Banks Sell Most Notes Tied to Serbia Sovereign Debt in 20 Months

Banks sold the most structured notes tied to Serbian government bonds in more than 1 1/2 years this month as investors seek yields as high as 10 percent while the country curbs issuance of debt in the local currency.

Citigroup Inc. and Standard Bank Group Ltd. sold $68.6 million of notes, the most tied to the country’s debt since the $76.4 million issued in May 2011, according to data compiled by Bloomberg.

Investors seeking higher yields amid near-zero interest rates in the U.S. and the euro area are turning to the largest former Yugoslav republic, where the government is focusing on external debt markets to raise funds, reducing the supply of local currency debt. The Balkan nation is also seeking a new loan agreement with the International Monetary Fund to increase economic stability.

“Suggestions that talks with the IMF and EU will be back on track in 2013, as well as the high yields in comparison to other countries in the region and the scarcity of local assets all add up to buying notes linked to Serbian dinar local debt,” said Aaron Gregory, an emerging markets credit trader at Citigroup in London.

Serbia’s Finance Minister Mladjan Dinkic said in September he wants to cut state borrowing in the home market to avoid crowding out the private sector and look to foreign funds to plug budget holes and repay debts. The country will seek as much as $3 billion in funds from abroad in 2013, Dinkic said on Jan. 15.

Citigroup Sale

Credit-linked notes, which tend to have higher yields and tailored maturities that may not be available in the bond market, could prove attractive given the shortage of local currency bonds, Citigroup’s Gregory said.

The third-biggest U.S. bank by assets sold 1.65 billion Serbian dinar ($19.8 million) of five-year notes that pay a 10 percent coupon and were bought at a 9.9 percent discount to par, Bloomberg data show. The coupon and redemption amounts are paid in euros.

Standard Bank issued $34.9 million of notes tied to Serbia. Africa’s biggest lender raised $21 million via three offerings on Jan. 18 linked to Serbian treasury bills that mature in April.

Serbia is seeking a new IMF loan deal to shore up confidence in government policies after the fiscal deficit reached a record 7.2 percent of gross domestic product in June. The government has repeatedly said it won’t seek IMF cash, only a standby loan program.

Investors in credit-linked notes suffer losses if the bank issuing the securities or the reference entity defaults.