Slovenská Sporiteľňa (SLSP), the country's largest retail deposit bank, in February reached out to tap investors on foreign markets when it placed an $80-million subordinated bond issue. Arranged by the investment bank Merrill Lynch International, SLSP officials said the bank is targeting American and Japanese investors who would be interested in the high-risk, yet high-yield bonds. The bonds carry an interest rate of LIBOR plus 1.25 percent for the first five years.
The goal, according to Jozef Straško, deputy chairman of Sporiteľňa's board of directors and its first vice-president, is to increase SLSP's basic capital and to reach the 8 percent level of capital adequacy ratio (CAR) - the ratio of basic capital to risk-weighted assets - by the end of 1996, as recommended by the National Bank of Slovakia (NBS). "Until now, Slovenská Sporiteľňa has had no opportunity to increase its capital," Straško said. "[The bond-issue] will enable us to extend our commercial activities abroad as well as reach the prescribed level of capital adequacy."
"Placing SLSP bonds on the US capital markets was a designed and purposeful step," Straško continued. "The choice of cities was not random, with roadshows taking place in the most important capital market centers - Boston, New York, Chicago and Los Angeles." SLSP also touted the bond issue to interested investors in London, Tokyo and Osaka, its representatives added.
The subordinated bonds are below investment grade, meaning that while bond-holders may see a high return, they will also be the last to be paid off in case SLSP has trouble paying off its debts.
"The investors in this deal are strictly creditors," said Tim Stephens, the deputy treasurer for Tatra Banka in Bratislava. "They don't own any equity in Sporiteľňa. Because it's subordinated debt, the people who own the pieces of paper that say they own a piece of Sporiteľňa will be paid off last. [Consequently,] they rank the lowest in the pecking order, [and are therefore] at greater risk."
While investors run a risk, the loan's manager, Merrill Lynch, is expected to make out like a bandit. "They're probably going to make a lot of money doing this," said Tom Grey, a corporate finance analyst at Creditanstalt in Bratislava, mainly because Merrill Lynch will charge a percentage commission based on the issue's volume. "If they make two percent on $80 million, that comes to $1.6 million, which is a good amount of money," Grey said.
Another factor in Merrill Lynch's decision to arrange the bond-issue, Grey said, is to prepare the ground for further business with SLSP and Slovak blue-chip companies. "I would be surprised if Merrill Lynch isn't approaching Slovak companies to manage similar transactions on the international bond-market," he said.
"The hard work is to find sellers," Grey continued. "Finding buyers [of the bonds] will be easy for Merrill Lynch, which has lots of buyers. The question is, buyers at what price?"
Albín Mráz, Sporiteľňa's deputy vice-president, said though the subordinated bonds will carry a 10-year maturity, "the bank intends to repay the debt" in half that time. He added that the bonds are listed on the Luxembourg Stock Exchange.
According to Grey, the high interest means an attractive return to investors seeking greater flexibility. "In the last five years we are seeing a wide range of financial products for investors," Grey said.
"All diversification strategies are being tried to reach the same yield at lower risk. You might be expecting one bad investment, but if they're all at 12 percent interest if one goes bad, you'll still make out on the others because of the higher yield."
"Japanese traders love the high return and eat it up," Stephens said. "Because in Japan, bonds are being sold at a 2-3 percent rate of interest, so if they get a higher interest rate, they're making a lot more money." Straško indirectly confirmed Stephens' view, saying that Slovakia's economic performance and SLSP's continuing profitability makes it the logical choice for international investors.
"Subordinated bonds are attractive to foreign investors by their price," said Straško, "But first of all by the low risk of our bank and the country [which should] enable SLSP to be well-established in global capital markets."
27. Feb 1997 at 0:00 | Tom Reynolds