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Emerging Markets

MTNs: diversity can be challenging

As issuers seek ever further diversity of funding sources in choppy borrowing conditions, the MTN product has become more important than ever, writes Tessa Wilkie.

  • 28 Sep 2011
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Faced with challenges like the eurozone debt crisis and funding problems in the US, it is a risky option for financial institution treasurers to rely on benchmark issuance. Private placements have therefore formed a useful support to many borrowers’ funding programmes.

However, with investors in search of yield and at the same time very risk averse, producing trades for financial institutions is not easy.

Lloyds TSB is a firm believer in the importance of private placements and has invested in in-house distribution capabilities this year, as well as placing treasurers on the ground in the US and Asia. On top of this it set up an SEC registered shelf and has tapped new currencies in MTNs, such as Indonesian rupiah.

"We have successfully broadened our funding base in the past 18 months," says Richard Shrimpton, head of capital markets issuance in group funding at Lloyds TSB. "The key is to have access to different markets and products and by having this you reduce funding risk."

Lloyds set up an SEC registered shelf in December, and, after launching public trades in January, sold its first MTNs in July. It raised about $120m through six deals in the weeks after launching the first MTNs.

"It suggests that we should have access to a new source of $1bn-$2bn a year of funding," says Shrimpton.

Lloyds is not the only borrower to value private placements.

ING Bank, which fills about 30% of its €20bn long term financing needs through private placements, with the rest through benchmarks, aims to increase its private placement issuance.

"Assuming our access to all markets remains the same, we hope to issue more private placements," says Martin Nijboer, head of long term funding at ING in Amsterdam.

"We have a really nice, diverse funding mix. Ideally we’ll try to diversify further. We can definitely do more in the smaller markets."

The borrower is looking to tap new investor bases.

"Japanese yen is a market we could do more in than we have so far," says Nijboer. "It’s a big MTN market."

This urge to diversify on a global scale is widespread.

"One of the things issuers are looking at is tapping into demand across the globe," says Hans Lentz, managing director in syndicate at Lloyds Banking Group in London.



Not all plain sailing

MTNs have obvious diversification benefits. Borrowers can offer investors the ability to take a position on rates through structured notes, for example, or they can access a new investor base through issuing in a non-core currency. Financial institutions have been able to raise a lot of cash in non-benchmark maturities, such as one year, through private deals.

One key advantage to selling a private placement is that there is no execution risk — a seductive proposition when public markets are whipsawing around. Because the buyer is lined up before the trade is announced, you risk none of the potential embarrassment of an undersubscribed deal, or worse, a pulled one. There are also pricing advantages.

"When the public market is closed or expensive, as it has been in the past months, borrowers continue to issue MTNs to get funding done," says Julie Pertuiset, a director in MTNs at Lloyds Bank Corporate Markets. "Also, it helps that MTN targets are through secondaries. The pricing gap between public and private deals gets bigger when there’s a difficult market."

But it’s not all easy. As issuers look to diversify their funding sources through the private market, many investors are increasingly looking to the liquidity that public trades can offer.

"Investors are sensitive about liquidity," says Olly Johnson, head of MTNs at Bank of America Merrill Lynch in London. "It doesn’t always help MTN issuance. Investors that might have bought 100% of a trade last year are now looking at buying a lower percentage and want others in the deal."

More issuers are looking at the possibility of issuing taps, in order to cater for these investor requirements.

Add to this, of course, extreme risk aversion and a very low rates environment and it adds up to quite a headache for MTN dealers.

The sovereign debt crisis means that many financial issuers are not in favour with investors. While those in Australia, Canada and Norway, for example, have benefited from a flight from the eurozone, many investors are spooked about bank exposures to the eurozone crisis.

"The right names are largely fine, the national champions, those in the right jurisdictions," says Chris Jones, global head of MTNs, structured notes and local currency syndicate at HSBC in London. "The names from the periphery are the ones that might struggle."

On top of this is the issue of yield. Private placements typically price in line with an issuer’s secondary curve, which doesn’t always compete with a public issue that offers not just liquidity but often a juicy new issue premium.

For the top names, demand can still be found, but issuers are wise to be nimble. An ability to provide investors with that extra bit of yield can be important.



Currency options

One, albeit diminishing, way to do this is to look to non-standard currencies. Currencies such as the Brazilian real and Australian dollars have all proved popular ways to maximise yield this year. But the popularity of these currencies has reduced their yield, and Brazil has gone as far as to introduce a derivatives tax which has further stemmed demand for the currency.

Lloyds printed its first notes in Indonesian rupiah in April this year, while Commonwealth Bank of Australia sold its first rupiah trade in late August. CBA expanded its range of non-deliverable currencies in response to increase enquiry from dealers.

As yields diminish, buyers may look further afield for return.

"The steam’s been taken away from Brazilian real, Indonesian rupiah and Indian rupees," says Jones at HSBC. "The currencies have rallied so far in the past six months. Instead there will be more international uptake of other Latin American currencies, and Mexican pesos. We are also seeing the internationalisation of the Singapore dollar."

While the opening up of the offshore renminbi market caused a stir at the beginning of the year, it remains unattractive for the majority of borrowers.

"For international issuers, access to the renminbi is limited by a number of economic and commercial factors and also the consideration of use of proceeds," says Jones.

"However, if an issuer has natural needs for the renminbi, for example to repatriate to a domestic operation, then there is a compelling case to consider this market."

Another way to provide investors with returns is the structured note. Investors have looked to make rates plays or pick up some yield with light structures such as collared floaters and CMS linkers.

And the investor rationale for structures looks more compelling than ever coming into September, as the low rates environment looks like it’s here to stay.

"We’ve got higher levels of volatility in euros, so now structured trades can start to get more interesting," says Johnson at Bank of America Merrill Lynch. "Earlier in the year we had low rates and low volatility. The increased optionality that volatility brings will give more leverage on the coupon. But coupons are still not going to be eye popping."

Another way in which investors can get yield is to extend. One of the most extreme examples of this was when Rabobank printed a 100 year bond in September last year. It’s a trend the market can expect to see more of.

"There are a number of investors looking at longer dated trades than they usually would," says Johnson.

Many FIG issuers are very well funded for 2011, and can more or less comfortably cruise to the end of the year. But 2012 will bring new challenges. There could be plenty for MTNs to do.

"We’d expect significant volumes of FIG issuance in 2012 simply because a lot of government guaranteed bank debt will fall due next year and will need to be refinanced," says Chris Hill, vice president in MTNs and structured notes at Barclays Capital in London. "But whether such refinancing will take the form of benchmarks, covered bonds or MTNs will depend on the issuer’s funding needs and market conditions at the time."

   
 

German private investors want variety

  An important buyer base for many MTN issuers is to be found in German private markets, where investors usually look to take on long-dated trades in size. More issuers may be able to take advantage of these markets, where the buyer base is looking to diversify. However, the amount of funding there for financials on the senior side could be limited.

"There’s a lot of appetite for non-German issuers [in Schuldschein]," says Olly Johnson, head of MTNs at Bank of America Merrill Lynch in London. "I don’t see it as a big funding vehicle for bank names though. It’s more likely for sovereign, supranational and agency issuers, or in covered format. For a senior FIG issuer it can be tough to get stuff done. You need appetite for 10 years plus maturity, and banks don’t necessarily want to pay up for that."    

But for those looking to print covered bonds, the registered covered bond investor base is looking to lap up new issuers.

"Registered covered bonds have been a big source of funding," says Chris Jones, global head of MTNs, structured notes and local currency syndicate at HSBC. "More and more issuers will tap that source of funding, including newer borrowers from different jurisdictions. Those investors are looking for diversity."    
  • 28 Sep 2011

Bookrunners of International Emerging Market DCM

Rank Lead Manager Amount $m No of issues Share %
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1 HSBC 38,825.26 253 0.00%
2 Citi 36,336.03 174 0.00%
3 JPMorgan 32,257.81 136 0.00%
4 Deutsche Bank 28,639.76 139 0.00%
5 Bank of America Merrill Lynch 19,785.76 107 0.00%

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Rank Lead Manager Amount $m No of issues Share %
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1 HSBC 10,513.16 37 11.07%
2 JPMorgan 8,713.23 30 9.17%
3 Deutsche Bank 8,709.83 31 9.17%
4 Citi 8,423.34 38 8.87%
5 Bank of America Merrill Lynch 7,704.20 29 8.11%

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1 Citi 12,485.54 45 12.99%
2 JPMorgan 11,127.22 30 11.58%
3 Barclays 7,913.99 22 8.23%
4 Deutsche Bank 7,887.28 30 8.21%
5 HSBC 7,711.67 32 8.02%

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Rank Lead Manager Amount $m No of issues Share %
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2 Goldman Sachs 262.76 86 7.96%
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5 Lazard 199.99 109 6.06%

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Rank Lead Manager Amount $m No of issues Share %
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1 Deutsche Bank 1,245.66 9 7.80%
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5 UniCredit 858.94 9 5.38%

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1 Standard Chartered Bank 3,070.25 24 11.37%
2 AXIS Bank 2,543.47 62 9.42%
3 Deutsche Bank 2,032.48 27 7.52%
4 HSBC 1,764.02 16 6.53%
5 Citi 1,514.67 10 5.61%