has since widened to around 85 basis points in the secondary market, while Prague's bond has held steady.

Slovakia made its debut in the international debt markets in May 1998, when it issued five-year bonds in both marks and dollars. Its mark bond due 2003 currently trades at around 380 basis points over Bunds.

Slovakia is rated BB+ by Standard & Poor's and Ba1 by Moody's Investors Service with a negative outlook.

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