Slovenia Credit Rating Cut to Junk by Moody’s
By SERENA RUFFONI And PRABHA NATARAJAN
Slovenia was wrapping up a successful sale of five- and 10-year dollar-denominated bonds when it announced it was calling off the deal. A little over an hour later, Moody’s said it was cutting Slovenia’s sovereign rating to Ba1 from Baa2, downgrading the country to below-investment-grade status.
“This is pretty rare. I’ve been doing this for a long time and I don’t remember this happening before” said Paul McNamara, investment director at London-based GAM, which manages about $53 billion.
The government said it would proceed with the bond issue. However, Slovenia will likely see higher borrowing costs, some investors said. Now that its bonds are rated junk, they will be off limits to investors that buy only investment-grade debt. Slovenia’s 10-year bond yielded 5.847% on Tuesday, compared with 5.69% a day earlier. Yields move inversely to prices.
Before it was halted, the bond sale was proceeding well, with orders amounting to $6 billion, according to people familiar with the deal. Slovenia was looking to issue up to $3 billion between the two bonds. The country had marketed a five-year bond with a yield likely to be about 5% and a 10-year bond at about 6.125%.
Moody’s said it was concerned about Slovenia’s undercapitalized banking sector and deteriorating government balance sheet. There was no immediate trigger for the downgrade, said Yves Lemay, managing director for Europe-Middle East-Africa sovereigns at the ratings firm. Moody’s followed its usual procedure of informing Slovenia’s government before publicly announcing the downgrade.
Moody’s also cited an “”uncertain funding environment” as contributing to the downgrade. “Despite the recent success, the sovereign’s cost of funding remains elevated and sensitive to financial market confidence” Moody’s said.
The downgrade echoed the concerns many investors and analysts have had about Slovenia since Cyprus, another small euro-zone state, obtained a rescue deal from international creditors in March. Slovenia was seen as a potential next bailout candidate. Its 10-year government bonds yielded about 7% at the end of March, prompting fears it would need outside aid to finance itself.
But those fears eased after a treasury bill sale and buyback went smoothly this month. Some analysts said the downgrade isn’t likely to dissuade many investors when it attempts another sale. Slovenia “may get away without too much downgrade damage,” said Gabriel Sterne, an economist at Exotix Investment Bank.