David Smith, CFO, and John Hoskins, senior vice president, treasury
Most of your debt has been sold domestically. Why?
DS: We began doing global bond offerings in 1995. That was when we took our first foray into the global markets, trying to entice international investors.
Of course we never really know where product ends up, we only know where it gets sold at first. About half of what we have sold we have tried to do in a global format and about half of it ends up in the US.
The needs of the global market are different from ours. The international market is short dated in preference and, in contrast, our desire is for long dated product. When we move overseas we find that investors have an appetite for five and 10 year paper. We have long life assets, and so really we prefer to issue paper that is dated at the longer end. A lot of our paper is 30 year. That is part of what makes us slightly different to other agency issuers who only issue longer term debt periodically.
We also find that the appetite of international investors for optionality is different. In our portfolio, we have quite an appetite for optionality. We issue callable product if the price is right, and we also issue puttable bonds. European and Asian investors have a preference for bullet bonds.
Why is that?
JH: I think that callable product is a much newer product - any type of bond with options is. There is probably a more widespread acceptance of the option-adjusted pricing models we use in the US than in, say, Europe. Investors there have historically bought treasuries, and as they move out of treasuries and into agencies, they are probably looking for a similar product.
Is that something that you wish to overcome?
DS: It is something you try to live with, but of course if you are an issuer like ourselves with a preference for optionality, you do try to educate investors. Besides, as the investment market worldwide becomes more uniform and as the pricing mechanisms we use here become more widespread, I think that they will become more used to that kind of product.
How has the market been this year?
DS: It has been an interesting year. Things were fairly tranquil in January, February and March, and then investors became very concerned in late March with Gensler's comments and with congressional hearings going on concerning Fannie Mae and Freddie Mac. The $2bn global issue we launched in June had first been targeted for late March, but we postponed it because of the disruption at that time. That was about the time that Gensler made his comments, and pricing for treasuries was unstable, because of concerns about interest rate increases, so we elected to come back at a time when the market was more tranquil.
Investors are not very discerning. If one agency is under a spotlight, it does not mean that all agencies are. We try to point out that the issues surrounding Fannie Mae and Freddie Mac are not at all issues that relate to TVA. One of the big differences between TVA and other agencies that investors lose sight of is that they are government sponsored enterprises (GSEs) and that that means exactly what it says. We are a government enterprise. We have no middle initial.
For a few savvy investors that are taking the time to do their research, there is a significant difference: they are publicly owned; we are government owned. In the minds of many investors, the risk premium for a government owned enterprise is less than that of a government sponsored enterprise.
Yet your $2bn 30 year global in June was priced 4bp-5bp outside Fannie Mae's paper in an equivalent maturity.
DS: Yes, that is odd, and annoying. Some people attribute that difference to liquidity - our portfolio of outstanding debt is about $25bn, Fannie Mae has maybe 20 times that much. But I have difficulties understanding that liquidity premium. Liquidity is not a function of size. It is a function of underwriter support and of bid price. You pay a bit more for ease of getting in and out of a security.
I think that in March, when all the issuers were under the spotlight, what we were saying is that all triple-A issuers are not created equal. You have to go behind the credit rating and assess the risks, and the relationship with the government. TVA is different because of government ownership. Our business is built on bricks and mortar, not out of mortgages and student loans. Our assets are quite different. I think investors need to take the time to do the same investment research for a triple-A as they would for anyone else.
Could it be that the other agencies are financial institutions and that you are seen as a utility?
DS: Our business is a utility, but our paper trades as an agency.
JH: Almost all the investment banking firms trade TVA as an agency and some banks trade us as a corporate bond, which is a carry-over from years ago. TVA was an issuer of long-term debt in the early 1960s and investment banking firms traded TVA off their corporate desks because the agency market was not really well developed. Sometimes old habits die hard.
DS: One thing true for TVA, and I think every other issuer, is that you try to approach new markets. We have unabashedly tried to attack and make inroads into the corporate retail investor market. In the 1990s, many investors who held preferred stock found that in terms of principal and investment flow, it was not such a good investment. So in 1995 and 1997 we offered a product that was specifically tailored to retail investors. It paid quarterly dividends, it was in $25 denominations, and we had the securities listed on the NYSE, so that people could look up the product in the same section of the Wall Street Journal that showed their utility preferred stocks. So these people probably see TVA as a utility.
And the rating agencies? Moody's, for example, definitely analyses you as a utility.
DS: There would be some degree of risk resulting from our business, if the government support was not there. Investors would be handicapping themselves if they did not look at the underlying business. So the ratings agencies also look at the underlying business, as well as the obvious thing, which is the government support.
It is also worth noting that TVA is a government owned enterprise that is fairly competitive with the utilities around it.
You have issued sizeable bonds in both Deutschmarks and sterling, but they were both one-offs. Why is that?
DS: The Deutschmark deal was DM1.5bn and was unique. It was a swap deal that we did with the EIB, one that was economically attractive for both of us. TVA always wants to get back to a dollar exposure, whatever else we may have outstanding.
The same was true of the sterling deal, which was unique in its duration - 23 years. It was trying to satisfy a unique portfolio need for a lot of investors in England and Scotland and we were able to swap it back into dollars very cost-effectively. We look at what investors are looking for and try to swap it back into dollars, so a non-dollar denominated issue needs to be at a cheaper price.
We looked at doing euro denominated product, but the swap market was at a level where it would not have been cost-effective. Freddie Mac's euro programme deal may not even be cost-effective for them. It is perfectly valid as a marketing strategy - trying to open up a market for the future - but that is not something that we would be interested in.
Are you looking at any new products at the moment?
DS: We are always juggling four or five new ideas, but as an issuer we rely heavily on the investment banking community, instead of on our own research.
How important is it to broaden your investor base?
DS: We have a fairly set list of guidelines for our issuance. Firstly, it has to be cost-effective. Whatever we do has to be the most efficient in that product category. That is what keeps us out of foreign currencies. Secondly, it has to be customer driven.
The third objective on our list is to broaden our customer base. It is important and to a large extent it is a function of being customer driven. Once you have figured out what you want to raise - what product - it becomes very much a marketing exercise.
Like selling toothpaste or automobiles, you are trying to find as many people as possible to buy the product. One of the ways of doing that is to go after a particular niche. And TVA is a niche player: we are not going to have large multi-billion dollar 'benchmark' programmes like the other folks have.
We can achieve our pricing objectives and broaden our investor base by going for niche markets. By that, I mean that we may be issuing a billion at a time, but not the size of Fannie Mae or Freddie Mac.
We are doing all the things they are doing. It is a marketing programme. You have to interest as many people as possible in buying what you have to sell. That way you achieve better pricing and it achieves better liquidity for the investor as well, if a lot more people invest in the product.
What challenges do you face going forward? Are there any problems, or highlights, on the horizon?
DS: Well, as an agency issuer there is not a lot we can do to effect the interest rate. We are all enjoying the benefits of a sound US economy at the moment, and the effect that that has on interest rates. But we can not do anything to help maintain that situation.
The spread to interest rates is something we can affect. And we are trying to do that by trying to educate investors and encourage them to do their research.
It is a challenge for all the agency issuers, as we are becoming more important than Treasuries - and this is especially true of our sister agencies.
We need to reassure investors that we are responsive, and aware that they need liquidity and all the things they have expected from Treasuries. *