5 Min Read
* Arion to sell first euro senior bond since Iceland banking collapse
* Painful memories haunt investor community
* Bankers hope for regular market access for Icelandic banks
By Aimee Donnellan
LONDON, April 17 (IFR) - Iceland's Arion Banki is to provide an even greater test of investor appetite for risky banks than recent deals from Greece as it plots its first wholesale market funding in a major currency in six years.
The bank was formerly known as Kaupthing Bank, a name that triggers memories of bank failures, burnt bondholders and legal wrangling.
Several law suits still hang over the country, which was bold enough to let its banks fail in 2008, unlike Ireland, Spain and the UK.
The timing of the euro senior bond could prove to be ideal. Troubled peripheral credits like Greece's Piraeus, rated Caa1/CCC/B-, have taken full advantage of investors' hunt for yield. And Arion may even go head to head with National Bank of Greece which is planning its own euro bond offering in the coming weeks.
"This is the last piece of the European puzzle," said Tommy Paxeus, head of Nordic FIG DCM at Deutsche Bank.
"The country's banks still have some minor legacy issues but looking at the credit quality and capital levels Arion is a very strong bank."
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.
If the bank is successful, it could open the door for other Icelandic lenders and more regular funding by the sovereign.
But investor scars run deep and getting them on side could be tricky.
"For many investors the memories of the collapse of the system will be too vivid," said Neil Williamson, head of EMEA credit research at Aberdeen Asset Management.
"There is also an on-going dispute between the UK and Dutch governments and the Icelandic deposit guarantee fund about the cost of the Icesave depositor guarantees, so it maybe has further to go in its redemption in the minds of investors than some countries."
The planned size of the Arion issue is not yet clear, but investors may be put off by the small size of Iceland's banking system where each bank has around 6bn of total assets. This means that its banks may not issue in benchmark size, making them a no-go for the bigger investors in the European bond market.
"Some investors may struggle with the limited size of Iceland's banking system in a European context. Others will be emotional about what happened during the crisis," said Paxeus.
"That said, there are a number of sophisticated investors that have been following Iceland's banks, understand the compelling investment case and will be looking to support them in their re-emergence."
The timing of the deal coincides with the final sign-off of European Union laws that will make it easier to apply bank bail-ins. This tool will ensure that bondholders and even large depositors face losses when banks fail.
Iceland's financial system crashed in 2008 during the credit crunch that followed the collapse of Lehman Brothers, leading to the full-scale nationalisation of the country's banks.
But it refused to bail-out bank creditors. Outside Iceland, more than 500,000 retail depositors found their accounts frozen, which led to diplomatic disputes. Payments on Icelandic bank debt were stopped - except on the covered bonds of Glitnir and Kaupthing.
All of this kept the country's lenders out of the public market since the crisis, forcing them to rely on government funding.
But in the past year banks have edged their way back. Arion sold a NKr500m (60m) three-year senior unsecured bond in February 2013 that offered investors a coupon of three-month Nibor plus 500bp.That has since rallied by nearly 200bp, according to a banker.
Islandsbanki soon followed Arion and issued a SKr500m (54m) four-year FRN in December that it tapped in March for another SKr300m. The tap came 70bp tighter than where the original bond priced. "We are unlikely to see a flood of issuance from the country, but I think we will get to a stage where the sovereign is a reasonably frequent issuer and there are a couple of transactions per year from the banks," said Deutsche's Paxeus.
Reporting by Aimee Donnellan; Editing by Alex Chambers and Matthew Davies