Slovenia Rating Cut to Junk by Moody’s as Bond Sale Delayed

Slovenia’s credit rating was cut to junk by Moody’s Investors Service, forcing the government to delay its first international bond sale this year, intended to to ease a financing crunch and avoid an international bailout.

The Finance Ministry yesterday 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 assess Slovenia at A-, the fourth-lowest investment grade.

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 an economic recovery. A detailed overhaul plan is set to be presented to the European Commission in Brussels by May 9.

“The history of the Slovenian capital markets in 2012 and 2013 reads like a crime story with unexpected twists and turns, like the downgrade in the midst of a bond sale,” Lutz Roehmeyer, who helps oversee $13 billion as a fund manager at Landesbank Berlin Investment in Berlin, said yesterday by e-mail. “There is a small fundamental problem but with these kind of incidents the risk that somethings goes wrong and Slovenia has to be bailed out externally increases.”

Yields Rise

The yield on the government’s dollar note due 2022 fell 4 basis points to 5.71 percent at 12:35 p.m. in Ljubljana, after climbing 11 basis points yesterday. It peaked at 6.38 percent on March 27. Markets in Slovenia are closed today and tomorrow for national holidays.

The initial market reaction “will be faded, as Slovenia is already trading as a sub-investment grade credit,” Abbas Ameli-Renani, an emerging-markets strategist at Royal Bank of Scotland Plc in London, wrote yesterday in an e-mailed note. “We expect the sovereign to return to the market soon, possibly within the next few days.”

Slovenia was offering five-year and 10-year dollar bonds, 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 10-year debt around 6.125 percent, the person said.

History Lesson

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.

Slovenia “expects the transaction to continue once additional information is available,” the Finance Ministry said in an e-mailed statement before the downgrade.

“Slovenia’s dollar bond issue transaction remains in progress,” Marjan Divjak, acting director general of the ministry’s treasury department, said today by e-mail. “Due to relevant U.S. legal restrictions on communications with the public for this type of transaction, the Ministry of Finance is not in a position to release any further comments at present.”

EBRD Role?

The European Bank for Reconstruction and Development may play a role in rescuing Slovenia’s troubled state-owned banks, EBRD President Suma Chakrabarti said in an April 29 interview, though the lender won’t make a decision before the government publishes details of how its plan to overhaul the industry. For the EBRD to participate, the state would have to reduce its role in the industry, he said.

“Loans or equity, we look at both,” Chakrabarti said. “It depends on what the plan of action is. We can’t really lend into a banking sector without seeing the framework of change. We would be interested provided the plans did shift significantly to private sector involvement.”

The three biggest banks -- Nova Ljubljanska Banka d.d., Nova Kreditna Banka Maribor d.d. and Abanka Vipa d.d. -- are government-owned or controlled and make up almost half the financial system. They have been buying sovereign debt as foreign investors stay away.

The government has injected about 1 billion euros into Slovenia’s three largest banks since 2008, according to data compiled by Andraz Grahek, a managing partner at Capital Genetics, a financial-advisory firm in Ljubljana. The country’s lenders will need an additional 900 million euros by the end of July, the government said last week.

‘Ongoing Turmoil’

A major factor underpinning the downgrade “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 late yesterday in an e-mailed statement from New York.

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.

Prior to the most recent bill offering on April 17, about 79 percent of this year’s sales were purchased locally, according to the Finance Ministry. The proportion for the latest sale was 71 percent, the nation’s securities-clearing company said.

Meanwhile, government debt has more than doubled since 2008, partly because of cash injections to keep banks alive. Those reciprocal money flows have reinforced the link between sovereign indebtedness and bank solvency that euro-region leaders vowed last year to break.