Even though the books are set to open on Monday, the lead managers were said to have gathered over $5bn of orders by the close of business on Thursday.
The guidance is set to be 20bp-25bp through Libor, with pricing expected to be at the tight end of that range. It will be the first time an issuer in the sovereign, supranational and agency sector will have tested such an expensive level since October 2008, when the European Investment Bank and Export Development Canada sold three year deals at less 40bp.
Canada priced a five year dollar deal last week at 15bp through Libor that was its first foreign currency deal since November 1999. It tightened to less 25bp, although widened back out to less 18bp on the back of the Germany announcement.
Should the deal be priced at 25bp through, it will save Germany around 20bp on its cost of funding in euros. Taking the basis swap into account as well as going from three to six month Euribor, 25bp through dollar Libor equates to around 55bp through Euribor. Germany’s January 2012 euro paper was trading at less 35bp and its April 2014 at 27bp through.
The cost saving remains large even though the basis swap moved against the issuer throughout this week. From Monday to Thursday it tightened 8bp, from 48bp to 40bp, as a result of heavy dollar supply from European issuers who then swapped the funds back into euros (see separate story).
Saving on funding costs is the key consideration for Germany when deciding whether or not to borrow in foreign currencies.
Carl Heinz Daube, managing director, Bundesrepublik Deutschland-Finanzagentur, in February told EuroWeek: "Our main purpose in life is to save interest payments and for the time being issuance in euros is, from a taxpayers’ perspective, cheaper than issuing in the same maturity in dollars and then using the basis swap price and a currency hedge and transfer it to euros. But if there was an opportunity to issue in dollars that would save the German taxpayer money then we would definitely do it. In the meantime we will continue to monitor the basis swap and wait for a suitable window."
The expected spread will equate to the mid to high teens over US Treasuries, which is close to what Germany paid when it sold a $5bn five year issue in 2005. Then, Germany paid 12bp over.
Germany rarely syndicates new issues and tends to favour the auction process for raising funds, but has syndicated borrowings in foreign currencies or linked to inflation.
Discussing how Germany chooses its lead managers, Daube said in the same EuroWeek interview that "one quality would be where the bank is in our bidding group — how a bank covers us".
"The second quality," he added, "would be speciality in a certain instrument. For example, if we needed dollars we would obviously look to bring on board a dollar expert.
"Or if we were planning an inflation-linked bond we would hire a bank that has proven expertise in linker products. A third element would be a bank’s ability to deliver something completely new or unusual."
Germany is expected to pay traditional public sector fees for a three year dollar deal, which are 10 cents. It paid the same amount when it did its last deal via Deutsche Bank, Goldman Sachs and Morgan Stanley.
While the deal size that has been touted is $3bn minimum, it could be larger if the issuer’s previous, $5bn issue is taken as a guide. The European Investment Bank priced a $5bn deal last week, which was its largest ever dollar global, on the back of a $6.8bn order book. This should give Germany some comfort that the market can absorb this kind of size should it be looking to raise so much.
However, some market participants have recalled how Germany’s last dollar deal underperformed after pricing. At the time, the deal’s large size was blamed for its widening.
Like most eurozone countries, Germany’s deficit has ballooned as a result of the crisis. The government forecast net borrowing of Eu18.5bn for 2009 in November 2008, but has revised this upwards twice: once in January to Eu39.6bn, and then in July to Eu49.1bn.
