Icelandic Bank to Sell Eurobonds for First Time Since 2008 Lender Defaults

Arion Bank hf, the state-created successor of failed Kaupthing Bank hf, is planning its first international bond sale just three years after the island’s biggest lenders defaulted on $85 billion.

The bank, based in Reykjavik, wants to fund itself via debt markets outside Iceland’s borders within the next 12 months, said Hoskuldur H. Olafsson, Arion’s chief executive officer.

“The outlook for tapping into the international debt markets is positive,” Olafsson said in an interview. “We’ve focused on maintaining the relationship we have with investors and on organizing the bank as a credible institution. We’ve made good progress and we believe that we might take steps in that direction sooner rather than later.”

Kaupthing, which was Iceland’s biggest bank before it failed in October 2008, is still trying to repay about $25 billion in creditor claims. The government’s decision three years ago to take control of Iceland’s domestic banking system and leave international creditors in the lurch protected the state from obligations that dwarfed the $12 billion economy.

Iceland is now recovering from its 2008 banking meltdown as the euro area sinks deeper into its debt crisis. It costs less to insure against an Icelandic default than it does to guard against a credit event in the common currency bloc, credit default swaps show. That’s encouraging the island’s new banks, created from the domestic remnants of lenders whose debt burdens swelled to 10 times the economy at their peak, to explore their funding options.

Capital Adequacy

“There are a lot of things going well in Iceland,” Olafsson said. “Things that are more positive than what is happening in Europe.”

Arion had a capital adequacy ratio of 21.4 percent at the end of the first half, Olafsson said. That compares with the Financial Supervisory Authority’s 16 percent target and a legal minimum of 8 percent, he said. Arion on Sept. 6 reported a 29 percent increase in first-half profit after tax from the year- earlier period to 10.2 billion kronur ($86 million).

Arion is 13 percent owned by the Icelandic state and 87 percent held by Kaupthing’s creditors, who are represented by a state-appointed resolution committee. The bank is in talks with rating companies to obtain a credit grade “in the near future,” Olafsson said.

Creditor Claims

A week before Kaupthing was taken over by the state, Moody’s Investors Service placed its A1 long-term grade on review for a downgrade, citing “weakened fundamentals within the Icelandic banking system,” according to a Sept. 30, 2008, statement. On Oct. 9, 2008, Moody’s cut Kaupthing to Caa1, seven levels below investment grade.

Kaupthing has accepted 2.93 trillion kronur ($25 billion) of the 5.6 trillion kronur in claims against it, according to a creditors’ report released today, which showed figures published in September haven’t been revised. The bank’s resolution committee said it has available cash reserves of 319 billion kronur.

Kaupthing bonds trade at 24 cents on the euro, according to the latest prices available from brokerage HF Verdbref.

The state seized Iceland’s erstwhile second-biggest lender Landsbanki Islands hf on Oct. 7, 2008, a week after it took control of Glitnir Banki hf, once the island’s third-biggest bank. The government has since created new units out of the domestic operations of both lenders to form Landsbankinn and Islandsbanki.

Ratings Changes

Standard & Poor’s on Nov. 24 this year raised the outlook on Iceland’s BBB- sovereign rating to stable from negative, citing the economy’s growth prospects since emerging from its 2008 crisis. Moody’s in a July 19 credit analysis of Iceland said the island enjoys a “moderate level of economic strength” and “high institutional strength.” The Baa3 rating is on negative outlook due to Iceland’s “high susceptibility to event risk,” Moody’s said. Fitch Ratings ranks Iceland’s debt junk.

Arion has foreign currency debt of about 1.2 billion euros ($1.6 billion), and the lender has no “near-term” refinancing needs, Olafsson said.

“We have not fully concluded how much debt we intend to issue in foreign currencies in the near term,” he said. “It’s important that we take small steps to begin with.”

Iceland’s economy will grow 2.5 percent this year and next, versus 1.6 percent in the euro area this year and 1.1 percent in 2012, the International Monetary Fund said Sept. 20. Next year, Iceland’s current account surplus will widen to 3.2 percent of the economy and unemployment will be 6 percent, versus 9.9 percent in the euro area, the fund said. CDS on Iceland’s five- year debt eased 13 percent last week, according to CMA.

IMF Program

The island ended a 33-month IMF program in August after the Washington-based fund established that all economic “objectives have been met and the country is on the road to recovery,” according to an Aug. 26 statement marking the island’s final review.

Iceland’s government in June received bids for twice the $1 billion in bonds offered at its first such auction since its 2008 bank crisis shut it off from international capital markets.

Olafsson said Arion’s plans to sell Eurobonds are possible thanks to the state issue. “It was paramount that the Icelandic Republic led the way and was successful,” he said.

To contact the reporter on this story: Omar R. Valdimarsson in Reykjavik valdimarsson@bloomberg.net

To contact the editor responsible for this story: Jonas Bergman in Stockholm at jbergman@bloomberg.net

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