Slovenia borrowed $3.5 billion on international markets on Thursday to shore up its ailing banks and stave off a bailout, bouncing back to finish an issue it had aborted two days earlier after Moody's cut its credit rating to junk.
The bonds will fund Prime Minister Alenka Bratusek's government at least until the end of the year and give it time to pursue unpopular cost cuts and the long-delayed sales of some of the state firms that make up around half of the economy.
However, the issue could prove a mixed blessing for the tiny euro zone state of 2 million people, as it may actually reduce the pressure on Bratusek's four-party coalition to enforce reforms quickly, analysts said.
"This is a short-term positive; it buys time, but the government cannot rest on its laurels. We need to see an ambitious reform model, and Slovenia needs to change its whole economic model," said Timothy Ash, an analyst at Standard Bank.
Following the chaotic rescue of fellow euro zone member Cyprus, Ljubljana had fallen under intensifying pressure from investors who raised the tiny Alpine nation's borrowing costs close to unsustainable levels last month.
But in a sign of confidence - and thirst for yield - investors offered bids totalling more than $16 billion for the issue, according to the Thomson Reuters market service IFR, allowing the finance ministry to pay less than initially envisaged despite Tuesday's two-notch ratings hit.
Slovenia sold $1 billion in five-year, 4.75 percent coupon bonds to yield 4.95 percent and $2.5 billion in 10-year, 5.85 percent coupon bonds to yield 6 percent, cheaper than initial price guidance of 5.125 percent and 6.25 percent.
Slovenia's 10-year benchmark was bid at 5.918 late on Thursday, while the 6 percent yield on the bond was above Spain's 4.041 and Portugal's 5.734, according to Reuters data.
"If anyone had any doubts about the investors' thirst for yield, this is proof," said RBS Analyst Abbas Ameli-Renani. "A country that was being compared to Cyprus only a month ago received demand for its bonds almost equivalent to a third of its GDP."
Bratusek will unveil her stability programme on May 9. It will then be reviewed by the European Commission.
At the top of her to-do list is the need to heal the three state-owned banks that dominate the country's lending sector and carry the lion's share of the sector's bad loans, which amount to about 20 percent of Slovenia's annual output.
It must also try to squeeze a rising budget gap without driving the economy deeper into its second recession since the start of the global economic crisis in 2008.
But Bratusek's coalition of pro-market and leftist parties has shown signs of softening on reforms, delaying talks on the euro zone's fiscal "golden rule", requiring cuts to the deficit.
It has also postponed the announcement of a comprehensive plan to sell state assets - something Slovenia alone among former Communist countries has refused to do since its 1991 independence.
Otilia Simkova, an analyst at Eurasia group, said the debt issue had bought time but had not completely ruled out the prospect of a bailout, as big financing needs next year would require Ljubljana to buckle down.
"Estimations are that Slovenia will need 5.7 billion euros next year, and by that time the government will have to convince the markets that it is trustworthy, if it wants to avoid facing the spectre of a bailout," she said.
Bond Sale a Mixed Blessing?
Slovenia delayed the bond sale on Tuesday after Moody's cut it to Ba1 from Baa2, but on Wednesday said it would proceed.
The downgrade followed weeks of criticism from investors, European Union officials and analysts that Bratusek's cabinet had been too slow in revealing details of a bank clean-up and austerity measures they say are required to shrink a budget gap swollen by recession.
Saso Stanovnik, an analyst at Ljubljana-based Alta Invest brokerage, said the government would have looked more credible by unveiling its reform and privatisation agenda before tapping the international markets.
"This way there is a risk that reforms might not be as fast as needed as the government might not feel pressure strong enough after having raised funds. So, the implementation of reforms could be slower than what would be hoped for," he said.
In explaining its rating cut, Moody's said bad loans in the two main banks, Nova Ljubljanska Banka and Nova Kreditna Banka Maribor, had reached 28 percent. The entire lending sector's non-performing credits total around 7 billion euros.
The government has suggested it may sell one of the three main banks, NLB, NKBM or Abanka Vipa, this year.
But it remains unclear when and at what price the sale could take place, or whether the government plans to retain a controlling stake, which could deter potential investors.
Another major rating agency, Standard & Poor's, told Reuters on Wednesday it still viewed Slovenia as an investment grade country and was "broadly confident" the government would implement reforms and overhaul public finances.
BNP Paribas, Deutsche Bank and JP Morgan are the leads on the 144A/Reg S transaction.