After the spectacular success of its euro denominated benchmark programme in 2001, there was a danger that there would be an element of anticlimax for Kreditanstalt für Wiederaufbau's (KfW) issuance in 2002.
But thanks to the dollar market, on the one hand, and the innovative use of the so-called "flexi-pot" on the other, by the middle of October it had already become apparent that KfW had once again positioned itself as a leading candidate for agency borrower of the year.
"KfW has definitely been the agency success story of the year once again," says Donald Ogilvie, head of debt capital markets at DrKW in Frankfurt. "It has established a euro benchmark curve which is going from strength to strength, and the bonds that have been issued under the benchmark programme are trading exceptionally well."
Few would disagree with this accolade, but as KfW's head of international capital markets, Frank Czichowski, explains, following the success the bank enjoyed in the euro market in 2001, it set out at the start of this year to make 2002 the year of the dollar.
At its half-yearly press conference in July, Hans Reich, chairman of KfW's board of managing directors, described its strategy in the dollar market as one that was aimed at transferring "the successful basic principles of the euro benchmark programme - quality, liquidity, performance and transparency - to [its] US dollar capital market activities."
In implementing its dollar programme, KfW did not let the grass grow under its feet, launching its first $3bn five year deal via Goldman Sachs, Merrill Lynch and Cititgoup/SSSB as early as the middle of January. Intensively marketed and priced at 5bp over the Fannie Mae 2007, compared with a guidance range of between 4bp and 7bp over, the dollar curtain-raiser attracted an order book comfortably in excess of $5bn. In the immediate aftermarket, the bonds traded in to 4bp-3.75bp over the US agency, which, as one co-manager commented at the time, left "a very good taste in the mouth of those who bought it."
It also efficiently paved the way for KfW's return to the dollar global market in April, when HSBC, Lehman Brothers and Morgan Stanley led its first $3bn three year transaction, which was priced on a curve-adjusted basis at just 1bp over US agencies, the tightest level the German bank had ever achieved in the public dollar market.
The most recent of KfW's dollar transactions was the $3bn three year global led in October by Credit Suisse First Boston, Deutsche Bank and JP Morgan, which was priced at 77bp over the two year US Treasury Bill and attracted an order book worth $4.7bn.
Czichowski says that in addition to the dollar programme, KfW has also successfully issued a series of callable issues in dollars this year. "The volatility in the US dollar this year has made the callable market a very effective funding vehicle for KfW," he says, "and we have raised a total of about $7bn in callables in 2002. Some of that has been in Japanese yen, but the majority has been in dollars."
The net result of all these deals has been that KfW has enjoyed a spectacularly successful year in terms of cultivating its investor base in the US. Czickhowski says that in the first two global dollar deals of the year, 55% and 50% of the transactions respectively were sold to US accounts. In the third transaction, that share dipped to about 39%.
Nevertheless, this successful penetration of the US investor base, coupled with the demand generated by KfW's callable deals on the opposite side of the Atlantic, means that more US investors are now participating in KfW bonds than ever before.
"At the end of 2002 we will have funded more in dollars than euros," says Czickhowski, saying that a rough breakdown of KfW's borrowing for the year as a whole would suggest that 40% will be accounted for by euros, 50% by dollars and the remaining 10% by currencies such as yen, sterling, Hong Kong dollars, Czech koruna, South African rand and a handful of others. "In total, we have raised $11bn in global dollar transactions this year, of which about 50% have been sold into the US," he adds. "That means that this year alone KfW has sold more bonds to US investors that it had in the previous 54 years combined. That is a big number and we're very satisfied with the results of our efforts to improve the way we are perceived by US investors."
Some of KfW's success in the dollar market is probably explained by concerns among domestic investors about the credit quality of the US agencies. "The feedback we've been getting from investors in the US is that they feel that they are over-exposed to the US agency borrowers which have seen their spreads widen out quite dramatically recently," says one Frankfurt-based banker. "US investors want differentiation and diversification and that is encouraging them to look much more favourably at European agency borrowers like KfW."
Bankers point out that a beneficial side-effect of KfW's successful borrowing in the dollar market has been that it has rubbed off on Germany's other triple-A borrowers, most notably Rentenbank, which now has a global issuance programme registered with the SEC under Schedule B, freeing it from a number of onerous disclosure requirements and giving it recognition in the US as a surrogate government issuer.
"I think Rentenbank is a very good example of a borrower that has managed to internationalise its funding very effectively," says Gerald Ruecker, co-head of German debt capital markets at BNP Paribas in London. "Both its global dollar issues have been very successful and could be upsized from $1bn to $1.25bn. But what was most remarkable about Rentenbank's first dollar global was that just over half of the issue was placed with US investors, a significantly higher US distribution than KfW achieved with its debut global dollar bond. To an extent, Rentenbank has of course benefited from KfW's issuance in the dollar market, but it has also done a very good job of getting its story across to US investors."
Rentenbank has had two other very obvious factors in its favour in tapping the dollar market. First, with a much smaller annual borrowing requirement than KfW, it is much freer to pick and choose in terms of market timing. And second, as Ruecker points out, the disappearance from the market of erstwhile triple-A German development bank borrowers such as DSL and DtA has left the playing field much clearer for KfW, Rentenbank and, to a lesser extent, L-Bank.
In the euro market, KfW began 2002 by indicating that it intended to raise at least Eu15bn under the euro benchmark programme it initiated at the start of 2001, although its first deal in euros did not emerge until the first week of March. As far as the borrower was concerned, it was clearly worth waiting for, with the Eu5bn 10 year deal via BNP Paribas, Citigroup/SSSB and DrKW attracting a total order book worth about Eu8.2bn.
A novel and important feature of KfW's euro benchmark programme in 2002 was the way in which it refined the pot system with a view to broadening its investor base still further. In its euro benchmark No 5 transaction launched in June, KfW introduced a twist in the syndication process with the introduction of the so-called "flexi-pot system" which Czichowski describes as an adaptation of the conventional pot mechanism.
"We've always said that we didn't want the pot system to be an end in itself, but a vehicle to improve the liquidity of KfW paper," he says. "We used the pot system when we started the euro benchmark programme and it certainly helped to broaden distribution and improve secondary market performance."
If there was a shortcoming associated with the use of the conventional pot, Czichowski adds, it was that a number of co-leads erred on the side of over-enthusiasm, generating more orders than they could possibly have hoped to fill via their allotments in the pot. "So we decided to concentrate the co-leads on quality rather than quantity by putting a cap on the amount that co-leads could expect to get from the pot," he says.
"The complication with that is that if you introduce a cap on each single allocation you run the risk of being left with some residual bonds if every co-lead is unable to place the full amount. With the flexi co-lead pot we decided that if there were any residual bonds they would be handed back to the leads rather than re-distributed among the co-leads."
The demonstrable result, says Czichowski, is that instead of competing furiously with one another for quantity in terms of orders, the co-leads were encouraged to focus purely on the quality and the regional distribution of the orders they were able to generate. "The system worked very well and the co-leads were much more effective in terms of bringing new accounts into the book and distributing the bonds in an orderly way."
By asking co-leads to focus on new accounts and on specific geographical regions, KfW achieved two important objectives that benefited the issuer and its investors alike. First, it spared investors from the all too common burden of having to take between 30 and 40 phonecalls from bank sales staff all promoting the same issue. Second, it clearly had the effect of broadening the KfW investor base. According to Czichowski, about 40% of the orders generated by the co-leads were from investors that were buying in to the KfW credit for the first time. *