UPDATE 2-Iceland's Arion Banki puts senior bond on ice

Thu May 1, 2014 9:21am EDT

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By Helene Durand

LONDON, May 1 (IFR) - Iceland's Arion Banki has put a euro bond issue on hold after investor feedback on pricing did not match its expectations, a setback for what was expected to be the last stage in the European banking sector recovery.

The bank mandated Citigroup, Deutsche Bank and Nomura to arrange an investor roadshow in the middle of April, saying that a euro-denominated senior unsecured deal could follow. That roadshow concluded on April 25, and while there was a deal on the table for Arion, the price was more than it wanted to pay.

The issuer will now monitor the market and could decide to bring the deal back if levels match its expectations. This is a blow for the bank, and for the country, as the transaction could have opened the door for other Icelandic lenders and more regular funding by the sovereign.

Only this week, Islandsbanki was assigned a BB+ rating by S&P. The bank was created in October 2008 when it acquired more than ISK900bn (about 5.8bn) in loans - originally valued at a 47% discount - from the estate of Glitnir Bank.

"The pricing was slightly outside what Arion Banki was willing to accept and the issuer has decided to take a step back and will monitor the market," a banker said. "Arion Banki has alternative sources of funding and a maturity profile that is extremely long and therefore does not need to come to market now."

He added that investor feedback otherwise had been solid and that the trade had received good traction during the roadshow.

The transaction from the issuer formerly known as Kaupthing Bank would have been its first wholesale deal in a major currency in six years and a stern test of investor appetite for risky bank debt.

Having let its banks fail in 2008, the country is still facing several law suits, and that could have played a part in investor sentiment towards the credit. Many accounts have stopped covering the country's banks and the deal would have been relatively small, which could also have impacted pricing.

Arion, rated BB+ by S&P, houses all of Kaupthing's domestic assets, and according to its January 2014 investor presentation has a Core Tier 1 ratio of 19.5% - a level that would typically put investors at ease.

However, an investor said the deal size was expected at 200m-300m - small for the market, but sizable in the context of Arion. "It's big given their balance sheet is only 6bn and they make a small profit a year," he said.

While no official guidance had been released, the leads were looking at various data points, including where Iceland is trading and where peripheral banks tend to price versus their sovereigns.

Iceland has two dollar issues. Its 2016s were trading in the high 100s over swaps, while its 2022s were in the low 200s. As a broad rule, peripheral banks tend to trade around 100bp back of their sovereign. That would have put fair value around the low 300s, although Iceland deals are in dollars and euros would be tighter. (Reporting by Helene Durand, editing by Julian Baker)

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