At the end of 2008, bankers and issuers feared that spread widening, the emergence of government guaranteed bank paper and increased funding needs by SSAs would cripple the new issue market for triple-A borrowers. But a sensational start to 2009 has banished these fears.
Syndicate bankers and issuers have been delighted, and more than just a little bit relieved, by the buoyancy of the new issue market for frequent issuers.
Indeed, far from the market being shut, as it was in March and September 2008, from January until the end of May, European sovereigns, supranationals and agencies raised the dollar equivalent of $510.6bn in new syndicated issues, compared with $352bn equivalent over the same period in 2008, according to Dealogic.
Frequent issuer business was always a prestige part of a banks fixed income offering. But in 2009, with the destruction of the securitisation market, the prestige of the frequent issuer business is now being matched by fees.Banks generated $395m equivalent of fees to May 26 this year, compared with $293m equivalent for the same period last year, according to figures from Dealogic. And fees from supranationals and non-US agencies reached $631m to May 26, up from $572m for the same period in 2008.
New paradigmsFor issuers, however, access to the market has come with two key provisos. Issuers have had to adapt to a new pricing paradigm, paying levels way in excess of what they have become accustomed to, and secondly, for the first three months of the year, volume came at the expense of duration.
In pricing terms, issuers more familiar with paying sub-Libor levels rapidly grew accustomed to new, far wider, pricing norms.
But bankers have applauded the way in which SSA issuers have adapted. "Most have been pragmatic and realised that the market would be challenging and that they should manage their funding programmes carefully as a result. Those with bigger programmes have been flexible in terms of structure, maturities, currencies and price," says Martin Egan, head of global primary markets at BNP Paribas.
During the first quarter, anxious investors stayed firmly focused on the short end with issuance concentrated in the two and three year parts of the euro curve.
In the first quarter, 24 two year issues totalling Eu17.9bn were printed compared with just six totalling Eu4.3bn in the same period in 2008, according to Dealogic.
By April, with 10 year Bund yields backing up all-in yield levels reaching the critical 4.25% level. By the end of the month, a tail-off in government supply had coincided with an estimated Eu130bn of coupon and redemption payments flowing back to investors, and accounts were once more looking to add duration.
KfW was the first to exploit the opportunity, printing a Eu3bn tap of its January 2019 benchmark. It was soon followed by the European Investment Bank, which printed a Eu6bn seven year Earn the largest ever seven year by an SSA issuer. The Province of Ontario took advantage of persistent strong demand for 10 year euros to issue Eu1.5bn of bonds.
By May, as more issuers began to brave the longer end of the curve, fears of a collision of SSAs in the euro sector started to mount. Yet, these proved unfounded. In a single week in mid-May, the market absorbed Eu5bn of competing 10 year supply from the World Bank which was funding euro loans Spains Instituto de Crédito Oficial (ICO), and a tightly priced Eu650m tap by Frances SNCF of its 15 year bond.
At the same time, there was strong support at the short end with large books for three year offerings from French bank funding agency SFEF and German development bank KfW.
"The 10 year euro market is much more developed and deeper than the 10 year dollar market at the moment, so if we could justify the all-in cost on a dollars basis, it made sense to fund directly in euros," says George Richardson, head of funding at World Bank in Washington.Indeed, the dominance of the central bank bid in dollars has ensured that while issuers have been able to achieve large volumes, duration has remained elusive. Other Washington-based supras are believed to be looking to emulate the World Bank, with the Inter-American Development Bank the prime candidate.
Dollars: liquidity at the expense of durationFor the first part of the year, the dollar market remained a vital source of liquidity and diversification, albeit at the short end of the curve. In the two year part of the curve, for example, there were 12 deals in the first quarter totalling $19bn, compared with the first quarter of 2008 when issuers priced just five two year deals, totalling $1.7bn.
In March, the World Bank demonstrated the depth of demand in dollars, pricing $6bn of three year bonds the largest ever dollar deal from a supranational issuer. And with conditions in the credit markets improving, April saw the re-opening of the five year sector in dollars. So receptive were investors to the maturity that two Washington supranationals International Finance Corp and Inter-American Development Bank were able to tap the market successfully in a single week.
In May, on the back of a drought in dollar supply and a sharp 10bp-20bp tightening in dollar spreads, the Kingdom of Denmark took advantage of buoyant conditions to price $3.5bn of three year Eurodollar bonds, the issuers largest foreign currency transaction and the largest sovereign dollar bond since the Federal Republic of Germanys $5bn five year issue in May 2005. The kingdom attracted orders of more than $4bn from 105 investors.
Yet while the backdrop appeared perfect for more primary issuance, borrowers were spooked by the extent and speed of the tightening and were waiting to see if spreads tighten further.And many have had their fill of short dated dollar paper.
GG fears unfoundedFears that the new class of government guaranteed bank paper would crowd out SSA issuers have happily, gone unrealised.
Indeed, far from cannibalising one another, the government guaranteed and SSA markets have managed to co-exist comfortably. Banks desire for short-dated paper has meant that SSAs able to tap the longer end of the curve have been unbothered by less price-sensitive financial institutions bearing government guarantees.
At the same time, government guaranteed issues have found an investor base in the form of bank treasuries, while central banks and agencies that have been the key to SSA issuers in the past remain key to public sector deals.
Bank treasuries have tended to buy more than half of government guaranteed bank bonds while taking around 30%-40% for traditional public sector agencies. The latter have been able to rely more on pension funds and insurance companies.
"The feedback we have received from Dutch institutional investors is that three out of four are not buying this government guaranteed paper," says Bart Van Dooren, head of funding at BNG.Investors are uncertain as to whether the bank treasuries that tend to dominate the order books for government guaranteed bank paper will keep the bonds on their books, says Van Dooren. Further, he suggests, government guaranteed bank bonds are not as liquid as traditional SSA deals.
Q4 wash-out concernsHowever, while bankers and issuers have been pleasantly surprised by the strength of the market in the first part of the year, some fear the wave of liquidity that has kept the new issue market afloat may not last, and may dry up just as issuers needs become most urgent.
"What could put the market at risk is the evaporation of liquidity in the fourth quarter," warns Zeina Bignier, head of sovereign, supras and public group debt origination at Société Générale in London. "Around 80% of the liquidity in this market is concentrated in the first seven months of the year between January and July. The fourth quarter could be more difficult with less liquidity and additional funding needs by governments in particular from those with huge deficits."
In the secondary market, a volatile start to the year has since given way to a stabilisation of spreads in the triple-A arena.
The remarkable ease with which record volumes of new issuance have been absorbed in the first part of the year and the stabilisation of spreads has given many bankers cause not only for hope but relief.After the horror show of 2008, who can blame them?