Europe's agencies face a changing world

  • 01 Mar 1999
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While the European municipal market is starting to evolve, and bonds from large cities and regions offer an asset class with near-sovereign risk, there are thousands of municipalities which are too small to issue on their own.

But the range of funding options for this class of borrower is improving, and they need not rely solely on government transfers as in the past.

As well as commercial banks and European bodies such as the European Investment Bank, most countries have a bank or central agency which specialises in lending to municipalities.

In France, Spain, Portugal, Italy and other countries, deregulation has opened the market to new participants. Elsewhere, central agencies remain state-owned and have a monopoly on municipal lending.

This is one of the reasons, say bankers, why the belief that the European municipal market will quickly come to resemble the much larger US model is probably misplaced.

A spokesman from one privatised municipal bank believes there are some features of the US market that cannot be replicated in Europe.

"In some European countries municipalities do not welcome disintermediation," the official says. "They prefer to bank face-to-face with people they know. In the US, local governments are used to investment banks, and to transparency and competition. Those things are good of course, but in Europe they are not always what municipalities look for first."

State-owned agencies work on economies of scale. They are not in the business for profit but to provide the cheapest possible funds to the municipalities, which are often shareholders or members. Their success depends on knowing the local market and streamlining documentation to reduce costs.

Bank Nederlandse Gemeenten (BNG) knows where its future lies. It is staying within its national borders to protect its relationships with Dutch municipalities.

Anne Rüsing, senior manager of international capital markets, says: "The local mentality has served us well so far. We don't want to spread ourselves too thinly. There are some German banks which lent too far abroad, and ended up with exposure in Russia and Asia."

With banks focusing on return on equity, BNG could be under pressure from its shareholders to look abroad for more business or move into project financing.

Rüsing says: "The shareholders of BNG could ask for higher dividends, but they accept lower returns because shareholder value for the Dutch municipalities is being able to access cheap funds at any time from the bank."

BNG is half owned by Dutch municipalities and half by the government, and there are no plans to privatise. Its priority is to keep its market share.

Seventy percent of its assets are in the Netherlands, giving it a comfortable 40% market share. Its triple-A rating and government support allow BNG to achieve a low cost of funds.

For instance, BNG's 2009 benchmark euro deal launched in December 1998 came at 27bp over Bunds, while the EIB came at 20bp over the Bund - the difference being the liquidity premium.

In May 1998 an MTN programme was signed with all the Dutch municipalities named as issuers. BNG and ABN Amro arranged the programme, under which individual municipalities can establish their own programmes.

The rating of the programme is implicitly triple-A because of the link with BNG and the Dutch government. With around Dfl300m ($158m) outstanding, Rüsing says the programme has been a success, but needs time to develop. The publication in February 1999 of a memorandum from the central government, which states the government's backing for Dutch municipalities, should encourage more activity.

Kommuninvest, the Swedish agency, is also staying at home. Chairman Lars Andersson says: "It is essential that agencies stay within their national boundaries. We are a state entity and we cannot be anything else. I can't stress enough that we have no ambitions at all to go abroad. Of course we tap international markets, but we lend at home."

Some 80%-90% of Kommuninvest's lending is refinancing old bank loans. "We generally borrow at Libor minus a single digit, and lend roughly 13bp above that. It depends on the original loan, but refinancing can save a Swedish municipality up to 100bp," says Andersson.

This is but one example of what one banker referred to as the "cosy margins" that commercial banks used to take off local authorities.

Andersson adds: "Agencies provide a lot more than cheap money. The process of issuing is getting more complicated. We do all the documentation and the swaps and hedging."

Rüsing believes that BNG could be "a blueprint", but is not advising agencies in other countries. The Scandinavian agencies are more proselytising, however.

When Panayiotis Tzanikos, mayor of Amaroussion, traveled through Europe looking for an agency to copy, he chose the Scandinavian versions. He set up the Hellenic Municipal Financial Services Company, of which he is chairman.

Tzanikos says: "We liked the Swedish model because it was created by the municipalities, and is 100% controlled by them. We didn't want to wait for an initiative by the central government."

The company has 40 member municipalities, with a total population of 12.5m. The company's first bond issue is several years away, but it has been advising Greek local authorities and helping to arrange loans. A $20m loan from foreign banks to Amaroussion should be ready in March.

Specialist banks in the US have grown up in the last 35 years to cater for small municipalities' bond issuance. Robert Lenna, executive director of Maine Municipal Bond Bank, says: "The private market would love to have exclusive rights for the big single-A or double-A rated municipalities, but they are not interested in smaller towns. The big investment banks come to Maine but only do business with the top 2% of municipalities."

Twice a year the bond bank pools the needs of about 30 local authorities and issues a $100m bond. Investors are protected against default by the bank's reserves, and by its right to intercept government payments to the borrower. The bank issues at the equivalent of 30bp over Treasuries, and its reserves allow it to lend at the same rate.

"We can nearly always get a lower total cost of funding than investment banks. Our documentation and insurance is less complicated," says Lenna. "Also, in the triple-A rated insurance market, the traders look at the underlying issuer. If they see a 30 year old bank, with 350 borrowers, that's better than any local authority."

Nicholas Anderson, managing director of the Finnish agency Municipality Finance, believes the US municipal bond market is inefficient. He criticises the complicated transactions for making municipalities dependent on layers of intermediaries.

In a recent report on the market he writes: "Some [US] states have attempted to introduce bond banks to simplify and broaden access to the bond markets, but these attempts have met with strong opposition from vested private interests and have not been adopted widely."

In contrast with the state-owned agencies which are staying at home, the Dexia group has built itself into the 25th largest bank in Europe, controlled by public and private owners.

Dexia was formed in 1996 by Crédit Local de France and Credit Communal de Belgique. Crédit Local was once part of state-owned CDC, which still holds a 7% stake, although Crédit Local acts as a private bank.

Crédit Local realised it was too small to survive the competitive environment alone. Margins were falling and in 1996 it lost its triple-A rating from Standard and Poor's.

There were two solutions: to increase the risks of the credits it lent to, or to get bigger and have fewer competitors. The bank chose the second option, and has since expanded its network to include Spain, Italy, Luxembourg and the UK. Crédit Local has a 40% market share in France, and others in the group are in strong positions at home. But cultural differences between local authorities in Europe make it hard to break into a domestic market as an outsider.

Dexia is buying stakes in local lending banks rather than evolving out of a central source and strategy, in an attempt to expand and yet remain close to local clients. The strategy is based on a need to grow, and a belief that disintermediation will not take hold in Europe as it has done in the US.

Municipality Finance's Anderson is wary of European municipal banks which mix public and private ownership.

He argues: "There are some organisations which seem to want to pass responsibility for guaranteeing the debt onto the state. There are no clear decisions on accountability. Small municipalities live in a different world to big banks. The prerequisites of efficient funding for them are transparency, competition and a clear guarantee system." RM

  • 01 Mar 1999

All International Bonds

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 17 Oct 2016
1 JPMorgan 310,048.18 1328 8.75%
2 Citi 285,934.48 1059 8.07%
3 Barclays 258,057.88 833 7.29%
4 Bank of America Merrill Lynch 248,459.06 911 7.01%
5 HSBC 218,245.86 884 6.16%

Bookrunners of All Syndicated Loans EMEA

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 18 Oct 2016
1 JPMorgan 29,669.98 55 6.95%
2 UniCredit 28,692.62 136 6.73%
3 BNP Paribas 28,431.90 139 6.66%
4 HSBC 22,935.49 112 5.38%
5 ING 18,645.88 118 4.37%

Bookrunners of all EMEA ECM Issuance

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 18 Oct 2016
1 JPMorgan 14,593.71 79 10.38%
2 Goldman Sachs 11,713.19 63 8.33%
3 Morgan Stanley 9,435.23 48 6.71%
4 Bank of America Merrill Lynch 9,019.27 40 6.41%
5 UBS 8,763.73 42 6.23%