Iceland’s Arion eyes landmark euro senior unsecured issue

Apr 17th, 2014

Arion Bank, the successor to Kaupthing Bank, is poised to become the first Icelandic bank to tap the euro senior unsecured market since the collapse of the country’s banks in the financial crisis, a move that the issuer’s CFO said the market is ready for.

Arion banki hus logo webArion has mandated Citi, Deutsche and Nomura in connection with a deal-related roadshow that starts next Tuesday (22 April). A subsequent transaction would be the first euro senior unsecured benchmark from an Icelandic bank since 2007, before the collapse of the Icelandic financial system in October 2008.

Stefán Pétursson, chief financial officer at Arion Bank, said that a euro senior unsecured transaction is “the next logical step” in the issuer’s long term strategy, after it began selling covered bonds domestically in early 2012 and in February 2013 sold an unrated but listed Nkr500m (Ikr9.36bn, Eu60.7m) three year senior unsecured issue.

A rating from Standard & Poor’s, BB+, in January this year was another important development paving the way for the issuer to approach the euro market, according to Pétursson.

“We feel that the development of our bank is such that we are now ready to come to market and have people evaluate what we have done and are doing for our business,” he told Nordic FIs & Covered. “We also believe the market is ready for an Icelandic issue.

“When you look at developments elsewhere in the periphery you can see that investors’ risk appetite has increased and spreads are continuing to narrow.”

For example, Piraeus Bank in mid-March became the first Greek bank to return to the public bond market since the bail-out of the sovereign, while Irish, Italian and Spanish banks have typically met with strong demand for new issues.

Arion is a commercial bank that was created out of the default of Kaupthing Bank in 2008, and is owned by the creditors of Kaupthing (87%) and the Icelandic government (13%). Kaupthing’s senior unsecured creditors faced losses on their bonds, but payments were maintained on covered bonds issued on a contractual basis by Kaupthing.

Indeed, covered bonds — now legislation-based — were the first wholesale funding instrument to be tapped by an Icelandic bank since the financial crisis, with Íslandsbanki in December 2011 selling a Isk4bn (Eu26m) inflation-linked issue to domestic institutional investors.

Arion is mainly funded by deposits, which stood at Isk500bn as at 30 September, and has longer term, mainly foreign currency funding from the Icelandic government and the central bank, according to Pétursson.

S&P considers that Arion operates in a high risk environment but benefits from a strong capital position, with the risk-adjusted capital ratio projected to approach 11.5% at the end of 2015, ample liquidity and a largely restructured loan book. Its funding is “average”, according to S&P, noting the risk of foreign currency and domestic deposit outflows but the potential for the bank to obtain other types of stable funding considering moderate asset encumbrance of around 20%.

Arion’s roadshow will visit London next Tuesday and Wednesday, Helsinki and Stockholm on Thursday and Copenhagen on Friday, according to a banker at one of the leads.

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