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Slovenia Companies Avoid Banks in Test of Investor Debt Appetite

Slovenian companies are testing the debt appetite of investors by selling commercial paper as local banks choke on non-performing loans and threaten to pull the country into the euro area’s sixth bailout.

Retailer Mercator Poslovni Sistem d.d., Petrol Group d.d. tapped the market in the past month, while appliance maker Gorenje Group d.d., Slovenia’s biggest exporter, will sell as much as 30 million euros ($39 million) of eight-month notes today at a price to yield 4.45 percent. That compares with a 4.625 percent yield on five-year Eurobonds sold this week by Indesit Company SpA, an Italian home appliance producer.

Companies looking for new funding sources during a crisis at the three largest banks, all state-owned institutions that jointly control about 80 percent of the market. Bad loans have risen to about a fifth of economic output, draining the trough of money corporate Slovenia has fed from for years.

“Commercial paper is handy in times of crisis,” Simon Mastnak, the executive director of Alta Group d.d., an investment and asset manager in Ljubljana, said by phone. “In the past, Slovenian companies relied heavily on bank loans and disregarded capital markets. Since banks are in trouble, these short-term instruments are much more attractive.”

Mercator sold 20 million euros of six-month paper March 19 at a yield of 4.87 percent. Nine days later, Petrol sold 60 million euros, the largest such issuance ever in Slovenia, of a similar maturity note at 3.8 percent. Energy trader Gen-I sold 30 million euros of one-year commercial notes in February at 4.3 percent. Gorenje’s rate of 4.45 percent compares with an average loan rate of 4.21 percent for February, central bank data show.

Falling Star

A former standout among post-Communist Europe nations, Slovenia was the first of the European Union’s eastern members to adopt the euro. With steady economic growth and low state debt at about 54 percent of gross domestic product, it was the antithesis of the countries it is now being lumped together with such as Cyprus, Spain, Portugal, Ireland and Greece.

As the government battles to avoid an international bailout, a lack of privatization, especially in the financial industry, is coming back to haunt the ex-Yugoslav republic of 2 million that borders Italy, Austria and the Adriatic Sea coast.

The yield on Slovenia’s 2022 dollar-denominated bond fell to a two-week low of 5.65 percent yesterday. The cost to insure the Alpine country’s debt for five years using credit-default swaps declined 10 basis points, or 0.1 percentage point, to 301, the lest since March 26, data compiled by Bloomberg show. That compares with 302 for debt from Hungary and 380 from Portugal.

State Financing

Slovenian governments over the past two decades used the banks to finance state projects and companies, with less focus on risk and return. As property and construction bubbles burst, bad debt has skyrocketed amid the nation’s second recession in four years.

Gorenje (GRVG), Slovenia’s most recognizable company abroad with its range of refrigerators, washers, dryers and ovens, hopes to diversify financing with its debut commercial paper issue, spokeswoman Elizabeta Bilus said.

“We are broadening the circle of our financiers and are partially withdrawing from high exposure toward the unstable banking sector,” she said in an e-mailed response to Bloomberg questions, noting that some banks abroad are also having troubles.

Domestic Sale

Gorenje is selling the paper locally, with the main targets being institutional investors such as insurers, pension funds and others “who have regular cash inflow and look for interesting investment opportunities,” Mastnak, whose investment house is managing the Gorenje issue, said.

Slovenian companies sold 124.2 million euros of commercial paper in 2012, according to the Ljubljana bourse. If Gorenje’s sale is successful, some 140 million euros of the notes will have been purchased so far this year.

The diversification of financing sources is positive and breaking the circle of debt between state-owned banks and companies is long overdue, according to Igor Masten, an economics professor at the Economics University in Ljubljana.

“Our banks have too much of a concentrated exposure to these companies,” Masten said by phone. “Until banks get fresh capital, they won’t be able to service these companies.”

Bad loans at Slovenia’s three largest banks, Nova Ljubljanska Banka d.d., Nova Kreditna Banka Maribor d.d. and Abanka Vipa d.d., are estimated to represent 30 percent of their total loans, according to an April 9 report by the Organization for Economic Cooperation and Development. The three lenders need 2 billion euros of fresh capital, Fitch Ratings said April 5.

Recapitalization Plan

Prime Minister Alenka Bratusek’s five-week-old administration has pledged to press ahead with a bank- recapitalization plan valued at as much as 4 billion euros and to step up austerity measures including tax increases.

The government also needs to support small- and medium- sized companies in its restructuring of the economy, said Gunter Deuber, the head of central and eastern Europe research at Raiffeisen Bank International AG (RBI) in Vienna.

“The situation will definitely remain challenging, corporate leverage is extremely high in Slovenia,” he said by e-mail. “Balance sheet restructuring will remain a big issue in Slovenia going forward.”

To contact the reporters on this story: Alan Crosby in Prague at acrosby1@bloomberg.net; Boris Cerni in Ljubljana at bcerni@bloomberg.net

To contact the editor responsible for this story: James M. Gomez at jagomez@bloomberg.net

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