Issuer: Eesti Uhispank (Union Bank of Estonia)
Amount: Dm350 million
Programme launched: June 2 1997
Arranger: Chase Manhattan
When the Asian currency crisis spilled over into the rest of the world’s emerging markets, bankers agreed on one thing: borrowers from many regions could forget about new Eurobond issues for the rest of the year.
Europe’s Baltic states were badly hit. In Estonia, the leader of the Baltic pack, the Tallinn Stock Exchange lost more than 40% of its value between the end of August and the beginning of November. Debut Eurobonds from leading financial institutions Hansabank and Hoiupank were put on hold.
Calm sits in the eye of a storm. And in the middle of the Baltic maelstrom, Eesti Uhispank – Union Bank of Estonia (UBE) – quietly went out and issued over $100 million of privately placed Euro-MTNs.
Few can now doubt the wisdom of the bank’s decision to set up a programme in June this year, although at the time even vice-president Margus Schults was uncertain whether it would succeed.
This is half the explanation for the initially modest programme ceiling of Dm100 million ($58.1 million). The other half is the bank’s inaccurate funding forecast. It is a miscalculation about which Schults is understandably sanguine. “In our initial funding forecast we didn’t estimate such a big growth rate,” he says. “Compared to amounts we had raised previously, Dm100 million seemed like a significant amount, and we wanted to be realistic in our goals.”
Much of the growth resulted from the bank’s merger with the North Estonian Bank, the fifth-largest bank in the country. “We expected synergies to start working during the first quarter of 1998, but they began to work much earlier, during the second half of 1997,” says Schults. Volumes of business grew, as did profitability. It became clear that the Dm100 million the bank expected to be sufficient until March 1998, would fall way short of its needs. At the start of October, just five months after signing, the programme ceiling was raised to Dm350 million.
As the Estonian kroon is pegged to the Deutschmark at a rate of eight to one, the bank had initially set out to focus on Deutschmark issues that wouldn’t need swapping. “But that market was somewhat limited in terms of investors,” says Schults. Since the programme increase, UBE has made its first forays into dollars in an attempt to widen its investor base.
According to Schults it is a policy that is set to continue. “We definitely want to expand into new markets, maybe into Asia,” he says. The bank may also alter its borrowing style, hoping to do its first large, benchmark transaction in the near future, either in dollars or Deutschmarks.
This emphasizes the fact that UBE’s approach to the market has reversed the accepted wisdom that says a programme should be inaugurated with a benchmark, and then progress to private placements. Since the first issue off the programme – a syndicated, Dm30 million FRN that can hardly claim benchmark status – UBE has stayed in the non-syndicated market.
Schults doesn’t agree that UBE has come to the market back-to-front. “Perhaps the small deals were a bit more expensive than they needed to be, but it created more knowledge of our name in the market. On every small deal we have done, the margins have come down. That suggests that if we had started with a benchmark, the level would have been unrealistically high.”
He suggests that it is only because of this strategy that UBE has been able to access the markets during the recent volatility. “We could do these deals mainly because we already had the programme in place. Investors know us already, and we have proved that we are a reliable partner. Even now we are receiving reverse enquiries on the Euro-MTN programme.”
While dealers express surprise that UBE has continued to borrow in such uncertain market conditions, they suspect that the situation is not as rosy as Schults would have them believe. “To be honest, I don’t think that they’ve overcome the problems,” says one dealer. “They know they need funding and that the market isn’t looking good. They’re just picking and taking what they can.”
Another suspects that the situation regarding Estonian borrowers is complicated by the lack of liquidity in the domestic banking market. “Perhaps they have had to turn to the international market while others have been able to batten down the hatches and stay at home,” he suggests.
These reservations aside, consensus is that the programme has given UBE definite advantages over its peers. “If you are a small borrower in absolute terms, it’s a big advantage to have an MTN programme,” says one dealer closely involved in the UBE programme. “You don’t need to wait until you’ve got the critical mass to issue a Eurobond.”
The bank started to consider setting up a Euro-MTN programme in December 1996. It had just completed its second privately placed Eurobond issue in three months, both through Chase Manhattan. The bank realized that, if it was going to continue funding in this piecemeal manner, it would be far more cost-efficient to set up an MTN programme.
For Estonian banks, a major problem is that deposits are predominantly short-term, mostly up to a year, and yet there is growing demand for long-term loans. In order to expand their maturity profile, the banks therefore need to look for international funding.
While some of its competitors looked to the syndicated loan market, UBE saw bonds as a more efficient method of borrowing in the long term. It talked to a number of banks about the possibility of setting up an MTN programme, and found their response very positive. “They had been expecting something from Estonia for a long time,” says Schults. The programme was signed in June this year, with Chase Manhattan as arranger.
Something Schults had observed from the syndicated loan market was that the smaller the size of transaction, the more important the level of fees became. He points out that, by setting up a programme, fees have been “reduced to the minimum”. The advantage of being able to tailor trades to suit investors’ requirements is that the risk for the underwriter is virtually removed, with fees being reduced accordingly.
The other main aim of the programme is to enable the bank to expand its maturity profile. “This is a step-by-step process,” says Schults. “We have to be careful, and make sure that we educate investors.”
The price UBE had to pay for accessing the market in recent weeks was that it had to reduce the maturities on two dollar notes to three and six months. It had previously gone out to five and seven years in Deutschmarks.
Despite this, Schults is very satisfied with the programme’s progress. In retrospect, he is sure that the bank could have come to the market earlier: “I don’t know why we waited so long,” he laughs.
