By Zoran Radosavljevic
ZAGREB (Reuters) - Slovenia still plans to raise funds through an international bond, it said on Wednesday, despite a credit downgrade prompted by fears the euro zone country will need a bailout.
Moody's rating agency cut Slovenia's rating two notches to Ba1, or 'junk' on Tuesday, just as books were being filled with investor bids for two dollar-denominated issues.
However, rival agency Standard & Poor's said on Wednesday it still viewed Slovenia as an investment grade country and was "broadly confident" the government would overhaul its finances.
Moody's cut reflected concerns that some 7 billion euros of bad debts in state-owned Slovenian banks will force the ex-Yugoslav republic to follow Cyprus in seeking aid.
Slovenia appeared to shelve the bond issue after the rating announcement, and a Slovenian market analyst said the confusion had further eroded the government's credibility.
But an investor following the deal told Thomson Reuters market service IFR: "Most of the investors are staying in the deal and are not rating sensitive. At the end of the day, Slovenia will still be rated the same as Ireland, and above where Portugal is."
Slovenia's finance ministry said in a statement: "After Moody's downgrade of Slovenia, the issue of the U.S. dollar bond is not dropped and will continue. Due to the U.S. regulations related to the bond issues, we cannot provide further details."
The investor told IFR that Slovenia was expected to "bring the deal to the market tomorrow".
A successful issue could buy Slovenia time, at least until the end of this year, to start clearing the banks' portfolios and selling some state assets.
S&P's lead analyst on Slovenia, Kyran Curry, told Reuters: "I think lessons have been learnt by the new government ... We're broadly confident ... that they will move to consolidate the fiscal position."
S&P rates Slovenia A-, four notches into investment grade, with a stable outlook, as does the other main agency Fitch.
However, data monitor Markit said that credit default swaps, which bondholders use for protection against default, already price in a junk rating for Slovenia's debt.
Andraz Grahek, an analyst at Capital Genetics consultancy, said: "The problem for the government is they have lost credibility across the board."
The downgrade followed weeks of criticism from investors, European Union officials and analysts that Prime Minister Alenka Bratusek's government has been too slow in revealing details of a bank clean up and austerity measures they say are required to shrink a budget deficit swollen by recession.
"They need to establish exact capital needs for the banks. This is now being second-guessed by a lot of people," Grahek said.
A government bond portfolio manager told IFR Slovenia had "$12 billion of orders for a $3 billion issue - it would have taken care of all Slovenia's debt needs for the next 12 months".
Yield guidance for five- and ten-year dollar denominated bonds was around 5 and 6.125 percent, according to IFR.
(Reporting by Igor Ilic and Zoran Radosavljevic in Zagreb; Additional reporting by John Geddie of IFR; Editing by Ruth Pitchford)
