The euro medium term note market spent the opening of 2013 in the shadow of syndicated public deals. One of the busiest Januaries in years meant many issuers were sitting on 20% of their funding programmes by the end of the month, according to syndicate bankers, helped in no small part by a return of investor confidence in the eurozone.
The buyside has also focused on the liquidity offered by public deals, further hampering demand for EMTNs. EMTN volume for SSAs stood at $25.1bn for the first two months of the year, down from $38.0bn during the same period in 2012, according to Dealogic.
Tight spreads have also reduced flows in short dated floating rate notes, a mainstay of the EMTN market. But that has created opportunities elsewhere.
"Early last year there were a lot more short-dated SSA floating rate notes at Euribor/Libor positive spreads," says Toby Croasdell, director, MTN syndicate at Barclays.
"Now it’s harder to get a meaningful spread above Libor unless you swap into a different currency. This has aided flows in non-core currencies, where you get a pick-up from the basis, like the Norwegian krone or Kiwi dollar, but not every issuer can do that."
Some investors have even looked down the credit curve in foreign currencies, but healthy demand for top rated SSAs will remain, according to Amaury Gossé, MTN director at Citi.
"The foreign currency game is very much alive," he says. "We have seen a move away from SSAs into corporate issuers over the last 12 months but there are still a lot of investors that don’t want the credit risk when making a foreign exchange play."
Aside from foreign currency opportunities, the dearth of yield in the short end has been favourable to EMTN demand in other forms.
Money market funds and other traditional buyers of ECP, faced with ultra-low and in some cases negative yields on top rated SSAs, have moved down the maturity curve to EMTNs.
"Historically short term buyers have moved out to 18 months to try to get a pick-up," says Fergus Kiely, head of EMTNs at RBC Capital Markets. "That’s meant increased EMTN flow at the expense of ECP."
Going longer even at the long end of the curve has also been a feature. Taiwanese life insurance firms’ love of long dated callable zeros in dollars has been one of the biggest sources of business for EMTN dealers in the past and, with yields falling, some issuers and investors have been willing to look beyond the traditional limit of 30 years.
"With spreads tighter and volatility lower than during the last year, one of the tricks is to go longer to get yield on callable zeros," says Citi’s Gossé. "It hasn’t been a big trend but we have seen it on occasions."
The move longer has also happened with euro denominated callable zeros, although some European investors have stricter limits than others.
"German and Taiwanese life insurance firms are happy to go long to get the extra yield," says Gossé. "Their French and Italian peers usually have restrictions though so are unable to extend tenors as far."
However, in general investors looking for increased yield have opted for a move down the credit curve, away from lower yielding supranational names to Scandinavian agencies or German states, according to Barclays’ Croasdell.
Low yields have also diverted some flow away from SSA issuers to other sectors, although there is always a place for the higher credit quality names.
"Investors are looking down the credit curve to top rated financials but they will also buy SSAs to get an average yield that works for them," says RBC’s Kiely.
The resilience of callable zeros has not been matched by other structured deals, particularly the most bespoke products.
"Structured volume is still pretty lean, apart from the straight callables which are a fairly commoditised product," says Barclays’ Croasdell. "There have been a handful of range accruals recently, so there are bits and pieces, but it is not a major flow like it used to be."
Investors’ reluctance to buy anything exotic, coupled with a lack of dealer appetite for adding complex risk to their books, is behind the stagnant flow, according to Citi’s Gossé.
"That hurt them too much in the past," he says.
Big in Japan
However, one investor base that has been happy to buy structured deals this year has been Japanese retail through the Uridashi format.
"There has been decent Uridashi volume this year and there have been quite a few structured deals," says Barclays’ Croasdell.
The trend contrasts with the early part of 2012 when there were large flows of vanilla Uridashi. Investors had looked at credit risk for yield enhancement — an option not available now.
"That’s probably driven by outright yields in Japan remaining low, as they have been for a long time, but importantly the basis swap from euros is very negative and credit spreads are so low that vanilla Uridashi looks less appealing — you need to do structured," says Croasdell.
"The combination of tightening credit spreads, moves in the basis and lower yen rates have left vanilla deals looking less appealing. There has been a reversion to slightly more structured, with equity-linked being more favourable."
Kommunalbanken has been one issuer that has benefitted from this shift, according to Citi’s Gossé. However, the nature of the structure means it is not an option open to many.
"It is not going away but it is usually very short funding — either auto callable or reverse convertible with short maturities," he says. "So issuers have to be flexible to do an equity-linked trade with a short call notice. This means that this business is restricted to a smaller number of issuers."
Even vanilla Uridashi might not be an avenue for issuers without experience in the market, according to RBC’s Kiely.
"It’s name recognition out there — SSAs that have done the work will see the rewards," he says. "Uridashi is all about good quality SSAs or financial credits known in the region with a good rating."
While breaking into Uridashi might be a challenge for some new issuers, the same is not true for private placements in general.
In the past year a handful of French local authorities have sold private placements for the first time, either using standalone documentation or EMTN programmes, while central and eastern European sovereigns have also been busy over the past few months.
"I’m sure there will be more demand for CEE paper as we’ve already seen Poland active in Schuldschein this year and Slovakia has placed a couple of EMTNs," says Barclays’ Croasdell.
"It’s one of the places where investors can find a bit more spread. Similarly with the French regions — if they pay 50bp or so over the sovereign that’s enough for investors to do the work and look at the name, even if they are comparatively small borrowers with no benchmarks outstanding. Clearly the domestic and international bid for some of those names is very strong."
These new sources of supply may even come from further afield than Europe.
"More and more different names are entering this sector, both existing non-European borrowers looking at the European market, or regional European names issuing directly. There has been a continual creep of new issuers because more and more are looking to the capital markets for their funding needs," says Croasdell.
"Our market always remains receptive to these new borrowers and many are getting a good proportion of their funding done in MTNs."
Even existing borrowers that are finding favour with public deals are unlikely to cut back drastically on EMTN issuance as they seek to maintain relationships.
"The public market is very buoyant and issuers are able to get good sized deals away, but many of them have done a lot of work with MTN buyers and they know they need to keep servicing them," says RBC’s Kiely.
"Even if they’ve just done a five year dollar global for example there may be an investor in the UK looking to put sterling to work and an MTN offering may service this."
For some of the most regular capital markets issuers, a healthy mix between public and private deals is crucial.
"We are open every day for taps and private placements," says Rodrigo Robledo, head of capital markets at Instituto de Crédito Oficial in Madrid.
"The demand for private placements is more down to investors than for the issuer. We respond to reverse enquiry. A lot of investors prefer the liquidity of benchmark deals but private placements, either taps or new issues, allows them to be flexible. They’re very advantageous for us as they usually price well through secondaries. Our funding is 50:50 private placements and public deals."
For the rest of the year and beyond, the relationship between EMTNs and syndicated deals is likely to become ever more important.
"There has been a blurring between MTNs and syndicated deals," says Kerr Finlayson, director of SSA syndicate at RBC Capital Markets in London. He points to club-type trades, with small groups of investors, something the European Investment Bank’s E-Coop programme has taken advantage of.
"They were initially aimed at a slightly smaller retail investor universe," he says. "However, such was the demand and success, EIB’s EARN benchmarks were put on the sidelines last year because of the demand for these smaller bespoke products."
Even classic vanilla EMTN products such as short dated floating rate notes have now become a liquid and sizeable part of some issuers’ programmes, according to Finlayson.
"Scandinavian issuers, such as KommuneKredit and Kommunalbanken, have done a significant amount of this — to the tune of billions —and now have liquid FRNs which rival classic fixed rate benchmarks," he says.
Those large deals offer more reverse enquiry opportunities.
"There have been strong flows in syndicated sterling and dollar deals, mainly one to four year floating rate notes," says Citi’s Gossé. "That’s driven by big investors like central banks, a few large funds and some bank treasuries. They’d rather buy liquid securities. But we can tap those deals — the appetite from investors is there and many issuers are open to these MTN-style taps. With most issuers, euro short dated FRNs do not provide coupons attractive enough to investors, while sterling and dollar issues can still price above Libor."