Despite the messy restructuring of Greek debt and the crisis intensifying for the single currency in the second quarter, the experience of 2012 so far has been positive for most sovereign, supranational and agency issuers.
However, the apparent ease with which much of the sector had been able to conduct funding doesnt apply to those issuers with the most pressing needs: those on the periphery.
The access of Spanish agencies has been brought into doubt by the problems facing their sovereign guarantor, and Italy itself which has historically had access to US dollar markets is, for now, reliant on funding in euros.
Even issuers in France and Belgium have been hit by the deterioration in sentiment as their borrowing costs have continued to rise this year.
Nevertheless, most bond market transactions have cleared although a number of accounts particularly the all-important Asian central banks have become more selective about adding to their European exposure.
This has resulted in a general increase in euro-based funding despite the presence of Middle Eastern and South American investors that have been more willing to build up their existing dollar portfolios.
Against this backdrop many issuers have been forced to adopt a pragmatic approach, one that has focused on investor demand rather than the economics of issuance.
Caisse dAmortissement de la Dette Sociale (Cades), the French state guaranteed social security agency, has found willing buyers of the 22.6bn of medium to longer dated debt it has sold so far this year but is mindful of the change in the dynamics in the market.
One of the changes considered by Cades was limiting the size of the deals it has brought to the market.
"We thought about limiting the size of our benchmark issues to 2bn at the end of last year. Although on at least two occasions we have found investor demand totalling over 4bn when we have been in the market, and have increased the issue sizes accordingly," says Philippe Noel, head of capital markets at Cades.
Another consequence for the issuers approach to the capital markets was in the way it handled deals internally.
"In the past we have sometimes chosen to pay in the swap market or sold Bund futures as a pre-hedge for our deals," says Noel. "However, as a result of the reduced appetite for European US dollar assets these days we are mainly reactive to demand for euros in particular from the more extensive investor base in Europe which is the main channel at our disposal for achieving duration."
Eila Kreivi, head of capital markets at the EIB shares a similar view.
"The EIB took the view that supply had to be tailored to meet demand and so far this year the demand has been there," she says. "This has enabled us to extend our duration by selling debt with final maturities of up to 30 years so far."
The ECB lifeline
Investors remain conscious that the benign conditions created by the European Central Banks offer of almost 1tr of funding at 1% through its long term refinancing operations were only temporary shelter from the eurozone crisis.
Much of the LTRO funding was used as a carry trade, which saw high yielding eurozone debt being bought up by banks. This resulted in peripheral spreads contracting sharply from the peaks that were reached in November 2011, although there were other factors at play.
"The ECBs action was probably not the only positive factor," says Ulrik Ross, global head of public sector DCM at HSBC in London. "In preparation for Basel III the banking industry was in the process of deleveraging at the end of 2011, which pushed spreads wider. In the first part of 2012 investors took advantage of this even before the impact of the second LTRO operation kicked in."
The apparent reluctance of the ECB to consider further such operations, and the pace at which European decision-makers are able to move towards resolving the crisis has led some to suggest that capital market conditions will get worse before improving.
Sean Taor, head of European DCM at RBC Capital Markets, points out the effect the LTROs have had on SSA supply. "As a consequence of the ECBs operations, market conditions were much more positive than many had feared at the end of 2011 and the result was a proliferation of shorter dated deals that had maturities which fell within or matched the expiry of the LTROs in 2015.
"With the ECB recently suggesting that the three year LTROs may not be repeated in conjunction with the extremely low yield environment at the shorter part of the curve, I expect to see stronger demand for longer dated assets."
"The result of the ECB action was a massive compression in SSA spreads during the first three months of the year as the risk environment improved significantly," says Dan Shane, head of SSA syndicate at Morgan Stanley.
Many issuers were quick out of the new year blocks, aware that market conditions could change very quickly for the worse. By the end of May, for example, KfW and the EIB had completed around 55% and 70% respectively of their planned 85bn and 60bn annual funding programmes.
Their strategy of heavy front-loading has unquestionably paid off the subsequent reversal in sovereign spread tightening that has occurred as a result of the political uncertainty surrounding Greece followed by concerns over the Spanish banking sector, has taken the gloss off the markets prospects.
"Spanish 10 year yields fell from almost 7% last November a psychological level that is regarded as unsustainable in the long term to as low as 4.85% after the LTROs were conducted," says Shane. "However, with the focus back on Spain once again, we have seen the rally in most asset classes come to a halt while the market waits for more clarity."
The pace with which the EIB tapped the markets at the beginning of the year led some to suggest that the issuer was planning to ultimately increase its funding target or that it expected conditions to deteriorate later in the year.
Kreivi rebuffs both of these suggestions. "Although we may have completed more funding than usual in the first quarter, we are where we would expect to be going into the typically quieter summer months although it is true that the market can close unexpectedly as has been the case in previous years," she says.
"But even if there is a possible increase in the EIBs capital, which will be determined by our shareholders most likely by the end of June, the effect of this will not be felt until the next fiscal year and we remain in a comfortable position currently."
Europes largest non-sovereign issuer, Germanys KfW, is also at a point it describes as comfortable although the credentials of the borrower probably give it more insulation than most from a market downturn.
"We continue to benefit from the backing of Europes strongest economy and as such enjoy the support of a wide cross-section of the international investors. For our euro funding that means sustaining the interest of bank treasuries among others, while in US dollars the role of the central bank community is pivotal," says Horst Seissinger, head of capital markets at KfW.
KfW started the year with clear currency targets and because of its rating and immunity to the negative headlines from Europe, it expects to adhere fairly closely to those targets.
"For an issuer of our size it is necessary that we retain access to all markets and all maturity segments," Seissinger says. "In addition it is more important than ever to ensure that new issue premiums reflect market conditions."
Uncertainty can be a positive
While the preservation of capital remains foremost in investors minds, the fact that the yields on shorter dated German assets at one point in June fell into negative territory can actually be seen as advantageous for issuers such as KfW that can offer a spread albeit a slim one over their sovereign. On June 1 the yield on two year debt or Schatz fell below 0%.
KfWs position is not unique though. The Washington based issuers such as the World Bank, the IADB and the IFC are also benefiting from the flight to quality bid.
The World Bank has completed $39bn of funding since its current fiscal year began on July 1, 2011, considerably more than its planned $30bn target.
"We took the decision to increase our funding as the market has remained receptive to our name and because of the cost of funding we are able to achieve we are able to generate a positive return on such pre-funding," said George Richardson, head of capital markets at the IBRD. "It is likely, however, that in the year about to begin we will revert to a programme closer to $30bn and hopefully as the situation in Europe approaches resolution the economics of being able to issue in euros will again become a possibility for us."
The World Bank has not sold euro denominated debt since 2009, when it issued a 10 year bond, because of the unfavourable cross-currency swap into US
The flight to quality trade has also enabled the World Bank to push ahead with issuance in other currencies, which have more than offset the lack of access to the euro market. But Richardson points out that it is not only the situation in Europe that concerns him.
"There is huge uncertainty over the environment that may be created in different markets in the future ranging from the way swaps are done and the possible imposition of collateral requirements by various regulatory authorities," he says.
Theres always a price
While most SSA issuers have been active in the markets so far this year there remains funding to be completed, and no one wants to find themselves last in the queue as the year draws to a close.
Having said that, issuers that have previously found themselves in this position have usually managed to salvage the situation by sometimes reluctantly agreeing to a concession on pricing terms.
For some issuers though, particularly those in Spain, the market is truly closed and some names are not expected to resurface until the concerns over the domestic banking sector are resolved.
Reference to historical precedent suggests that the SSA sector will find the resources to fulfil its needs, although in the wake of the wind-down of Eksportfinans by the Norwegian government, the homogeneity of the SSA market has been brought into question."The ability of issuers to access the market remains fundamentally sound despite the more idiosyncratic nature of the borrower universe," says Martin Weber, head of SSA syndicate at Goldman Sachs. "Underlying strong credit stories underpin most of the SSA market and, as long as issuers show a degree of flexibility, there is cash out there waiting to be invested."