However, supranationals face a new set of challenges with the onset of the European peripheral sovereign fiscal crisis. This time, the storm is raging in their own back yard, with the credit quality of sovereigns under severe pressure most notably that of Greece, which was downgraded to junk by Standard & Poors at the end of April.
Investors immediate reaction was to carve up the public sector issuer base with the Washington supras, Japanese agencies and non-euro Nordic agencies in the top tier, euro agencies in the middle (with sharply increased focus on their exposure to Mediterranean sovereigns) and those carrying the direct guarantees of southern European countries sitting a little uncomfortably in the bottom tier.
However, thanks to the years of investor relations development and careful nurturing of maturity curves and currencies, even those in the lower tiers should be able to access markets throughout the year.In this roundtable, held in New York in late March 2010, some of the leading supranational borrowers and bankers discuss their experiences of the past 18 months, debate which products and investor bases will fare better than others, and reflect on the likely impact of the European peripheral sovereign fiscal crisis.
Participants in this roundtable were:
Allegra Berman, global head of SSA fixed income, UBSPJ Bye, director, public sector DCM, HSBCBarbara Bargagli-Petrucci, director and head of capital markets department, European Investment BankAlex Corley-Smith, managing director, SSA origination, BNP ParibasAnthony demartino, executive director, global co-head of SSA trading, UBSJeff Diehl, global head, public sector capital markets, HSBCSoren Elbech, treasurer, finance department, Inter-American Development BankDoris Herrera-Pol, global head of capital markets, World BankScott Lampard, head of private equity, infrastructure and power, Bank of America Merrill Lynch CanadaStuart McGregor, head of EMEA public sector DCM, Bank of America Merrill LynchBill Northfield, head of sovereign, supranational and agency originations, Deutsche BankNina Shapiro, vice president finance and treasurer, IFCNathaniel Timbrell-Whittle, SSA DCM, BNP ParibasSean Taor, head of global rates syndicate, Barclays CapitalToby Fildes, moderator, EuroWeek
EUROWEEK: Having got through the first three months of 2010, do you feel more confident than you did at the beginning of the year? A lot has happened in that time to make the markets more uncertain.
Doris Herrera-Pol, World Bank:Right now we are comfortably more than halfway through our borrowing programme. We have raised over $15bn in the market. We were not in a rush to tap the benchmark markets in January or February because of ample opportunities elsewhere. But we have taken comfort from seeing successful and well received issuance by our peers across maturities and across different currencies.
Barbara Bargagli-Petrucci, EIB:We are on track right now. In February we funded more selectively and we focused more on targeted and tailor-made transactions because we were steering around this exceptional market volatility.
So in euros we were more focused on floating rate notes, but also fixed rate bonds, the so-called Co-operative Bonds, which we placed in Germany with the co-operative and savings bank sector we have in fact raised Eu4.2bn from that technique. Overall, we are now [late March] at over Eu27bn-Eu27.5bn.
EUROWEEK: Thats on target?
Bargagli-Petrucci, EIB: Thats exactly on target. We wanted to have Eu27bn by the end of March, which is a good one-third of our funding programme of Eu80bn equivalent for this year, which we fund in a variety of currencies. So, for example, last year we had 22 currencies. So far weve funded in 14 currencies, including our three main currencies, which are the euro, the dollar and sterling.
EUROWEEK: Nina, how about you? Are you feeling better now that we have the first three months of the year out of the way?
Nina Shapiro, IFC:Yes, we are in a similar situation. Our fiscal year starts on July 1 and we are now in a very good position in terms of the overall funding targets for size and maturity. Everybody expects that when the flowers bloom in spring IFC will issue its global... and true to form we issued in mid-April. So far, we have had good arbitrage opportunities and some private placements. We have also done a couple of deals in domestic markets, which didnt add much to volume but of course are significant as part of our development mandate. There have been sufficient other opportunities, more than originally expected, for good arbitrage and structures, especially out of Japan and Asia, to keep costs down.
However, I think the market now has more questions than it did a month ago. While we can tap our core dollar market, the rest is a different matter. A lot of what we have done in Australian dollars has to do with basis swaps back into dollars, and the basis swap is the reason euros are not attractive for IFC. Australia was an incredible market this year in terms of its depth. Overall, for funding cost, we will probably get halfway to where we were before the crisis. It has not swung all the way back.
EUROWEEK: Thats a pretty positive picture. Are you surprised though that that is the case?
Sean Taor, Barclays:Im not surprised. But what has surprised me this year is how the markets been driven a lot more by sentiment sometimes. In January the markets were extremely buoyant; in February things turned very quickly to being quite tough but they turned around very quickly in March. We saw in the first two weeks of March in Europe, for example, just over Eu80bn printed, which was more than the whole of February. But things can turn around very quickly and the sentiments around external factors, whether it be sovereign risk, regulation, whatever it is, can have a marked effect across the markets for all issuers.
EUROWEEK: Soren, how are you feeling?
Soren Elbech, IADB:We have done approximately a third of this years programmes and for us all transactions have been spot-on. We have around $16bn to do this year; were looking at maybe some rebalancing of some assets that could revise the size of programmes down by a few billion. We came out in January and issued in the Aussie dollar market around A$1bn and then in February we did a 10 year dollar benchmark of $1.5bn.
The sovereign risk that has been introduced into the markets is an issue, particularly on the asset side, but there are of course also opportunities for us on the liabilities side. Our asset class is probably much less volatile than the sovereigns and consequently we have seen requests for more direct issuance in the last couple of weeks.
EUROWEEK: Allegra, have you been pleasantly surprised by developments so far?
Allegra Berman, UBS:Yes, I have been pleasantly surprised and the SSA sector has had a very good run, but its clear the markets are going to be extremely difficult and its premature to think that its going to be such smooth sailing for the rest of this year.
The problems around the European sovereigns are not going to go away and the refinancing pressures that the financial institutions will be under in the latter part of this year are going to be tremendous. If we dont see other liquidity sources open up for those financials in the form of more covered bonds and securitisations then markets are going to get even more skittish.
On the other hand, there are markets that are re-opening that are offering good liquidity in greater volume than a lot of people would have otherwise considered, for example, Australian dollars and Swiss francs.
Meanwhile, the sterling market is going to continue to be challenging, given the weakness of the currency and the outlook for the Gilt market. But generally speaking, if the basis swaps stay where they are, which in some of those markets will remain the case, for example in Australia, then there will be other markets people can tap for liquidity.
EUROWEEK: PJ, so those windows of issuance are becoming slightly smaller?
PJ Bye, HSBC: I agree with Allegra in the sense that theres a perception that supplys a problem this year, but its not really a problem for the supras. It may become a problem for financials. Corporates are in very good shape as theres more demand than supply there. But for the supranational issuer base, youve got so many markets open compared to this time last year.
For example, the central bank community was pulling back and was much more risk-averse this time last year. Now most of the traditional buyers have returned, so benchmarks can go in size, right across the maturity curve. But also youve got all these other markets: Aussies and sterling are back if you want to pay the price and thats ultimately the question here the asset price. The supranationals can get their programmes done five times over. Its just about selecting which markets offer the best terms and getting the sequencing right.
Thats the problem in the euro market, why there is such a perception on the investor side that theres an overhang of supply. Its because when the windows open, too many sovereigns come through at the same time. Thats why we have this perception of too much supply.
Nathaniel Timbrell-Whittle, BNP Paribas: PJ has a very valid point. To some extent market access for supranational issuers has never been better. This time last year supranational issuers were looking at either the euro or US dollar market but in 2010 they have access to markets from Australian dollars to Turkish lira. More importantly, the ability to raise duration funding is also back.
EUROWEEK: So Bill, size isnt a problem for issuers; its more the timing?
Bill Northfield, Deutsche Bank: Thats certainly going to be a feature. Whats been impressive is the flexibility of the SSA community... particularly the supranationals, who have been able to time their issuance around the various market opportunities. Thats one thing that the supras have over any other asset classes: theyre so experienced in tapping so many different markets. Their name recognition is better than any others on the planet owing to years of presence in various markets. And they dont have the headline risk that some of the sovereigns or some of the financials are facing, as Allegra pointed out. Obtaining size is not likely to be a problem for the supras. So from that perspective, supras can duck and dive, they can swerve in and out of markets where the basis swap provides the best value. And in agreement with PJ and Allegra, were not concerned about the supranationals having access; having different options allows them to choose their markets. If volatility returns and investors become more cautious again, I would be more concerned for some of the sovereigns in Europe, given redemption factors.
Stuart McGregor, Bank of America Merrill Lynch: Yes, as we sit here today, it certainly looks better than we were fearing as we came into the year. But there are still some dark spots out there. If were sitting here talking about the basis swaps driving a lot of the attractive funding, that can obviously move very quickly. And also were talking about a lot of swapped issuance there and Im sure at some point were going to get on to the ability with CSAs, etc, to take advantage of those basis swaps its very credit intensive.
Looking forward, its fairly clear that, as weve seen in the UK market, swap spreads can deteriorate dramatically. Were talking about a Libor-based set of clients here against a market where most of the money comes from the fixed rate. While were obviously seeing an increasing amount done in the floating market, overall its still small amounts of funding.
If we look at fixed rate and we think swap spreads continue to deteriorate, there are lots of events that can happen over the next six months that are going to make it difficult. The demand side weve seen a huge variety of accounts participating in the sector, far more than weve ever seen in the past and in a wider range of currencies and bigger size. But youve still got the question of the arbitrage with the swaps going forward and thats, certainly from our side, one of the biggest concerns.
Alex Corley-Smith, BNP Paribas: I agree completely but I also think that, in order to look forward, we have to look back. Last year was the most extraordinary year where the issuers around this table decoupled from the rest of the SSA community, especially away from the sovereign sector.
Weve reached a new reality for this issuer group in terms of pricing: many investors have enjoyed the 75bp ride in from the historically wide and dislocated SSA market levels that existed this time last year. It will be interesting to monitor the strategy of these investors now the correction has halted.
For the SSA credits weve gone back to a market that is very similar to 2006 execution conditions. Im pessimistic about basis swap levels limiting currency options for those who require US dollars. Admittedly, basis swaps can move fast, but weve only seen a one way trend recently, rendering euros, sterling and Swiss franc options too expensive to consider. While Barbara can take a different view and has been able to take advantage of the reverse, the US dollar issuer base in Washington has had their issuance strategy constrained in terms of viable, cost-effective currencies on offer.
EUROWEEK: Jeff, are you feeling like its 2006 all over again?
Jeff Diehl, HSBC: Id have to disagree with that. There is still a lot of nervousness out there, especially with investors, and thats the key thing that investors really are anxious about overall supply in the supra, sovereign and agency sector. This is no longer a pure rates market, but a rates and credit market and clearly theres differentiation among issuers. The supras have been very good performers within that increased credit component, but I think investors are nervous about supply, theyre nervous about what happens with quantitative easings being phased out, and thats clearly coming through in terms of spreads, especially in the longer end and especially in dollars.
This gets back to the point that PJ makes: its about sequencing as well. Unfortunately, the supras arent in a world by themselves they are in a broader triple-A world where a number of those issuers are concerned about getting their funding programmes done and therefore are rushing to market when they see a window opening. And although, as Bill said, theyre very flexible and can go to a number of different markets at any point, they can get caught up also in the wave of other issuers who perhaps dont come to market as often, dont have as much flexibility in terms of markets they can access and it can end up costing everybody money.
Scott Lampard, BofA Merrill Lynch: Just picking up on a point that Allegra made, the uncertainty or the discussions are going to continue, particularly as some of the sectors that have been closed or dormant re-open.
So if you think about the covered bond market coming back online, think about the securitisation of mortgage money coming back online, then one of the biggest surprises is the enormous increase in demand thats coming from bank treasuries. There are a lot of reasons why thats been the case. But as some of those asset classes are historically attractive, and a lot of their investor dollars come back online, youll see rotation away from the supranational community and back into mortgages, securitisation, and some of the financials as well. Thats going to be one of the factors that contributes to the uncertainty the markets are going to be faced with.
Anthony Demartino, UBS: Taking a more US focus and dollar focus, most issuers are very happy with the contribution the US has made to recent deals. The ability to issue cheap to the GSEs has obvious advantages. Going forward the picture is less clear. With the announcement of the mortgage buybacks the GSEs will need to raise more cash than anticipated. Increased issuance will cheapen spreads and tighten the SSA/agency basis. Domestic investors have been buyers of SSA paper that allows them to pick over agencies. As the pick-up diminishes so should demand.
Shapiro, IFC: We are beginning to see some resistance. The comeback was so swift for the supras from the extreme levels of a year ago, that people thought there would be a total recovery. But, as I said, it has stopped about halfway and now with the questions about the agencies, sovereign borrowings and the swap curve, it has become more sticky.
Demartino, UBS: The US investor will struggle to buy these names through the GSE names.
Northfield, Deutsche: But isnt that why its so valuable that the supranationals have so many other markets to go to? Isnt that why the Australian dollar market has provided an incredible safe haven for the supranationals to go for size and duration because they cant get it in dollars?
Herrera-Pol, World Bank: One thing in our favour is that during the crisis, because US agencies tightened relative to supranationals when the US Treasury announced its purchase programme, many investors tried us for the first time. It has opened up their eyes quite a bit in the sense that they see the supra sector with very minimal headline risk and many investors have come to appreciate that stability. So thats one thing that may make them think twice about moving back to US agencies in spite of the changes in spread differential.
Elbech, IADB: Last year we took an opportunity in issuing floating rate note benchmark transactions in global format, both for two year and five year maturities. In the bookbuilding, we saw a lot of investors we had never seen before. If we retain, say, half of that investor base, weve actually gained a whole new audience. Our business model means that we mainly pass the cost of funding on to our borrowers. So if we go from Libor minus to Libor plus, it doesnt mean that we stop lending. Consequently you can say that the market is what the market is. We issue at market and try to get the most cost-efficient price we can in any given time. The eye-opener with these FRNs was that we gained a new range of investors.
Shapiro, IFC:Thats true but it will be interesting this year to see exactly how many of those stay, with other asset classes coming back. Its not a slam-dunk. Obviously, anything is additive and thats great, and we had names last year that Id never even heard of there were weird places, like Vermont, with tons of money. This obviously made an impression. So were going to make a big effort to keep some of them. But its certainly not clear to me if they will stick around.
EUROWEEK: But they will value the liquidity, surely, that you can offer and perhaps other asset classes cant?
Corley-Smith, BNP Paribas:The return of the US real money manager last year in the order books of the elite triple-A space was fascinating to watch. What will be interesting to see as Doris said is who will stick around for more at these far more expensive levels. Some US investment managers Im sure will continue to invest in SSAs as I believe they fear what is going to happen to triple-A supply post-conservatorship of Freddie and Fannie. Many of the larger real money managers we talk to are focusing on SSAs as a valid alternative for that possible future and of course the better credits will do best. So while the question mark hangs over the future for the GSEs whether thats two years hence or five there will be a solid core of US real money investors who were drawn in last year by those wonderful Libor plus levels who should stick around while they try and develop a new asset class within their portfolios.
EUROWEEK: Nathaniel, do you think this is the supras great opportunity to establish themselves as core issuers for US investors?
Nathaniel Timbrell-Whittle, BNP Paribas: Last year was the first time that US investors had the opportunity to buy supras at Libor plus-plus and significantly back from GSE paper. Although some of these investors will not have the same demand for supra paper at the new levels, there are some that will have had their eyes opened to a new product. In addition, over recent years there has been headline risk associated with the GSEs and there are still a number of unanswered questions about whether the GSE market will continue in the same vein given that the GSEs remain under conservatorship. For investors, the concept is simple supras will keep issuing and also offer a diversification tool away from GSE paper. In summary, I think even at these new spread levels there is every chance that the US investor base remains an important component of supras US dollar transactions going forward.
Berman, UBS: Also theres been a huge pick-up in the amount of liquidity offered in the US time zone, where there have been more commitments to trading the product. In the past people have paid lip service to it. Now the time has come where people are dedicating a lot more to making sure that theyve got risk on an SSA book in the States, theyre taking much more aggressive positions, therefore giving comfort to US rates investors that they can trade in and out of the product in size, even when Europe is closed.
Certainly at UBS we are seeing a huge pick-up in terms of the rates portfolios buying, whereas in days of old it was only the corporate portfolios. Its slower than wed all like but were definitely seeing it.
So I agree with Alexs point that these real money managers are not going away and this product is going into their rates portfolios, which is going to be key to them at least performing well during the rest of 2010 and beyond.
Demartino, UBS: US clients are more comfortable with larger issue sizes, which many of you have been able to provide. That, coupled with increased intraday US trading, has pushed more clients to be involved in both the primary markets and secondary trading. If a fund manager has a sizeable secondary buy programme there is increased confidence they will get liquidity from the US.
Bye, HSBC: We can all talk about the improvement in liquidity and I dont think anyones going to disagree that its getting better and better. But youre never going to be able to compete with the US agency space because of the sheer volume of issuance from a relatively select group of issuers.
But thats not really what the investor base is looking for when buying SSA product; the real attraction is the lack of volatility. Thats the key for the US guys. They have seen so much headline risk around the agencies that, while they can get in and out on a half basis point spread in the good times, thats not important if your spread is going to blow out 20bp on any given day on a rogue headline. Thats just not going to happen with supras. So supras are always going to benefit from that much more stable trading environment and the relative lack of headline risk even if they remain slightly less liquid.
EUROWEEK: Doris, would you say that the past 18 months have been a breakthrough for you in the US market?
Herrera-Pol, World Bank: Yes, that is correct. As you know, with the small borrowing programme that we had until 2007, we only needed to sell to central banks and to our Japanese retail franchise and we were done.
Our larger borrowing programme has given us opportunities to cater to the US market and it has been a tremendous success. We are also trying to test different ways to cater to retail investors in the US, in addition to the solid demand we have been getting from institutional investors we are confident that a good share will stay with us after the changes in spreads. We have certainly worked hard to keep US investors engaged.
EUROWEEK: Whats your feeling on how many of these investors will stick? Is it a permanent shift?
Herrera-Pol, World Bank: We will keep those that value the spread to Treasuries, that value the stability of our triple-A rating and the stability of our spreads overall, and those that want diversification.
EUROWEEK: Barbara, has the past 18 months been a breakthrough for you? Everybodys talked about accessing the US investor base for many years, but have you made more progress in the past 18 months than before?
Bargagli-Petrucci, EIB: In 2008 the majority of our funding volume was in US dollars. Traditionally we place a quarter of our dollar issues into the US. Last year it was half and we have found new investors, notably bank treasuries, real money accounts, but also corporates particularly so in the last deal that we did. We dont know how long they will stay, given what might happen to spreads. Indeed, 2009 was exceptional, as unusually high spreads over GSEs delivered very strong US demand. We expected this to taper off somewhat as spreads to GSEs tightened, and that is taking place. Also, in 10 years, the swap spreads have tied us in we are not inclined to pay over the odds. Thats why we havent done a 10 year recently.
But perhaps just one point, around the table we have the impression that we are all arbitrage funders. I have a programme of Eu80bn equivalent, so we will obviously remain a stable issuer in these core currencies and the US dollar market, which traditionally accounts for one third of our funding programme, will remain an important market for us.
How the investor composition will change in the future is a good question because we have seen central banks return quite strongly into our books our last five year dollar bond was a good example of that. So we are not arbitrage-driven in the sense of tapping the US dollar market. Our approach is to persist in gradually building acceptance over time.
EUROWEEK: But, from what people have said, it has paid to diversify in the past 18 months, and therefore a lesson that has been learnt from the credit crisis is that its perhaps worth looking after that US investor base by adding a couple of basis points. Is that a strategy you might employ?
Bargagli-Petrucci, EIB: Yes, we have been paying concessions in the primary market over the last year. This year, the concession has been less, around two basis points, which is good. But, frankly, we will be a regular issuer in the dollar market and we will price our bonds to leave some performance. That strategy has worked very well in the past.
EUROWEEK: Sean, do you think the permanent breakthrough has been achieved?
Taor, Barclays: Last year it was an awakening for the US investor base but, to be frank, a lot of that was down to price; thats fairly obvious. And since then the amount of research and trading, as Allegra said, the amount of awareness from the sales force and the investor base is clearly much higher than it was a year or two years ago.
But the point is more that you dont need to pay the price to get 100% of those investors back in the market now because other investors are still very healthy. As PJ says, the central banks reserves have gone up and theyre very actively buying again. Its a good balance where we sit now and if the market deteriorated and, for example, the central bank universe stopped buying, youve got the comfort of knowing those investors would be there at a price.
Thats clearly a benefit. Even if only half are buying now or are looking at buying potential deals, the amount of knowledge theyve gained around the product, around issuers specific questions, particularly around volume of funding, has grown exponentially. So the price was what hooked them in; now their knowledge is there, theyll be there in the future if need be. Its still a question of price for some of them, but for the majority, theyre still very much involved. So deals today which are much more expensive than last year are still getting much deeper penetration into the US than two or three years ago.
Northfield, Deutsche Bank: Three or four years ago, pre-crisis, perhaps a number of these investors were focusing more on liquidity than credit diversification. It was easy to buy US agencies because they had bigger programmes, they were more liquid in secondary. And while these investors understood the supra asset class and attended road shows, a lot were looking and saying, yes, I get it, youre triple-A rated, but I can buy the agencies. But one of the most important lessons of the crisis is the fact that, if you concentrate the bulk of your funds in one narrow sector, you are going have a problem.
So more and more US investors have done the credit work on international SSA names and are far more open-minded that previously. They may not be there in the same size in the future owing to the significant rally in spreads to Treasuries from a year ago, but I agree with Seans point that a real psychological barrier has been crossed.
Demartino, UBS: US investors have become far more focused on capital preservation, as evidenced by the continued inflows into bond funds. Theyve seen the near bankruptcies and bailouts of the last couple of years and are choosing to put their eggs in several different baskets. The supranationals will definitely benefit although we might not see the same size interest from domestic accounts as we did when spreads were at distressed levels.
Diehl, HSBC: Dont forget the government guaranteed paper in the triple-A space that we have seen over the last year or so will be maturing with cash coming back in US investors hands and thats going to have to be redeployed. So theres a vested interest in continuing to follow the supra, sovereign, agency sector.
Berman, UBS: That certainly was an interesting development because central banks bought GGBs much faster and in much larger volumes than a lot of us, certainly in my case, thought. GGB paper was definitely competition for the SSAs because it was cheap when it first came out. But thats going off the boil as are covered bonds, which central banks were beginning to approve and buy but are now seemingly less interested in, although this too will change over time.
Bye, HSBC: I was going to make the other point actually. The supranationals cant become too complacent. Yes, theyve been doing this for years and years and theyve put in the hard work. For example, I remember Nina starting her programme back in 2000 doing a $1bn five year trade every year, and each year the investor base growing and growing. Indeed, when the crisis came around, they could really take advantage of that name recognition and get some great volume on board. The supras have been ahead of the rest of universe. And yes, the government guaranteed paper has gone away, and yes, the covered bond market has struggled to get going, although arguably its coming back again with the CIBC and RBC dollar trades.
But the rest of the European agency universe is catching up. We are seeing a lot more of the agencies, the other supras like Council of Europe now, in global and 144a format the competition is really growing. So, yes, the supras have got through some challenges, but they cant stand still.
Shapiro, IFC: I agree with that and I have a lot of faith in the short memory of the market. We are in a very advantageous position because of whats happening in this cycle. This is going to continue for the next couple of years. But as some other asset classes come back, as some other issuers start doing the things that we all have done in the US and in other places, its not a permanent state of play.
McGregor, Bank of America Merrill Lynch: There seems to be a lot of focus here on US investors when, if you look at this asset class overall, the split between euros and dollars for supras is quite often around 50/50, the bigger deals certainly. Doris has had a successful trip to euros. Most people have had something there, but the dollar deals are 30%-40% bought by EMEA and the euro deals are 85%-90% bought by EMEA. So the most important investor group within the supras can be that European base. Obviously the Asians, especially when it comes down to the structured notes and some of the private placements, can be extremely important too.
Shapiro, IFC: But also the central banks.
McGregor, Bank of America Merrill Lynch: And obviously the central banks. Were all very focused on US investors because theyve got loads and loads of dollars. But theyve also got loads and loads of product that, as Scott said, is going to come back online and the competition is going to be hard. And youre fighting for whats gone from 21% to 36% and given no price tension. So I agree its important and weve always spent a lot of time with everyone discussing this investor base, but it really is the smallest part of the supranational pie, in my opinion.
Demartino, UBS: And I think we all agree that were focusing on the US investor as a broad group, but youre neglecting a large investor segment, which is the callable buyer. The benchmark deals get all the headlines but a good piece of funding is getting done in the callable space. The product appeals to municipalities and banks that are looking to beat returns on bullets. I feel this is a product and market segment that needs to be tapped to gain additional traction with US buyers.
Elbech, IADB: Of course it also depends on your risk management profile because we cannot just leave that optionality open. We have to have it hedged and that consequently takes the economics out of the deal.Demartino, UBS: Fannie and Freddie do not typically hedge their optionality while FHLB does. Even after hedging costs the callable structure provides some of the best funding for the GSEs.
Herrera-Pol, World Bank: We can only do so much of that, the optionality has no value to us.
Demartino, UBS: Right and thats where the banks and the state local governments are focused. This is the next tier you want to break into.
Elbech, IADB: But, as mentioned before, weve seen new investors including those you mentioned. In fact, we have been issuing also a couple of direct issues to some of these investors. But it takes a long time because they do not necessarily know our type of issuer and maybe not even us as a bank. Therefore, it takes a lot of time for their credit committees to get comfortable with us.
While we could spend a lot of time getting into a new investor base that might or might not stick, we must also maintain a presence in the markets for those investors that have been there for a long time. Stuarts point about being global is also very important. Its not just US investors, but all of us here at the table spend a lot of time travelling globally to retain a global investor base.
Herrera-Pol, World Bank: A very interesting trend as regards the investor base is that many of our traditional investors are buying other types of products from us that they were not buying before, for instance, Australian dollars. When the market started, it was mostly for domestic Australian investors and some funds in Asia, and now were seeing a lot of central banks interested in that market. So the world has changed; we still sell structures, we sell global bonds, but the currencies, products and investor bases for these are different to what we had before.
Shapiro, IFC: And it takes more work. Were finding we really have to focus on different types of investors when we do our marketing and get to know exactly what the preferences are and how theyre changing. In a way its much more targeted.
Berman, UBS: To go back to the point that Bill talked about capital preservation retail investors have been absolutely obsessed with capital preservation as opposed to capital appreciation. Weve seen products developed for that including the co-operative bonds, targeted into Germany, or green bonds or any of those types of products. We have seen an explosion of European and Asian retail, which has been a very interesting development and will continue to be there as rates stay so low.
EUROWEEK: Have you had to re-evaluate the products or terms or structures of your issuance in response to the crisis?
Elbech, IADB: We have a relatively small team, so we have not been able to allocate a lot of resources to developing products and structures. So we tend to piggyback a lot on the pioneering, in terms of developing investors and learning from what other borrowers have been doing.
Clearly there are some adjustments going on in the market for example, the zero coupon callable market has been very interesting for us.
As a response to the crisis, our borrowing programme doubled three years in a row and we have gravitated more towards the big benchmarks to raise the money required rather than diversify products. But of course now that our borrowing programme is stabilising, we will probably start being presented with more different products and will take a look
Bargagli-Petrucci, EIB: Out of our Eu80bn programme, which was the same last year, two-thirds is through benchmarks. And when I talk benchmarks I mean the Earns, the US dollar globals and the sterling bonds, which we take up to liquid size beyond £1bn. So we have a yield curve in all our major currencies.
But starting last year, we saw a home bias develop among issuers and investors. And so EIB, as a European issuer, has been testing that phenomenon, starting with our popular bonds in Italy, which are typically smaller in size.
Then we went into Europe within the Unico system [of co-operative banks in Europe] placing floaters. So all this local reach has been a very strong factor, in the creation of new products like the co-operative bonds, which have seen the co-operative and savings banks participate, and in the construction of the associated syndicates.
When you look at EIBs syndicates, in particular in euros, you see that we give relatively large participations to local banks in Germany, France and Italy, in particular.
Shapiro, IFC: When you say Eu80bn, thats a very different strategy to us. First of all, we are in dollars and we think were big at $9bn. Obviously, we have to have a much more bespoke strategy that also plays off our business and benefits the rest of our business.
EUROWEEK: Lets quickly touch on the MTN markets. Are you finding youre doing more there now than you were a year ago?
Elbech, IADB: We are not a big user of the MTN market. We dont yet have the systems capability for managing the risks associated. In 2007 we borrowed $6bn. In 2008 we borrowed $11bn and last year we borrowed $17bn. So with the same amount of people, weve trebled the programme in just a couple of years, which has meant we have gravitated towards global bonds.
However, we have at the same time been setting up the systems capability and we expect within a couple of years to start diversifying our products. So, right now we have been focusing mainly on zero coupon callables in terms of the MTNs that weve been issuing but very few inflation-linked and equity-linked bonds.
EUROWEEK: Doris, is it an important part of your plans?
Herrera-Pol, World Bank: We continue to be major issuers through our MTN programme. But keep in mind that MTNs are not used only for structures into the Japanese market but also to issue small bonds in Uridashi format and for our World Supporter Fund managed by Nikko AM. In fact, we now have two bond funds in Japan, one that only invests in World Bank bonds denominated in emerging market currencies, and we have issued in 22 different currencies, mostly for that fund, this year. And we have a new green fund also in Japan. So we use our MTN programme for these issuances, as well as for a variety of private placements with central banks and other institutions.
Bargagli-Petrucci, EIB: Thats the same for us. For example, we use our MTN programme for co-operative bonds but we use it in Japan where we see a huge pick-up of retail investor demand for green bonds, which we call climate awareness bonds. The amount of structured deals has shrunk substantially it was around 3% of the overall funding programme for EIB last year, whereas in 2005 it was almost 20%.
McGregor, Bank of America Merrill Lynch: The structured notes are such a small part of your business because you wont take the short-dated callable feature. A lot of the structures, as you know from your past, need some sort of early redemption. If an investor reaches its targets early, it wants the option to be able to get out. I dont think anyone here likes to have lots of short calls in their portfolio, so unless that comes in structured notes, then it would be difficult to play a meaningful part.
Bye, HSBC: The biggest constraint is the credit exposure taken on by the banks in doing such structured notes. On a zero coupon callable obviously thats going to hurt when its 30 years, but also just the basis swap is tying up a massive amount of capital. So, yes, the supras are getting more risk systems and theyve definitely got the experience and theres the investor appetite for this product. But at some point when youre using the same amount of line on a swap to do a small structured note, as you are for doing, say, a $5bn benchmark, it makes no sense to use that line exposure for a frequent name. You may as well do it for a smaller Scandinavian agency where youre not going to be having to save up a line for the bigger benchmarks. So thats going to be a constraint going forward, unless the whole system of CSAs becomes bilateral or we move to a central clearing house model.
Bargagli-Petrucci, EIB: We have been fostering the Schuldschein market in Germany to good effect. It has become quite significant for us we have done around Eu3bn in Schuldschein last year. Its quite a good diversification for us in terms of product and in terms of lines.
EUROWEEK: Are any other products being discussed?
Bye, HSBC:The FRN market is interesting at the moment. For investors not wishing to swap fixed rate products into floating, buying FRNs while it may be more expensive against where the benchmarks come can actually save them money on the reduced credit exposure. And thats why were now seeing Sonia and Eonia floaters you can see that thats going to grow because theres an awful lot of guys in the market, particularly the banking sector, that are swapping into Sonia and Eonia on a regular basis and just building up derivative exposure which they dont really want.
Bargagli-Petrucci, EIB:Thats an excellent funding opportunity for us, which we took in mid-March, with the Sonia £300m floater.
Berman, UBS:PJs point about the lines is one of the concerns for the supras. Unless the market changes, be it central clearing or another type of mechanism, that is going to be a problem, especially in the structured products arena.
Taor, Barclays:But why do the banks do that stuff? They do it to get the benchmark. But its a chicken and egg situation: they have to balance it. But all the banks around this table have the same problem and I think we all see the future. The larger banks that traditionally do most of the benchmark business and most of the swap business for the issuers are finding it tough, and the smaller banks or the newer banks might currently have the lines, they might not currently charge the full funding charge, but that wont last forever.
McGregor, Bank of America Merrill Lynch:Its short-term solutions at the moment, where it depends how your portfolio is set up.
Taor, Barclays:Im sure some banks acknowledge theres a charge and perhaps waive some of the charge; some banks probably dont even acknowledge the charge.
McGregor, Bank of America Merrill Lynch: But its there.
Taor, Barclays:It is a real charge, yes.
Berman, UBS:But issuers, as a result of that, are actually outsourcing the swaps as well. Just because youre a lead does not mean youre going to be doing the swap. In the days of old it was a package and you split the swap equally and thats how you would do it you all matched the levels. Now we find that the interest rate and the cross-currency swaps are being split up and they are being put out to competition, and again thats because we all have such differing funding costs attached to the trades.McGregor, Bank of America Merrill Lynch: But what were saying is its short-termist, because the real numbers are real numbers. Because a couple of banks ignore it, it doesnt mean its not there.
Berman, UBS: I completely agree.
Shapiro, IFC:But thats the same thing that used to happen with the Japanese in the marketplace. Its no different.
EUROWEEK: As Stuart rightly pointed out earlier, we should give some time to euros. Is there a danger of oversupply in euros?
Northfield, Deutsche Bank:Yes, I think there is, among the sovereign and quasi-sovereign community. And one of the words were becoming more familiar with now in view of some of the sovereign situations is sustainability sustainability of funding and sustainability of finances, given the comparatively high coupons some issuers might need to pay in future.
The actual volume of supply coming down the pipe, not only from public sector issuers but also the financial sector and corporates, suggests we will have an issue where the capacity is finite. I think spreads will widen and that is something that people arent yet focused on.
If spreads do go higher and higher and coupon prints are higher, we could see some pressure on financials and selected sovereigns, and their ability to tap the markets.
Timbrell-Whittle, BNP Paribas:Over recent months, activity in the euro market has been dictated by developments surrounding Greece. We saw this most recently at the beginning of March when a number of issuers came into the market on the back of the positive momentum produced by the Greek 10 year benchmark. I believe thats the way that were going to see things evolve in the next couple of months; there will be windows of opportunity and then we will see a lot of supply. Supply in the SSA euro market has, to date, been extremely well digested but there is still a lot of funding to be completed. With constant focus on sovereign credit-worthiness and the evolution of the investor base for rates product it could make 2010 a challenging year.
Taor, Barclays:Sorry to stick the knife in, but I totally disagree. If you look at the volume of issuance in euros this year compared with last year, its not materially different at all. Its much lower than we were forecasting it would be back in Q3, Q4 last year. All the supply this year has been taken down very well; the clear exception was the Greece five year deal, which struggled for many reasons Greece is unique and its not so much a credit issue, its a liquidity issue.
If you compare the dollar market to the euro market, I dont see euro spreads widening. I see dollar spreads widening. I see more supply in dollars relative to the depth of the market than the euro market. I havent found any sovereign deal or any agency deal struggling in euros this year and I dont think well see one either.
McGregor, Bank of America Merrill Lynch: Deals of $3bn in dollars this year are about the right size. But the book size in euros is just phenomenal, across the curve. In euros for a 30 year you have a massive book in several hours. In dollars youre going to have to sit down and think about it.Diehl, HSBC:If you look at the dollar market, weve seen the overall credit market decline from $2.5tr in 2007 to about $1.5tr now. The US government is doing its best to soak up some of that excess demand but theres a lot of cash out there that ultimately comes down to price. And when youre a floating rate borrower, like the issuers at this table, or youre a euro-based borrower, relative price can become a lot more important than, say, the GSEs, which are doing something different in terms of relative value and pricing. So the comment that the dollar markets much more constrained, I dont think that is very accurate either.
Taor, Barclays:But there are multiples of investors, more in euros than in dollars, and theres a much deeper investor base for euros than in dollars.
And in dollars, moving the price two or three basis points in the current market isnt going to make a material difference to the end result. In euros it does make a material difference.
Berman, UBS:I agree. If there are 15 big investors that dont buy you in US dollars you dont have a deal
McGregor, Bank of America Merrill Lynch: I dont think you would even need to go to 15.
Berman, UBS:Its a small number. If you have 50 investors in euros that dont buy you it doesnt matter, there are hundreds of other investors out there that will.
Corley-Smith, BNP Paribas:Or is it more because pricing for this group can be much finer in dollars than it is in euros? One of the reasons you have hugely over-subscribed books for the European sovereign syndications in euros is because they are new government bond lines providing a visible new issue premium to the outstanding market.
The challenges facing the European sovereigns have only intensified and the new issue pricing achievable has suffered investors have capitalised on that. In US dollars for this issuer group theres a finer, more sophisticated pricing methodology because, exactly as Allegra said, there is only a small group of key investors who help drive every deal.
Herrera-Pol, World Bank:The other beauty of euros is that there is a long-dated or long end of the curve that tends to be more resilient than in US dollars.
Diehl, HSBC:But that gets down to the fact that the major difference between the two markets is that the euro market still is a supra-sovereign-agency-oriented market, whereas the US market, especially in the long end, is much more credit-oriented.
EUROWEEK: Driven on technicals rather than fundamentals perhaps?
Diehl, HSBC:Offering long-dated triple-A paper in the US market is much more problematic than long-dated triple-B paper in reality, because thats what the investors are looking for.
McGregor, Bank of America Merrill Lynch:But long-dated triple-B products into euros is not an issue.
Diehl, HSBC: No, Im not saying it is, but theres still greater depth. As you said, theres a greater depth of demand in the triple-A space in longer-dated euros than there is in the US.Bargagli-Petrucci, EIB:Does that have to do with differences in ALM requirements between the US and Europe? In Europe the pension funds, insurance companies, they have to have asset liability matching. Thats where EIB profits from, because we issue long-dated bonds. In the US it seems to me that its not a requirement as it is in Europe; thats one reason why issuing long-dated is more difficult for EIB in the US than in Europe.
Herrera-Pol, World Bank:That is the case. We have visited many US insurance companies during roadshows over the last couple of years and they have never been particularly married into the so-called liability-based management, which of course they are in Europe and that is what creates steady demand for 30 or 20 or 15 year paper in Europe. In the US we would hear from insurance companies that they would have a preference for three years or even callables, so they dont seem to have the very strict benchmarks that Europeans have.
EUROWEEK: To go back to the original question though, are you worried that there is an oversupply in euros coming up this year?
Bargagli-Petrucci, EIB:I am not worried, to be honest. So far we have had a very good absorption capacity and, as I said, we stayed out of the market in February and there is a huge amount of liquidity in the marketplace I cant see how this would disappear all of a sudden.
However, one of the areas that slightly concerns me is the huge amount of investment by bank treasuries and at what level they will continue to support the sovereign and supra sectors how permanent their support will be. The liquidity buffer regulations are encouraging them to be big buyers but there is a big question mark over how much they will be buying and how consistently they will be buying.
But I must also tell you, that apart from the huge bank treasury orders, we have seen exceptional granularity in our bonds, in particular for the longer dated transactions that we are doing with small insurance companies across Europe who typically take small tickets. This is quite different from before when we had ticket sizes of Eu500m here, Eu750m there, and that made a deal work.
Now we have the bank treasuries who come and help develop momentum in the book and that gives confidence to the market. But then we always build up oversubscription in the books as a result of all the real money accounts coming into the deal. This is very encouraging.Northfield, Deutsche Bank:But dont you think perhaps thats a reflection of the markets right now, that EIB doesnt have the headline risk of some of the sovereigns in Europe? And so for selected issuers, I think you may benefit when others are facing challenges.
Shapiro, IFC:But there is a lot more liquidity around and we were all recognising that a few months ago.
Bye, HSBC:This goes back to the point about price in that the euro market is adjusting far quicker than it ever used to and so were now seeing these massive differentials between the sovereigns that can issue four or five billion with zero new issue premiums, such as Finland, and the higher beta names that have to pay 25, 35 basis point new issue premiums. But if they pay that in a stable market, theyll get a 600 plus ticket order book. Look at the 600 accounts in the five year Greek deal or the 400 plus accounts for their 10 year deal. The investor base is massive. So we perhaps underestimate the number of people who will come into a deal if its offering obvious value.
Corley-Smith, BNP Paribas: If they sniff a bargain.
Northfield, Deutsche Bank:Its the same thing as saying liquiditys always there at a price. The danger of oversupply only applies unless issuers dont adjust their expectations on price, and I think there are several issuers, not at this table, who will face pressure on their spreads.
Bye, HSBC:The issuers arent even using the full curve though. If you look at KfWs transaction in mid-March a two year trade at Libor less 31bp thats better than weve ever seen before, simply because no ones issuing at the front end. So if it all went horribly wrong, issuers that have been using the euro market primarily for duration could shift down to the short end of the curve where theres obviously massive demand, which they dont want or dont need currently because other sources of funding give them better levels. But its there to be taken if necessary.
Bargagli-Petrucci, EIB:I actually foresee more opportunities to place more longer-dated bonds into the real money accounts in euros as the 4% level becomes more common and sustainable, which we will most probably arrive at as the yield curve steepens which most of us are predicting will happen.
EUROWEEK: Is there an investor base beyond the eurozone in euros and, if so, has that investor base voiced any concerns over the recent volatility in the EU peripheral sovereigns?
Taor, Barclays:The central bank universe has been, over the past few years, more active in euros and perhaps less so in dollars on occasion. Theyre clearly more focused on the short, middle part of the curve, than the longer part of the curve and some of the concerns around Greece have affected other countries as well and there is a bit more caution. But, generally speaking, theyre not going to be driving a transaction, theyre going to be, in terms of volumes, peripheral to a transaction. That demand will continue to grow but its not going to be as important to the success of a deal as perhaps in the dollar market.Corley-Smith, BNP Paribas:We still see a frightening lack of focus on euros in the US. It is quite unnerving how little interest we see in the sovereign contagion problem over in Europe at the moment.
Elbech, IADB:The headline risk is too big now.
EUROWEEK: Barbara, are you having to field questions about the problems in Europe?
Bargagli-Petrucci, EIB:We are doing a huge amount of investor work on a continuous basis. Lately, we have been doing a lot of explaining to investors about what EIB does, which is finance viable, sound projects. What we have had to explain to investors is that we are not in the business of bailing out countries, banks or corporates, and that we cannot fund budget deficits or balance of payments because of our statutes which are annexed to the new EU Treaty. The only expertise EIB has is project finance. Thats what weve done for the last 50 years and we cant do anything else, from a practical point of view.
And yes, we have also had to explain our different exposures to different European countries and in so doing have explained our exposure to Greece.
Shapiro, IFC:That ties in with your point Soren, that were getting on the roadshows, and they want to hear much more about the real business. They want to know what the fundamental business is and the details of how we go about it, how we handle our portfolio, in much more depth than weve seen before.
Elbech, IADB:That is exactly my point. Recently there was a central bank conference in Paris, where we were constantly asked by investors to explain what we actually do in terms of the development mission of the Bank.
EUROWEEK: Questions that you perhaps were not asked three years ago?
Elbech, IADB:Three years ago, people looked at development and bank and said, OK, we know what youre doing. But now they really want to know what the business model is and want to take a look at what backs the repayment of your bond issues. They are now looking at your shareholder group. Thats unprecedented.
Herrera-Pol, World Bank:Some investors are even asking what percentage of our liquidity portfolio we have invested in Europe.Demartino, UBS:In the US we saw strong demand to start the year. This demand is in part responsible for how tight spreads are now. If you look at the two to three year part of the curve there are many issues trading inside 20bp versus matched maturity Treasuries. At some point spreads will run out of room to tighten. The fact that more accounts are asking about your business model is encouraging. Unfortunately the small incremental pick-up over treasuries will keep US demand muted.
Corley-Smith, BNP Paribas: But Im heartened by the fact that the shared experience of the supras here is that theres actually more emphasis again on the true credit behind why you are a triple-A. One of the outcomes of the crisis which benefited you as a group was that the value of a sovereign guarantee was significantly diluted. Pre-crisis you competed against plenty of triple-A rated issuers out there who enjoyed sovereign links or various government support or ties, but still offered investors attractive additional yield on top of yourselves.
When the triple-A rated TLGP and all the European government guaranteed bank bonds arrived en masse, investors questioned the way they valued a sovereign guarantee. Thats thrown the supras into a very different light in terms of credit analysis going forward.
EUROWEEK: Do we expect the sector to benefit from the liquidity buffer regulations, as Barbara touched on earlier?
Taor, Barclays Capital:It has benefited and government yields have gone down because of it. Its hard to know whether that will be a complete replacement for what is called QE around the world, probably not. But it certainly has been a benefit, yes.
EUROWEEK: To the detriment of others?
Taor, Barclays Capital:If sovereigns perform and supranationals perform, that drags in other issuers as well, and vice versa. Going back to the situation in Europe for the US investors, the bad news around Greece has affected not just sovereigns and supranationals; it has affected the whole market. It affected the US corporate market; that fell 50% in the following two weeks in terms of issuance volume. And that sentiment is a big driver; thats why February was such a quiet month compared to March. It wasnt a credit issue around corporates who are still very healthy, or around supranationals who are still very healthy, but the market sentiment did turn and it turned in equities, it turned in fixed income.
EUROWEEK: Governments have gone to the effort of creating these systems and programmes, such as QE, to help everyone so you would have thought that theyd handle the exit from those systems just as thoughtfully.
Taor, Barclays Capital:Well, I think they have done. Clearly, theyve very much helped cure a problem, or at least nursed the problem back to health. They dont want to be seen to be doing the wrong thing now and exiting in an irrational way. And obviously having spent so much money helping the markets get back on their feet, they dont want to be the people that are actually turning it back the other way. As February and early April showed, markets are still very fragile and its not necessarily going to be an easy ride going forward.
Northfield, Deutsche Bank:One of the strongest points made is the importance of perception and sentiment, how much that has helped to sway the markets back into touch and back on course. It has been a herd mentality at times and in February we saw that. Few would invest in sovereigns for a while and spread volatility got to be a little too much for most peoples risk appetites. But once the market sensed that theres a backstop bid, once they sensed that the authorities are there to stand firm together, that helped sentiment. And we saw that in March and then it went the other way in early April. Its sentiment thats driving this.
Sequencing is also an issue that we should not forget about. There are a lot more issuers trying to tap the significant liquidity in euros but the windows of issuance are narrower than they are in dollars because there are many more regional holidays in Europe. This means everyones going to focus on the same narrow windows. And with sentiment changing direction quickly, that is going to provide further congestion not necessarily the massive oversupply problem that some predict, but pricing for some will likely need to adjust somewhat if they are not first in the queue.
EUROWEEK: How do the borrowers feel about issuing in sterling at the moment given what is happening to the UK economy and the uncertainty over the election?
Bargagli-Petrucci, EIB:We had a slow start this year. Traditionally our sterling issuance is around 10% it was 8% last year and we are at the same level now. But we are a bit shorter dated in sterling than we normally are.
I consider the euro and sterling as the currencies in which I can fund duration. We will always remain in the sterling market as it is a core currency for us.
EUROWEEK: Are you not more concerned now about sterling than perhaps you have been in the past because of the noise around the UK?
Bye, HSBC:Theres nothing to be concerned about really though. The sterling market has got a massive ability to absorb the supply thats coming through the UK governments issuing over £200bn a year and its not been a problem. Yes, the Bank of England has bought most of it indirectly and wont be doing so going forward. But if you look across the curve, the demand for triple-A product is still very high. At the very long end, EIB, KfW spreads are, in some cases, single digits above Gilts. Again its just a question of economics. It doesnt make any sense at the moment for the supras to issue in sterling on an after swap basis.
Berman, UBS:I am quite encouraged by what is happening in the sterling market. In fact we have seen some central banks begin to increase their exposure, admittedly from a low base, while others have actually opened Gilt portfolios. And already theyre switching very quickly into triple-A non-Gilt product because theyd rather have that exposure and a yield pick-up. Its then a question of economics and whether it stacks up versus where you can fund elsewhere. But in terms of the demand, I think there is demand in sterling and I think it is at the expense of Gilts.
EUROWEEK: Lets go round the table, to ask about hopes and fears for the next nine months.
Taor, Barclays Capital:The markets going to be fragmented this year were all agreed on that. The concerns we have going forward are more on the regulatory side than anything else. Its still very unclear what politicians want, in terms of a banking model.
EUROWEEK: On what youre allowed to do in this market?
Taor, Barclays Capital:What banks are allowed to do whether investment banks and commercial banks need to be separate, whether they can use their balance sheet to do the normal business they do, whether they will be, as some politicians want, the plumbing for the economy or part of the economy. The banks are still seen as part of the problem and too many politicians are trying to solve the problem by bashing the banks and making the business these institutions do very well much harder going forward.
Shapiro, IFC:And a lack of consistency across jurisdictions is going to be really problematic.
Taor, Barclays Capital:Theres no consistency. UK banks are having a tougher time than others, particularly because of the liquidity buffers, for example. There are much more stringent rules for UK banks in London than American banks or European banks and that is bad news for them.
Shapiro, IFC:Therell be regulatory arbitrage.
Taor, Barclays Capital:Exactly. It doesnt seem like a consistent way of doing it, of solving a problem. So regulation is going to be a problem for everyone.
Diehl, HSBC:One of the other things that we see as a big concern as well is leverage ratios and how possible changes (eg, across the board reductions) to those will impact our ability to do repo in this triple-A market. It could significantly constrain our ability to make markets in this sector. Our ability to finance positions via repo is a very important part of this business.
It also gets back into what is speculative business versus what is true market making. If dealers can only buy or sell bonds when they have the other side of the trade lined up, without an ability to take a position, then clearly that significantly constrains the business.
And if we cant finance market-making positions because of leverage ratios, even if were allowed to take them, then thats going to have a significant impact on this market. And then perhaps volume becomes a greater concern.
Lampard, Bank of America Merrill Lynch:Beyond the regulatory question, which is ever present, its the stability in the sovereign sector. If I think about the last two years, what have we done? Weve really shifted a lot of problems with the private sector to the public sector and so its going to take five, seven, 10 years to deal with that and sort it out. And thats going to inject a tremendous amount of uncertainty and volatility in the underlying sovereigns which will have a big knock-on effect, to add to Alexs point.
McGregor, Bank of America Merrill Lynch: Lets look at little bit more at the hopes. Lets look back over the last 20 odd years. The supranational sector is the one that developed this whole fixed income market, whether its through the swap market, whether its opening new sectors. Were now in that position again. Lets be honest, before the turmoil, things were getting a little bit generic and it was getting hard to do new things. Climate awareness bonds or whatever name you want to use can be interesting, but there werent that many big steps forward being taken.
And while I agree with Sean that regulation is a concern, thats actually the kind of thing this sectors always taken on and been the first to break through and create new markets or new products.
Bye, HSBC:Ive got a similar concern. My worry is that complacency comes back into the market, credit spreads get compressed again and we lose the creativity, we lose the market dynamism that weve seen over the last 18 months. Its been a very good time for issuers to really show the results of the work theyve done over many years. Weve probably had too much volatility but, if we go back to the opposite extreme, our lives arent going to be that interesting again for a while.
Demartino, UBS:For me its the undervaluing of volatility and the willingness of investors to continue to buy at levels which I feel dont accurately reflect all the risks. The direction of the markets is being shaped more from Washington than Wall Street and that scares me. Just look at the mortgage buy-back situation with the GSEs from a few weeks ago. Investors lost billions on what was perceived to be a low risk/carry trade. With all the political uncertainty in the world I believe risk premia are too tight. Its almost like picking up pennies in front of a bulldozer.
Timbrell-Whittle, BNP Paribas:My main concern over the next 12 months is the question of what will happen to Europe. It seems on the face of it that the Greece situation is under control but some of the other European sovereigns are also in a precarious fiscal position. Who is going to foot the bill if more sovereign support is need and what does this mean for the eurozone? I dont think everyones necessarily digested all the issues surrounding sovereigns away from Greece and I fear that the worst is yet to come.
Berman, UBS:Im worried that were just delaying the problem I think we will come up with some possible solution and well get through 2010.
But again, going back to a point that Bill made regarding sustainability of debt and the rising interest costs, its not getting that much cheaper for the likes of Greece. They are pricing their bonds to clear and they now have access to a EU/IMF funds at a preferential rate versus their market currently, but I think that we are just pushing this problem out and that its going to come back and haunt us. Im also concerned about the redemption pressures on financials and whether theyll be able to access sufficient funding for themselves, particularly for term funding and particularly for the second or third tier names in each of the countries, particularly in Europe. It may be fine for the country champions, but whats happening to the next level or the level beneath that?
And then finally, just in terms of global growth, Im worried about whats going on in China as we are so dependent on their growth to boost everyone elses.
Northfield, Deutsche Bank:Following on from what Jeff was saying, the regulatory developments are key, not only the leverage ratios but equally on balance sheets and how that affects our ability to extend credit, via swap lines and CSAs, and how that changes the model for the swap-dependent issuers. Its not a question yet for sovereigns but with the agencies and supranationals its an issue. As mentioned earlier, the sustainability of sovereign finance is another issue. We have termed out the problem but a big question is how that problem gets socialised across Europe, which is of course not one single federal market like the US, but its 12 different public opinions, which in different countries have different levels of discipline. And that could be a problem: whatever solution is agreed, as thats socialised, what does that mean for the cohesion of the respective EU societies?
Herrera-Pol, World Bank: What makes me lose sleep sometimes is all the excitement around our business, because these days we are not only funding the institution. We are also busy raising money for IFFIm, we are selling carbon emission rights (CERs) on behalf of the Adaptation Fund, we are arranging Cat bonds for Mexico and other issuers, were buying back bonds for Gabon and so on and so on. So its a very heterogeneous programme, and having so many different clients can be very demanding at times. But it is also very, very exciting.
Bargagli-Petrucci, EIB:We are more homogeneous in this regard because we dont have all these mandates although the press for many years has speculated about EIB becoming a vehicle to finance Europe in the capital markets, to do all the bond issues.
The issue came up again with the potential bailout of Greece and other European countries. Then in the middle of March it was suggested that EIB could run the European Monetary Fund. Im not losing any sleep over it as there is no political will behind involving EIB in it but it is distracting.
My hope is that my funding programme will not grow over Eu80bn. We are doing everything cashflow-wise to keep it at this level. That also has to do with the fact that we may have to lend, according to the agreements within Ecofin, Eu15bn more in both 2009 and in 2010. Hopefully the EUs economies are getting better so that we can reduce our project financing activities. And thats the wish of the Council that was agreed in December 2008, so we are planning for a situation when we can run down our lending programmes.
Elbech, IADB:There are four things that keep me up at night. First of all, how far is Denmark going to get in the World Cup?
Second, Im concerned about how capital adequacy constraints might impact us in a world where there might be more consolidation going on in banking. We might have fewer credit lines, ie less capacity, to deal within in a continuous borrowing world.
The third has already been mentioned the European problem. The European solution might not be good for Europe, it might be good money thrown after bad, and that might have long-term impacts on the markets that we have not yet even started to see and we might not be able to comprehend because it is so incredibly difficult to sustain. If you were Greek and you had a euro deposit in your bank and you simply take that money out of your Greek bank and put it into Deutsche Bank in Germany, its still a euro deposit. And what happens if Greece goes bust? Who is behind that money really? There are so many unanswered questions on that.
And the fourth concern is how far Denmark is going to progress in the World Cup.
Corley-Smith, BNP Paribas:My fear is that we just go back to very little spread dynamics and suffocating credit compression in the SSA space and that were going to see lethargy and, even worse, apathy, from investors again as a result. And weve got to a point where weve had a wonderful ride. Its been a rollercoaster but my fear is that we rebuild the narrow walls we bashed against before.
Diehl, HSBC:Coming in on the positive side again, we estimate that in the next 25 years theres $40tr worth of infrastructure financing that needs to go on in the world and much of that goes to the heart of this business and what the supras are all about. And so, from that perspective, weve got a lot of value to add. We think that the supras can be a significant factor in funding this requirement, that they have strong balance sheets and a lot of business for all of us here.