Bo Heide-Ottosen, the Nordic Investment Bank's treasurer and CFO, and Kari Kukka, head of funding, talk to Neil Day about the institution's imaginative use of currencies and its growing presence in the international capital markets.
Although a familiar name to most market participants, the Nordic Investment Bank (NIB) had not until last year launched a benchmark transaction. With a limited annual funding requirement of around $2.5bn, the Helsinki-based supranational could raise the majority of its funding in the MTN markets.
But last year its needs grew to $3bn-$3.5bn and the NIB took the decision to establish a presence on the international stage through a benchmark issue. The result was a $1bn three year global bond via Citigroup and Goldman Sachs in early December 2002.
"One of the strategic objectives of the issue was the idea of diversifying the NIB's investor base globally," Bo Heide-Ottosen, the bank's treasurer and CFO, told EuroWeek at the time of the deal. "It was important to do the bond in a global format to maximise the available investor base."
Preceded by a three week roadshow, the issue achieved the NIB's target to the full. Pricing was accelerated by a day and fixed at the tight end of the 85bp-83bp over the two year Treasury guidance. Some 43% of the paper was sold to the US and 40% to Asia; by investor class central banks and other governmental institutions took around 60% of the deal.
But although the transaction marked a change in the supranational's funding strategy, Heide-Ottosen pointed out that the NIB's requirements were still modest. "Our funding needs are only $3bn-$3.5bn this year," he said, "far less than someone like the European Investment Bank (EIB), so we are not able to commit to doing a benchmark every year. We look at all markets and this is a market that we would like to come back to.
"The combination of issuing a strategic deal plus more flexible MTN issuance is a good one," he added. "There is definitely the possibility that we might issue a global benchmark next year, but that depends on our funding needs and currency requirements."
That possibility became a reality in April when the supranational returned to the global dollar market, this time with a $1bn five year deal via BNP Paribas, HSBC and Morgan Stanley. The NIB was able to take advantage of its rarity value and high quality to achieve attractive pricing.
Following price guidance of 24bp-25bp over the five year Treasury, the supranational could again achieve the tight end of its range. This also meant that having come 1bp-1.5bp back from the EIB with its debut global, it could now command a level flat to its larger peer - something that not everybody had believed it could do.
"Everyone was suspicious at the outset, thinking that the deal was too tight historically for NIB and against its supranational peers, but the doubters were proved wrong," said one syndicate member.
Dollars dominate
While perhaps not as competitive as the arbitrage available to the NIB in the MTN market, the re-offer spread of around Libor minus 18bp made the transaction an attractive proposition.
It also explains why the NIB, like other supranationals and agencies with modest funding requirements, chose to launch its benchmark in dollars rather than euros.
"The euro market would be interesting and the natural currency for us to issue in," says Kari Kukka, head of funding at the NIB, "but we are still a relatively small borrower, raising just $3.5bn equivalent this year, and if I only have to issue one benchmark a year in euros or dollars, dollars is more competitive."
However, Kukka is keen to stress that it was not only the attractive funding costs that drove the two transactions. "First of all, there is, of course, the good funding," he says. "But the two $1bn issues created liquid benchmarks for the NIB, facilitating the comparison between ourselves and our peers, the other supranationals. They were also aimed at achieving a diversification of our investor base and improving our name recognition, and they successfully did so."
While it might have been hard to miss the NIB's entry into the global dollar market, the supranational has been busy launching pioneering transactions on a smaller scale.
In July 2002, it became the first supranational to issue in the Icelandic krona market. Its Ikr3bn (Eu35m) 15 year deal was a CPI-linked transaction, locally cleared, listed on the Icelandic Stock Exchange, launched under Icelandic law, and acceptable for repo operations.
This July, the NIB scored another first, this time in the Lavtian lats market. The supranational had tapped the market in 2000, but this year launched the first deal for a supranational to be documented under its MTN programme. The Lats5bn (Eu8m) four year deal was based on local law, cleared locally and eligible for repo operations at the central bank.
The borrower also launched the largest Swedish krona issue in 2001, a Skr3bn (Eu320m) five year transaction.
Although the funding volumes available in such markets are tiny compared with the borrower's $1bn global bonds, NIB is keen to help develop local markets in the Nordic and Baltic regions when possible.
"The Latvian issue was made possible because we had a funding need in that currency," says Kukka. "Issuance in these currencies requires such a need, because the swap markets are not liquid, but when there is an opportunity we try to be active."
Japanese cornerstone
In addition to its benchmarks and pioneering smaller trades, the NIB continues to take advantage of attractive arbitrage opportunities. Kukka says that Uridashi bonds have proved particularly interesting in the past couple of years, and the supranational has sold into the market in a variety of currencies, including dollars, euros and Australian dollars.
The importance of the Japanese market is further underlined by the 21% share of the NIB's funding accounted for by yen in 2002.
Other currencies making up the supranationals diverse range of MTN trades have included Hong Kong dollars, Taiwanese dollars, Canadian dollars, Polish zlotys and South African rand.
