One of the attractions of the MTN markets for issuers is that they can be tailored to suit indivivual needs. Euroweek spoke to funding officials at five leading MTN issuers - KfW, the World Bank, LBW, DNIB and OKB - about how they access the MTN market.
RAISING THE QUESTION OF HOW issuers can use the MTN markets to lower funding programme costs gives rise to many others.
"MTNs are such flexible instruments that they are what you make them," says Scott Church, head of MTNs at Merrill Lynch. And their nature depends on the approach and needs of the borrowers themselves.
Some issuers use MTNs as bond issuance shelves from which syndicated public bonds are issued. These are generally the frequent borrowers, the higher-rated issuers and the supranationals and agencies. "For them, MTNs are purely a documentation or streamlining exercise," Church says.
One such frequent issuer is Kreditanstalt für Wiederaufbau (KfW), which uses MTNs as a documentation platform for its public debt issuance.
In the year to August, KfW has raised Eu23.5bn in the international bond markets, approximately half of which was documented under its programmes.
"We are increasingly using programmes for all issuance and not for particular purposes," says Frank Czichowski, first vice president and head of capital markets at the German development agency.
"Our programmes are flexible so that
we can document all issuance under it, and the majority of euro issuance is
documented under our Eu25bn note
programme," Czichowski says.
"And the majority of our non euro issuance is documented under our [$40bn] global debt issuance programme."
Using the same documentation for each transaction reduces costs in terms of efficiency as opposed to documenting each single tranche individually, and information costs to the investor are also reduced.
"But we can't pretend that we use the MTN programme to reduce funding costs. It's simply a convenient documentation platform for the issuer and the investor," says Czichowski.
"For us, medium term notes are not a product, but a distinction can be made between large liquid benchmark transactions, targeted issues and private placements.
Apart from globals, benchmark bonds and all other issues, even large dollar bonds are issued under documentation platforms. Therefore the term MTN is not something specific to a product."
The World Bank follows a similar line to KfW. "MTNs have become different things to different borrowers," says Gumersindo Oliveros, the World Bank's director of treasury finance.
"Distinctions based on programme registration or other legal aspects have become less relevant since the mainstream syndicated market has taken on more of the investor-friendly characteristics of the MTN market."
The World Bank issued $31bn off its global debt issuance facility out of its $32bn debt issuance programme in 1998. The supranational departed from established practice in 1997 and introduced changes to its documentation platform to maximise its flexibility as an issuance instrument.
In common with other highly rated issuers, the triple-A rated World Bank has found the market more expensive since the advent of European monetary union.
"There have been few surprises," says Oliveros. "European demand
products continues to be very strong, making up for over half of all of our placement activity in the year ending in June 1999, but most of it has been in non-euro currencies."
Oliveros adds: "The steady stream of euro benchmark issuance by borrowers seeking to establish a presence with major continental accounts has made plain vanilla funding relatively expensive for us in that market, but we have been quite active in structured financing in euros."
LANDESBANK BADEN-Württemberg (LBW), which was formed from the
L-Bank, Südwestdeutsche Landesbank and Landesgirokasse on January 1, 1999, has been no slouch in using the currency that shares its birthdate.
LBW has a $50bn Euro-MTN programme which, at the end of July, had over $20bn of outstanding issuance.
"Since the merger we've issued about Eu4bn in the public and private markets," says Eugene Yurist, LBW's head of international funding.
"Of that, about Eu3.5bn has been off the Euro-MTN programme in trades ranging from around Eu8m to Eu650m in size."
LBW's new Euro-MTN programme was written to be as flexible as possible. "We can do equity-linked transactions off the programme, and we have a shelf registration in Japan from which we can sell retail targeted deals," says Yurist.
LBW's main investor base is Europe, followed by Japan and then the rest of Asia "as a distant third", Yurist says. However, in terms of structured deals LBW is constrained to an extent by the fact it must value all counterparty risk within its swaps daily.
De Nationale Investeringsbank (DNIB) is nearly Eu2bn into a borrowing programme of approximately Eu5bn for 1999, most of which will be issued off a Eu10bn Euro-MTN programme.
Nicolette Kroon, manager of funding and investor relations for DNIB, has seen a few effects of monetary union so far. "There have been fewer arbitrage deals in 1999 - most deals have been in dollars, yen or euro," she says.
Oesterreichische Kontrollbank (OKB) has seen the developments since monetary union as being principally unfavourable to its bond issuance programme.
"We are not happy with the way spreads have developed," says Anton Ebner, deputy head of funding at the Austrian borrower. "The corporate market is developing well, but for triple-A rated borrowers we see difficulties and we have avoided issuing a benchmark in euros so far. Spreads need to settle down in Europe."
OKB is a borrower with a long pedigree in the debt markets, having issued internationally since the 1970s. OKB had an MTN programme in place as far back as 1989.
The Austrian agency issuer now has what Ebner describes as a $10bn Euro-shelf programme from which it has launched $7bn of private and public bond issues.
"I wouldn't say we were the grand dame of the markets, but we provide quality, a frequent borrower with a degree of scarcity value and a good alternative to prime borrowers," Ebner says.
Bankers in the MTN market say that issuer strategies are beginning to change. "Increasingly, borrowers are seeing the benefits of the private placement Euro-MTN market and the value that can be produced there," says Pieter van Dyck, global MTN product manager at ABN Amro.
"The market used to be run on the basis of being able to do structured transactions with deep sub-Libor funding. Structured note investors are now increasingly knowledgeable about credit and deep sub-Libor opportunities have become rare.
Van Dyck adds: "Pricing now has to be more fair value, but in return issuers have greater diversification opportunities in building repayment schedules that fit their business needs."