Slovenian Credit Cut to Junk by Moody’s as Bond Sale Delayed
Slovenia delayed a bond sale as its credit rating was cut to junk by Moody’s Investors Service, which cited banking-industry “turmoil” and said the government would have to offer lenders more financial support.
Slovenia postponed an offering of dollar-denominated benchmark bonds before the rating was lowered two levels to Ba1 from Baa2, on par with Turkey, and given a negative outlook. Five members of the 17-nation euro area are now rated junk by Moody’s. Standard & Poor’s and Fitch Ratings both rate Slovenia at A-, the fourth-lowest investment grade.
“The first key factor underpinning today’s rating action is the ongoing turmoil in the country’s banking system and the high likelihood that the sovereign will be required to provide further assistance and capital injections,” Moody’s said today in an e-mailed statement from New York. “Asset quality at the banks deteriorated considerably in 2012 and has continued to deteriorate since.”
Slovenia, struggling with its second recession since 2009, is working to fix its ailing banking industry with a 900 million-euro ($1.2 billion) capital boost and the creation of a so-called bad bank to cleanse lenders’ balance sheets and aid economic recovery. A detailed overhaul plan is set to be presented to the European Commission in Brussels by May 9.
Bond-market history indicates that the utility of sovereign ratings may be limited. Almost half the time, yields on government bonds fall when a rating action by S&P and Moody’s suggests they should climb, according to data compiled by Bloomberg on 314 upgrades, downgrades and outlook changes going back as far as the 1970s.
The yield on the government’s dollar note due 2022 rose 11 basis points to 5.75 percent at 7:45 p.m. in Ljubljana. It peaked at 6.38 percent on March 27 as investors speculated Slovenia will be the next euro-area country to seek a bailout after Cyprus.
Slovenia was offering five-year and 10-year dollar bonds today, according to a person familiar with the matter who asked not to be identified before the transaction is completed. The five-year notes were being initially offered in the region of 5 percent and the longer-maturity debt around 6.125 percent, the person said.
Slovenia “expects the transaction to continue once additional information is available,” the Finance Ministry said in an e-mailed statement before the downgrade.
“We highlighted before the risks of a ratings spiral was an important factor to watch but this is mitigated by the prospect of issuance still in the near future, perhaps at a higher spread now,” Peter Attard Montalto, an economist at Nomura International in London, said by e-mail. “After the roadshow, the government has a group who knows the country and wants to buy it and can work with them still to get an issue away.”
Slovenia’s recovery from a recession that wiped 2.3 percent off gross domestic product last year is largely down to the health of the banking industry, according to Moody’s, which predicted the economy would shrink 1.9 percent in 2013 before “weak” expansion in 2014. The plan to recapitalize lenders will cost, between 8 percent and 11 percent of GDP, it said.
“Risks remain skewed firmly to the downside and the economic outlook will depend to a large degree on the stabilization of the banking crisis,” Moody’s said.
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