Bundesland Nordrhein-Westfalen, a municipal authority in western Germany, plans to set up a medium-term note program and will use foreign exchange swaps to convert all non-euro denominated issues into the single European currency. Eckhard Helms, head of funding in Düsseldorf, said the authority has decided to widen its investor base with benchmark bonds and medium-term notes to meet its annual EUR11 billion (USD9.5 billion) funding requirement since demand for municipal debt, known as Schuldscheine, has plummeted. Helms envisages the bonds will be denominated in euros but the MTNs could be in any currency. Colleagues at other Bundesländer have encountered strong interest for Japanese yen-denominated MTNs, which are then converted into synthetic euro-denominated notes using foreign exchange swaps.
Helms predicts it will issue approximately EUR2 billion of MTNs a year and EUR6 billion of bonds. The regional authority tested the water with a sterling MTN earlier this year, which was a success and has given it a taste for more. Proceeds from the sterling MTN were converted to euros via a swap with Westdeutsche Landesbank. The authority wants to set up a dedicated program because of the economies of scale generated in using the same legal framework.
The demand for Schuldscheine has declined as interest-rates have fallen and mortgage banks, the main buyers of the notes, are no longer able to meet their investment targets. Helms said last year it was issuing the notes with coupons of 10 basis points below six-month LIBOR, whereas it now has to issue at 3bps below LIBOR to place the notes. He hopes that by widening its investor base it will be able to achieve better funding rates.
The Bundesland chooses derivatives counterparties based on a minimum double A minus credit rating, price, relationship and experience, Helms said. The Bundesland is Aa1 rated by Moody's Investors Service, double A plus rated by Standard & Poor's and triple A rated by Fitch.