Nova Ljubljanska banka made a remarkable return to the Tier 2 market on Monday, finally getting a 10-year non-call five deal over the line at the third time of asking and just days after its most recent failure.
The Slovenian lender landed a €225m note at a yield of 11% via sole lead Bank of America, with the US bank underwriting the trade. Bank of America, together with NLB itself, which was co-lead manager, "worked on the basis of an execution strategy which removed any potential execution risk associated with the transaction", said NLB in a statement.
Pricing on Monday's deal, the 11% yield and a 10.75% coupon, was set from the start, ensuring investors had some certainty about the terms. The size target was a minimum €200m, which was surpassed, though the amount raised was €75m less than how much NLB had hoped for when last week's mandate was announced.
"It attracted more investor demand and resulted in a significantly higher issued amount than in the first attempt last week," Archibald Kremser, chief financial officer at NLB, told IFR. "With the new strategy used we were also able to almost immediately return to the market, which investors perceived positively."
Books on Monday's trade were about €300m, including lead interest, without specifying the amount. Demand came from 44 investors, including international, regional and domestic accounts, made up of fund managers, international financial institutions, banks and insurance companies.
The 11% yield injected enough momentum to get the trade over the line, raising the question of whether starting at around the same level last Thursday would have enabled NLB to raise the amount it eventually did but at a tighter price, or even reach its full €300m target.
Instead, its attempt on November 17 fell apart after pricing began at 10.25% area. NLB launched a €120m deal (downsized from an initial target of €300m and then €200m–€300m) at 10.25%, before pulling it. Demand had reached €200m. That deal had four bookrunners: Bank of America, Erste Group, JP Morgan and NLB.
Although NLB was finally able to put the Tier 2 to bed and conclude its efforts for the year, to diversify and strengthen its capital base, the hurried return to market raised eyebrows.
"NLB went out; they tested it; it didn’t work," said a banker away. "Clearly, they need the money in the door, hence they came back 48 hours later, having removed two banks, keeping the third, and going with a wider [yield]. I do think we’ll see more of these types of trades, where smaller issuers just have to go for it and put an eye-watering number on it."
Kremser had told IFR following the postponement that the bank had plenty of time, and the option to issue seniors, for meeting its MREL targets. But NLB remained interested in Tier 2, given what it would provide in terms of funding growth options, supporting senior ratings and preparing for call dates. NLB is rated BBB by S&P while the Tier 2 is expected to be rated BB.
As for pricing, some investors certainly found the 11% level attractive compared to the previously floated 10.25% area.
"Given that the bank is a leading financial institution in Slovenia and other Balkan countries, maintains solid operating and capital metrics, and is in need of MREL-eligible securities in order to maintain portfolio growth, we see credit risk as low, and an 11% yield-to-call, even for a subordinated bond, is an attractive level that offers nearly equity-like return but with guaranteed coupon, unlike dividends that could be postponed," said Kasparas Subacius, fund manager at CEE investment firm INVL Asset Management.
In contrast, he said about last week's terms: "Although 10.25% yield-to-call might have seemed like an attractive return in absolute terms, another [NLB] 2030 subordinated issue was offered at the same level, so there was not enough new issue premium to get [the] bond off the ground."
The bank had originally sought to do the trade in January via JP Morgan and itself but that attempt never came to fruition.