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SSA

Supras cross frontiers in SRI, investor bases and currencies

Supranational issuers have enjoyed a strong start to 2017, with core currency markets in fine fettle. Wide swap spreads have aided dollar issuance — as have efforts to tap the US investor base — while several borrowers have introduced new strands to their SRI and currency mix. The political outlook is also rosier after Emmanuel Macron won the French presidency, although risks remain in the form of an unconventional US administration and looming Brexit negotiations. GlobalCapital met some of the world’s top tier supranational issuers in May to discuss these topics — and more.

Participants in the roundtable were:

Gabriel Felpeto, corporate director of financial policy and international bond issuance, CAF, Development Bank of Latin America

Jens Hellerup, head of funding and investor relations, Nordic Investment Bank

Kalin Anev Janse, secretary general, European Stability Mechanism

Eila Kreivi, director and head of capital markets, European Investment Bank

Isabelle Laurent, deputy treasurer and head of funding, European Bank for Reconstruction and Development

Ben Powell, head of funding, International Finance Corporation

Craig McGlashan, moderator, GlobalCapital


globcap
: It has been quite a start to the year with plenty of $5bn and €5bn deals, and lots of deals pricing on or through the curve. What has been driving that trend?

Ben Powell, IFC: At the beginning of the year dollar swap spreads started to widen and then they continued to widen — really until the start of May, when they tightened sharply. High swap spreads have meant that valuations versus US Treasuries have looked attractive and that’s enabled borrowers to tap the markets in size.

There’s a lot of liquidity out there. Wider swap spreads have unlocked additional investors, that’s for sure, but even as swap spreads have narrowed again, I’ve been positively surprised by the amount of cash that’s been put to work — even as you cross the Rubicon into Libor negative. Many supranationals have printed there, particularly in three years. We priced a social bond at minus 5bp, EDC managed to get to minus 7bp not long after. Even with negative swap valuations, bonds have been performing well. 

Despite the tightening in swap spreads over the last few weeks, deals that have come this year haven’t performed that badly versus swaps either. That shows that the demand is there and that investors are holding those bonds quite tightly. 

Eila Kreivi, EIB: It’s been fairly par for the course this year. We have front-loaded a little bit more than last year because we saw a period between mid-March and mid-May when benchmarks might not be opportune. We had the Dutch election, then the Easter period, then the French election and then more holidays. We did a little more than normal in the first quarter and then we continued after the French election because the euro market was very strong.

Every January we have all these scenarios. What are the threats and the supportive factors? But this year it’s been playing quite well. The dollar market has been quite good in the short end, although at the longer end it hasn’t really worked that well — apart from smaller issues like we did in May. The euro market has been extremely supportive and even the sterling market has been OK. The pricing in sterling has not been terribly attractive for most of the time.

All-in-all, it’s been a fairly good year. In spite of the front-loading that we did in the first quarter, by the end of July we’ll probably be at a more normal pace. June and July will be fairly quiet on our side.

Kalin Anev Janse, ESM: A year ago, if we would have said that in a year’s time Europe would be a stable haven to invest in and that the UK and the US would be less stable, no one would have believed us. Within a year, the world has changed to the advantage of Europe. 

Last year, there were political events that were completely unpredictable. When we were planning our 2017 issuance programme, we had that in mind. I made a bit of bold statement in December in an article for the World Economic Forum where I stated that I believed Europe would not follow the populist route in the elections. And it turned out to be correct. We had elections in Austria, the Netherlands, Bulgaria and then France — and all outcomes were pro-European. 

Populism is now much less of a risk, and that had a strong effect on our bond issuance. January was very good. Then in February and March, we saw a bit of tension in the market from some investors. In Japan, they were pulling out of their euro investments. Then, after the first round of elections in France, they came back. The risk was gone.

We had some phenomenal trades. Two days after the first round of the French elections, we did a dual tranche, raising €8bn in total. We had a book of more than €20bn — everyone wanted to come back to Europe. 

I’m quite positive about Europe over the coming months. Europe has de-risked, but at the same time, there’s a lot of uncertainty in the US — what will the new administration do? And there’s a lot of uncertainty in the UK — time is ticking, with 22 months to go to Brexit. So there’s a positive investment thesis for Europe.

Gabriel Felpeto, CAF: Because of the unexpected political events last year, we also decided to front-load our funding plan for 2017. We’ve done around 50%. We’ve sold benchmark transactions in euros and Swiss francs, and other deals in dollars and some other currencies. Although we are a dollar-based issuer, we haven’t done any benchmark transactions in dollars yet this year, but we are planning to do so in the remainder of the year. 

We wanted to be on the cautious side and we decided to fund ourselves in other currencies. Since the basis swap from euros to dollars has improved a lot since September last year, we decided to take advantage of that opportunity, given that we swap everything back to dollars.

Jens Hellerup, NIB: The market has been very good and has performed well despite all the supply. Another reason for that is the supply vacuum in dollars last year, before the US elections. The euro market has, of course, one big investor that’s buying a large part of the supply. 

Swap spreads are one of the most difficult baselines to predict, we always find an explanation for the movement afterwards. I think one of the explanations for the widening of swap spreads is due to the money market reform in the US. Investment was moved from corporations’ and financials’ commercial paper into short T-bills, which widened the swap spread. Supply, especially from corporates, has come back, which is why swap spreads have tightened again. 

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Powell, IFC: Central bank reserves have been a factor. There was the initial dollar strength and lots of emerging market currency weakness. China’s the big example there — having to sell dollars to shore up the renminbi. That was some time ago now, but we’ve seen the recovery of all the mid-sized central banks, which has helped to support US Treasury performance as that big buyer base has come back into the market. That stability is also an element.

There had been euphoria around Trump’s plans, but the expectation of those being delivered starting to crumble has not helped swap spreads. There has been a lot of T-bill issuance because of the government shutdown, which meant the US was not been able to fund long term. That’s led to an underperformance of the short end, which has led to the recent spread tightening.

Kreivi, EIB: Swap spreads are not something that you can try to predict. We are all frequent borrowers, so we just try to time issuance well with the demand. If demand coincides with the moment when the numbers look a bit better, that’s very welcome. 

globcap
: Are jumbo 10 year dollar benchmarks back on the table?

Kreivi, EIB: No. There’s been one benchmark from our sector back in January and we did a $1.5bn green bond as part of a dual tranche with a three year benchmark in May. We’d normally print $2bn or $3bn with a 10 year dollar benchmark. Our May trade was smaller as we didn’t want to commit too much on the asset size — $1.5bn is pretty much the maximum we would do with a green bond. 

The green feature does get a little bit of extra demand and 10 years is a good maturity for green bonds because the projects tend to be a little bit longer, so it matches well on the asset side. So 10 years has not opened up — you can do small volumes, but it’s still a tough place to be.

Felpeto, CAF: For benchmark size transactions in dollars, we’re looking more at the three to seven year space. The demand is most concentrated there. We also don’t need 10 year funding. In euros, we also don’t look beyond seven years. 

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Hellerup, NIB: We’ve done a little bit of 10 year issuance in Australia, and some callables in euros and dollars at 10 years. That’s where we’ve got the maturity from this year. We’ve also printed seven year green paper in euros this year, so there’s no need for us to issue long dollar bonds.

Powell, IFC: Other markets have provided more cost-effective duration than dollars. We don’t need duration that much, so we don’t need to go to the dollar for volume. We’re doing $500m or $1bn and we’ve been able to get the right amount of duration in Australia, for example.

Isabelle Laurent, EBRD: We’ve done threes, fours and fives in dollars this year. We expect the bulk of the demand to remain there for the rest of the year, although EIB’s 10 year green bond in May did remarkably well.

Sometimes the balance between three and 10 is not obvious. A 10 year is normally much harder, but it didn’t seem that way with EIB’s deal. It’s very difficult to predict exactly what kind of demand you’re going to get at the long maturity. It sometimes works extremely well and deals that don’t look fantastic when they first come often perform very well.

One of our peer supranationals came out very early in the year with a 10 year and while it may not have got breathtaking demand in primary placement, it performed extremely well thereafter. It’s much harder to predict where the market is. 

But as we don’t need duration and the maturity curve is quite steep, we focus in the three to five years. 

Anev Janse, ESM: We have done only euro issues. But by the end of 2017 we aim to do our first dollar issue. We’re looking more at two to five years, because that’s more attractive at this moment. 

If you have only one currency you have liquidity risk. Opening up different currencies makes it easier. Secondly, we want to tap a new set of investors. Our programmes are increasing — ESM and EFSF have a combined €61.5bn to issue this year. 

We also want to be present across the curve as our loans are a bit longer than many of the institutions here. For Greece, the average maturity is 32.5 years and the longest maturity is until 2059. Our range is from three month bills up to 40 year bonds, which are quite long issuances for our world.

globcap
: Has the sweet spot in euros been more dynamic this year than in dollars? 

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Kreivi, EIB: The best spot for us has been above five years, because in the short end our yields are still negative or very low. While you might get bank treasuries to buy based on the Eonia level, it’s not the best place to be. Unlike most of our peers, we need duration and we target an over seven year average maturity. You can’t get that through dollars and the smaller currencies don’t provide enough. So the euro is the natural place for us.

We sold a seven and 10 year earlier in the year and, a bit to our surprise, got full-sized €5bn deals in one go on each. We thought we’d do €3bn-€4bn and leave some room for tapping. So then we were scratching our heads in April about what to do next. I was not particularly keen to do a five year because €5bn in one go is a lot in euro fives, as we get that at a slightly better price in dollars and do a lot of fives in dollar already.

After the French presidential election, the sky opened and 15 year deals were what everybody wanted. We also looked quite attractive to OATs for the first time in months. We did a trade that went extremely well. Euros has been very supportive in the long end, from seven to 15 years, although we haven’t tested the ultra-long end. Our spreads have also continued to normalise from last year, so we’re at levels that are seen as very attractive. That’s a pretty good market for duration.

Anev Janse, ESM: Our loan book is completely different to EIB’s. We want to be present across the curve but if we can get long maturities, we will. 

In January there was an agreement for Greece that involved extending the average maturity from 28 to 32.5 years, and also that we would create more matched funding. That meant more issuance at the longer end. 

It’s very attractive to issue in euros. A lot of investors were holding off for a few months but now they are rebuilding their portfolios. Some — especially in Asia — even sold Europe because they were afraid. Now Europe has de-risked they want to build up their portfolios again. 

I was in New York in May for a roadshow and saw a complete switch in how investors looked at Europe. A year ago they were afraid and, certainly towards the end of the year when they saw the populist moves in the UK and US, they were afraid of a domino effect in Europe. But that didn’t happen. 

Now, even in the US, a lot of investors see stability in Europe and view it as a very attractive place to put money, because they see uncertainty in other parts of the world. In 2016, the EU grew faster than the US. A lot of people didn’t realise that, but the EU grew at 1.8%, the eurozone at 1.7% and the US at 1.6%. Europe is picking up. Unemployment is going down and there is a stream of investments in European equities.

Kreivi, EIB: I was at a conference outside Europe a couple of months ago and the introduction to the panel I spoke on was that European growth is at a very low level compared to the US. I recommended number checking. People don’t check the facts — they just assume.

In Europe, the populist threats led to market caution, whereas in the US the election of a populist president led to a six month rally. Two days after Trump’s election I was making a syndicate and sales presentation in Asia and someone there had a map of political risk events for 2017. There were 16 events — all in Europe. How could they think all political threats in 2017 would come from Europe? There’s something wrong with the market’s periscope sometimes.

Populism in Europe hasn’t gone away, but it’s not the biggest movement — unlike elsewhere. European governments have to take action to keep it away in the next election run, but at least we’ve got a time-out.

Hellerup, NIB: The euro might have hit the bottom on the FX and people around the world invest more in euros now because they maybe think it will start getting stronger. We’ve done two €100m-€150m private placements in euros this year. Some of the investors are from outside Europe, which suggests they think the euro will get stronger.

Felpeto, CAF: We’ve sold an €800m five year bond this year. We try to maintain a presence in this currency, but we have to choose the moment carefully because we swap everything back to dollars and have to manage the basis swap.

Powell, IFC: We have a limited programme and there are more cost-efficient markets for us than euros out there. The basis swap has improved a lot and there was a period over a year ago when long end dollars widened and some of our dollar-based peers looked at 15 or 20 year euros. 

On paper, at least, it was just about better than dollars. But we didn’t want to pay up for that kind of duration and that’s still the case now. Our programme’s not big enough and when the average life of our loan book is about four years, it doesn’t make any sense. 

globcap
: Are you still seeing increasing numbers of US investors in your books?

Laurent, EBRD: Definitely. A very significant portion of our books go to investors from the Americas. In some of our deals, they’ve been the majority.

Some of us have to thank the work World Bank has done in talking to the state treasuries and others to create a much broader investor base. We’ve started to see some banks focusing on SSAs where historically they were focused on the GSEs and US Treasuries. We’ve also seen funds come in much more actively.

When the Fed first decided what might qualify as high quality liquid assets, there was a sense that supranationals with the US as a shareholder being counted as level one and GSEs not being was an aberration that would be corrected soon, so investors didn’t really have to change anything. But by now, there’s been more of a focus.

Kreivi, EIB: This hasn’t impacted the handful of very large banks much because they want to have something they can sell $1bn of in one go, which doesn’t apply to the issuers on this table. The additional demand has come from the second and third-tier banks that don’t require such huge amounts. 

It’s been more individual changes than a very broad based move, but it has been gradually getting a little bit deeper. I wouldn’t say it is a permanent foothold. The banking sector maybe is, but the cities and states will take more time because some of them may need to change their regulations.

But it’s a large base, so the work is worth doing. And the World Bank has been doing a lot of work there.

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Anev Janse, ESM: We did our first US roadshow in May. The feedback was that there is a shortage of supply in dollars and a lot of US investors have hit their limits with some of our peers. They are looking for new names and new supply, especially in the two to three year area, with a strong credit and in size. It is an attractive market. A lot of investors are interested to buy us because they see a new strong issuer in dollars.

Hellerup, NIB: In the last 10 years we’ve had US participation of 10%-25% on our bonds. There’s big potential there but you’d spend probably four months going around the country if you want to see all potential investors. 

We have done a little, but the World Bank has done a very good introduction to the supranational sector. That’s how we introduce ourselves: we are basically like the World Bank, but the Nordic version. That is how NIB fits into the US investor base as a strong credit where the investors can get diversification into the Nordic region.

Laurent, EBRD: Historically, US investors viewed anything that wasn’t US as having political risk and at risk of fluctuating significantly. They weren’t focusing on the fact that, say, even the US Treasuries that they thought would be immune were subject to international political events. When the taper tantrum hit, when there was a point where we saw Middle East selling, then China selling, they realised that actually, a home-grown domestic market is not only moved by domestic events they understand. It’s moved by big, global shifts. 

One of the benefits of buying dollar bonds from institutions like ourselves is that we tend to have demand from many different markets around the world, whereas some of the more domestic credits are often very much the focus of the domestic entities. These international investors will buy us at tighter prices than they would buy the GSEs. So there would be follow-on demand from, say, Japan, or Australia, where many of us have shareholders, or from Europe or other parts of the world. 

Powell, IFC: There’s very little clarity on the long term future of the GSEs. That’s also been important for US investors’ mindsets. I’m biased, but our future is clearer in terms of our borrowing history, our trajectory and our ability to tap markets. If I were an investor, I would see much more continuity with regard to the people round this table compared with the GSEs. It’s a political hot potato.

Kreivi, EIB: The GSEs’ liquidity it’s not the same as it was five or 10 years ago. Nowadays, on-the-run Treasuries are considered liquid and the rest is case by case.

Laurent, EBRD: Investors tend to see liquidity as how much something trades. Bonds trade until there’s a problem and then they don’t trade at all — including off-the-run Treasuries. There’s this spurious notion that if it’s very large and you’ve seen it trade a lot, it’s going to be fine when you want to sell. 

A range of types of investors from different geographies is far more likely to guarantee liquidity, or whether you are repo eligible with central banks and so on. That’s the critical aspect.

We’re a relatively small issuer, and even when we issue some of our larger deals — our largest was for $3bn — how often did it trade? Remarkably rarely because they tend to go to buy-and-hold investors. You don’t see much in the way of trading, but when a crisis happens — and we’ve been through various permutations of crises — it hasn’t affected demand. 

That helps reinforce things. Investors sometimes focus on the wrong meaning of liquidity, when really what they care about is: can I sell if I really want to?

Anev Janse, ESM: Some investors need to hold until maturity, but others want to be able to trade. We invest a lot internally to understand how much our bonds are traded and how they are traded. On a monthly basis we send out a survey to all banks and they have to supply us with information in some detail so that we know what kinds of investors are trading our bonds in what volumes.

The clip sizes of €20m-€50m are the most interesting. They’re not ultra-big but also not very small. We also know whether it’s central banks or hedge funds that are trading us. 

Laurent, EBRD: I’m not suggesting there was any category of investor that doesn’t want to be able to trade the bond. They’re buying a benchmark rather than a private placement in order that they can sell. But the ability to trade on any given day, in a normal market, doesn’t tell you anything about what happens in a crisis. 

Kreivi, EIB: Our market is, nowadays, a primary market. The secondary market doesn’t really function very well. Maybe you can find €5m-€10m, but if you want to buy €100m you have to wait for the next new issue.

globcap
: The EIB sold its first dollar dual tranche in May. Would you consider a dual tranche euro deal?

Kreivi, EIB: You do a dual tranche if it’s practical, but usually when we do a benchmark we raise €3bn-€5b, and then you don’t need the dual tranche. With the dollar dual tranche, it was because you do a 10 year dollar when it works — even if it’s a Sunday. That deal was more that we wanted to do a three year but then we heard there was demand for a 10 year dollar green bond, and the maturity suited our needs. 

In euros it’s less useful because our euro benchmarks tend to be slightly bigger. It would look a bit odd to do, say, €7bn. 

Anev Janse, ESM: For us it works well, especially if we want to go for size and duration. You can touch two different types of investor groups. We did €6bn in 16 years because there was a lot of demand there and we also wanted — because of our programme countries — to go to 26 years, where we could do €2bn. If the market is there, we take advantage.

Previously, we had to disappoint a lot of investors when they didn’t get enough allocation. That’s why we’ve started to do a bit of pre-funding for later quarters if the demand is there.

globcap
: There is speculation the ECB could start paving the way for the end of QE. Has that had any effect on your funding outlook?

Hellerup, NIB: It has not changed anything on our side. We have done a little bit more euros than we normally do, but that’s by choice. One of the reasons short end dollars have worked that much better is because there’s more expectations of rate hikes in the US.

Anev Janse, ESM: QE has provided a lot of advantages for eurozone countries, by making it much cheaper for countries to refinance themselves. It is one of the reasons why Europe is growing out of the crisis. For us, it has a few advantages. It’s cheaper to issue and we on-lend to programme countries, so we’re reducing the fees for countries like Greece. We charge Greece around 1%, which is very low.

But we see a change in patterns from investors. A lot of central banks would buy around five years — they’re pushed up to 10 years. In one of our latest deals, a 10 year, 20% went to central banks, which was uncommon before. Some of the Asian central banks are not able to invest at negative rates, so it has helped us push maturities a bit longer. In the secondary market the ECB is one of our largest buyers. It holds around 34% of our debt, almost €80bn. 

Kreivi, EIB: When QE started in 2015, everything compressed so quickly and aggressively that many non-European investors were lost, at least in SSA, because of the low yields and spreads. 

If the ECB started to taper or get out of QE it would undoubtedly cause volatility. But there is the other side of the coin, when those investors that quit the market come back.

Central banks are too sticky to change currency allocations in a very short time horizon. But some of those that reduced euros — or went into cash — when QE started have come back, starting from the second quarter of last year. There are investors in the non-public sector that will come back when yields get a closer to what we have in the US.

Powell, IFC: There is the spectre of tapering. The ECB sees value at a level that is different to that of the rest of the market. The ECB has about a third of the market so when it starts to sell, it will be very important how it delivers that message — as the Fed knows. The move could potentially be sharp.

Kreivi, EIB: That is true for corporates, which the ECB can buy in primary. In our world, it can’t buy in primary, so we have to build books without the ECB. It’s not easy to forecast — the ECB doesn’t start to buy bonds until they’ve been paid, a week or 10 days after pricing. They also have their own preferences — maybe one week the ECB is buying seven year bonds and the next week it’s buying 20 year bonds.

Two years ago, in the long end we were 5bp over Bunds — now we are some 50bp over Bunds. The underlying is still very tight, but the government spreads have largely normalised. New issue concessions are a bit wider than they used to be. We were about 3bp before QE — now we are about 5bp-7bp. 

That has compensated the tighter spreads in secondary. Our bonds have to be sold to normal investors at the level at which they agree to buy, otherwise you can’t do a deal. The ECB is not going to save you, because it might buy one month from the issue — so the banks would have been sitting on those bonds for a long time. 

Anev Janse, ESM: Yields went down, so some investors were unhappy. On the other side, they know there is always a buyer. If you buy in primary then sell to the ECB, you’re still making a profit. 

The turning point is when QE ends, and there are different ways of doing that. One way could be for the ECB to hold its bonds to maturity, so there would be less distortion. But it’s too early to make a statement on how QE will end.

What is important is to keep liquidity outside the ECB. We work with 39 banks and we ask them to give us detailed reports on liquidity. They send us, line by line, how much they traded on a monthly basis. We have €10bn-€12bn of our bonds trading outside PSPP, which still makes us quite liquid. A lot of insurance companies are selling to central banks and vice versa.

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Felpeto, CAF: Although we’re not on the ECB buying list, we have liquidity in our bonds and don’t have any price distortion. Some investors also prefer us to tighter credits and also the size of our bonds is not that large, so it doesn’t make a big difference.

globcap
: What currencies have worked for arbitrage? 

Felpeto, CAF: Swiss francs are in line with our dollar levels. The Australian dollar has a real arbitrage, as have some currencies in Latin America we issue in, particularly Mexican pesos. Depending on the day, of course — given the recent volatility in that currency.

Powell, IFC: For us, swapping Swiss francs into dollars has looked really expensive for a long, long time.

Kreivi, EIB: That’s also true in euros.

Hellerup, NIB: Kangaroo and Kauri haven’t worked as well as in the past. Two years ago, we raised 15% of our funding in Australia and 15% in New Zealand. The combined total last year was less than 10%. We haven’t been able to issue in New Zealand dollars this year, even though we had been issuing Kauri bonds every year for the last 10 years. We have done some Australian dollars this year but it is only about 6% of the funding this year. Regarding pricing it’s not obvious — it can be more or less in line with dollars, but we can pay up a little compared to dollars to get the diversification.

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Laurent, EBRD: We haven’t done any large public deals outside dollars. Our largest was in Kazakh tenge, at around $90m equivalent, which was listed in London and was a CPI-linked bond. We used the funding to on-lend to projects we have in the country.

It was actually a relatively large transaction. We’d done one a few months previously, of similar size. There’s a reasonable demand for that product. It’s very hard in some of these markets to get a positive real return, and there’s a reasonably large institutional investor base there of pension funds that need positive real return, so an inflation-linked return works well. We also have projects that are at least notionally linked to inflation, so it’s a good match.

We use many different markets. We’ve done quite a lot in Indian rupee this year and we’ve issued in nine different currencies, many of them exotic currencies, including ones in which we on-lend. Georgian lari, Armenian dram and others. 

It’s more for on-lending purposes, although it normally serves a joint benefit. We did the first Eurobond in Georgian lari. It was jointly listed in London and Tbilisi, and was clearable through Clearstream. That helps benefit domestic capital markets, allows us to on-lend Georgian lari and, potentially, broadens the investor base.

We’ve done very little by comparison in other currencies. We’ve done some Mexican peso, some Indonesian rupiah and Argentinian peso as well as the Indian rupee, but they’re very small. 

Powell, IFC: Dollars is our number one — about 60% — and then Australian dollars. It’s gone as high as 20%, but the cost-effectiveness is not quite what it used to be. We’ve managed to scrape 1bp-2bp inside dollars. 

Demand has also been a bit patchier. When it’s been there it’s been very good, but sometimes it will be very quiet. The 10 year demand has been pretty consistent.

We’ve done about 13% of our funding in Aussie this year, which is in line with last year. The rest is mainly private placements in emerging markets currencies. Our Uridashi business has been particularly successful this year — it’s jumped to about 15% of our total funding. That’s welcome, given it’s become a much more competitive market.

We do smaller deals in emerging market currencies for on-lending. We do a large amount in Turkish lira, Mexican peso, Russian rouble and Brazilian real. About 5% of our programme is issued in Brazilian real, and that’s usually in smaller syndicated transactions, but also private placements and Uridashi. 

We get good volumes in those types of markets, mostly sold into Japan and European retail and European institutional investors. We’ve done close to 20 different currencies this year. We’ve been particularly surprised by the demand of currencies like Azerbaijani manat and Myanmar kyat. 

Payments are in dollars, but linked to the currency. There’s been more demand for that type of currency, which has been positive. There are a handful of specific frontier market funds out there, but I think the number funds is growing. 

In some cases, we swap to dollars at a very attractive level. But it also paves the way for us to use this demand and structure to provide local currency funding. 

Hellerup, NIB: We’ve been in a few of these emerging markets, like the Argentina peso, Brazilian real, Indian rupee and Turkish lira, but only in small trades. The third biggest currency for us this year is Norwegian krone, among other reasons because we need it for our lending side so we can keep the kroner. Both domestic and international demand has been good for Norwegian krone transactions this year.

globcap
: What about sterling?

Kreivi, EIB: We did a reasonable amount at the beginning of the year. But it’s been bit quieter since because the funding cost has not been attractive. Most of the time it is in line with dollars but in recent months it has not been. 

I would really like long dated sterling because we have a very long UK lending portfolio. But that has not been attractive. 

globcap
: Are there any concerns about banks’ commitment to the SSA business? 

Laurent, EBRD: There was so much talk about which banks would pull out. There was UBS, and then it was about who would follow — nobody was going to do swaps, nobody was going to do other things. It’s just not happened. Banks are prepared to trade. We see new banks coming in, being active and able to support transactions. It’s reassuringly positive — even more positive over the last year than it looked a couple of years ago.

Powell, IFC: Some players have taken the place of those that pulled out. They’ve provided a variety of funding opportunities. All the talk of banks leaving about a year and a half ago hasn’t affected our business. We’ve traded with probably more counterparts this year than the previous year. 

One thing is that headcount pressure has meant some senior people have left. There isn’t one-for-one hiring at the senior level so responsibility is cascading down to the junior teams. The term ‘juniorisation’ pops up quite a lot.

Laurent, EBRD: Banks are also supporting SSAs as they qualify as high quality liquid assets. A lot of them came into the market, but it was very much Singaporean banks, UK banks, Canadian banks and a few European banks. At first it wasn’t that widespread, but when the short end of the market went sub-Libor they would go further out the curve. There was a sense that they may be doing less, but in fact that was compensated by more banks buying SSA bonds.

Another welcome development is some of the industry innovations, such as platforms like Origin. They are trying to facilitate the jobs of banks in being able to search more quickly, especially when they’ve got fewer staff. But they’re not trying to replace banks, which is welcome because we assume regulated banks are doing the key jobs they’re supposed to, including due diligence and secondary market support. 

Anev Janse, ESM: We’ve seen an upgrade, where our institutions are serviced on the strategic level. Maybe it has to do with our mandate. A lot of banks are interested in what happens in Europe and the banking sector. But CEOs want to meet with us and the large banks to understand where Europe is heading in the next five to 10 years.

I gave a speech at the World Bank at the end of April about how we are living in a technological revolution. There’s a lot of innovation. Issuers cannot avoid looking into that and seeing how finance and technology can disrupt our business.

I looked at it more from a Capital Markets Union perspective — how we can strengthen and harmonise markets. We and the ECB are aligning in our thoughts. We see that it can create a stronger European market and we can use technology to help. 

The ECB works on middle, back office and settlement with T2S. But you can also create such a collaboration in the front office to have an issuance platform managed by the public sector, where you issue bonds, bills or CP. Such a platform will be safe and secure and will help create better markets. Because we would do it on a cost-covered basis, the fees would be lower.

In the public sector we can be leaders in shaping the discussion of how technology can change the industry over the next five to 10 years. It’s too early to say how this will develop. But we are looking at it, the ECB is looking at it and other places are too. We must not shy away but take a deep dive instead to see how technology can make markets more efficient.

Powell, IFC: The low-hanging fruit is the settlement and clearing process. There’s been a lot written about the use of blockchain in making it much more seamless, streamlined and real time. That’s something I would keep an eye on. 

It’s still a little early to talk about bond issuance, but projects like Origin really help facilitate the market between the banks, which are under pressure on manpower, and delivering to a larger set of investors. 

Queensland Treasury Corp ran a mock auction using blockchain this year. The Kenyan government used online banking technology to auction government securities to retail investors through an app. 

We’re starting to see developments that will hopefully facilitate issuance opportunities and smoother transaction processes. It’s a long road ahead, but the seeds are being planted now.

globcap
: What innovations are there in SRI?

Powell, IFC: We launched two social programmes in the Uridashi market in 2012 and 2013, but we launched a new programme combining these two existing programmes in March to deliver social bonds to institutional investors and provide all the impact reporting they’re used to on the green side. Clearly there’s demand out there. 

We’re involved in the development of green bonds, and that goes all the way through to our clients and trying to get green bond markets to function and to start to work in emerging markets. We’ve partnered with Amundi to create a Green Cornerstone Bond Fund, which is essentially to kickstart emerging market green bonds. 

We and others have proven that you can get liquidity in green bonds and investors have very clear mandates to invest in this product. But now we can issue Indian rupee green bonds and pass the proceeds on to green bond issuers in India.

There’s been good progress, not only in transmission of financing but of knowledge too. We’re involved in financing our own book through green and social bonds, but also helping clients finance themselves.

Kreivi, EIB: For the time being we’re sticking to green bonds. It’s a question of bandwidth because we are very involved with the green bond market and that’s a lot of work. 

But I agree with Ben. There are a lot of things going on, lots of innovation and supranationals like us are working for ourselves but also for the market. 

It’s a constant process and there have been new initiatives coming from all sides. We are working with the People’s Bank of China to try to map their framework to the Western Green Bond Principles. The social bond sector has exploded over the last 12 months and a lot of work has gone into developing that framework.

It’s hard work but it’s very rewarding. Everybody’s enthusiastic. Every week there’s an invitation to talk about green bonds somewhere, or someone from a distant part of the world sends you a mail asking for more information on the market because they’re trying to develop their own framework. Japan published its own framework guidelines a couple of months ago. 

It’s becoming global. Every continent is involved. It requires lots of development because not everything works in the same way in all parts of the world, but it’s a booming product.

Laurent, EBRD: It also broadens the discussions you have. Historically, one had discussions about the credit of your institution and any political factors that govern this, but there is a whole new range of discussions about the types of projects you’re doing and the impact reporting. It not only informs what we do in the green bond market, but starts focusing a bit more what you do in funding with what you’re doing in your organisation, and trying to feed off each other. 

The impact reporting for the organisation as a whole starts working in tandem because it’s being driven from different directions. It’s a very different dialogue and it’s good for us, especially at this time, to be able to articulate as well as we can what impact our projects have. It’s not just this idea of triple-A organisations, but what their purpose is and how and why they’re doing it. That’s all the more important.

Kreivi, EIB: The most important thing about green and social bonds is not that you give financing to something that would not get it otherwise. The most important point is the transparency and accountability — what you do with the money. 

In 20 years’ time, if things go well, people won’t understand that you used to be able to borrow money without telling investors what you were doing with it. It’s a whole new perspective. It’s not going to go away.

Powell, IFC: It’s one wider project, which started with green bonds, where treasury has interacted with multiple places within the institution. We’re working with clients, with the development outcome team — we’re much more involved with other parts of the institution than we would have been before. 

Laurent, EBRD: It won’t go away. Look at the rating agencies — they always said they factored ESG [environmental, social and governance] within their credit ratings, but it’s not quite so clear that they did. Every time we’ve had a meaningful environmental or social drama, it has hit the credit. 

This integration is important. You can’t focus on a one-dimensional view of an entity — you have to look at the wider aspect and at the credit going forward. It’s not just a credit story in the historic understanding of the word.

Hellerup, NIB: It’s fascinating how fast this is going. One or two years ago when we went on roadshows in Asia or the Pacific it was not a given that we’d discuss green bonds in a meeting — now it will be taken up in every single meeting. Some are further ahead than others, some would just like to know what is going on. I think this is a very positive development as long as green bonds are priced in line with conventional bonds. Green bonds by themselves will not save the environment — what is important is the awareness of the things we do in our daily behaviour and investment. I believe the green bond market has been very good as a communication tool.

Laurent, EBRD: One should not assume that if the green bond market hasn’t grown by a certain amount then it means the dialogue or focus has changed. A lot of it is about all investors asking these questions and having to evaluate these issues — that it’s not enough for them to say we need triple-A or minimum single-A or whatever. It’s not only green bonds that these kinds of dialogues are focused on, though obviously it’s more intense there.

Anev Janse, ESM: Even though the ESM doesn’t have a green or social bond label, investors look at us as an issuer that is helping sustainability. Some of them buy ESM because they want to make Europe better and stronger, especially outside the eurozone. Even without that label, it helps.

Over the next five or 10 years, another group of people will fill the boardrooms — the millennials. They care a lot about green and social issues. A lot of them are mid-30s, they have small children and they’re thinking about what kind of world they want to hand over to their children. 

Felpeto, CAF: We started to issue SRI bonds last year, specifically to finance water related projects. We have issued a total of three ‘water bonds’ totalling $209m in the Japanese market. Given that CAF’s mandate is sustainable development, we are planning to incorporate this element into our bonds in the future.

globcap
: Are investors that don’t ask about your ESG criteria now the minority?

Kreivi, EIB: It’s geographic. But even investors that were not engaged, for example some central banks, are asking questions to know what’s going on for their due diligence. Sometimes the government tells the central bank they’re interested in this sector and it should be more visible there. 

Powell, IFC: The feedback on our social bond that frustrated me most was when investors would say they don’t have lines for social. If you look at the product, the credit rating, the transparency involved, what the bonds are supporting, how can you not have lines for it? If you have lines for IFC, how can you not have lines for this?

We must continue to educate. The level of transparency inherent in a green or social bond programme means you get so much additional information for free. The excuse of not having lines just doesn’t wash.

Hellerup, NIB: I’ve not heard anyone saying they wouldn’t buy because it’s green. But maybe they wouldn’t buy because there’s less perceived liquidity as green bonds are smaller. Regarding ESG criteria in general, I am still surprised we don’t get more questions about our ESG criteria as an overall issuer, but the questions are mainly focused on the ESG in relation to our green bonds.

Laurent, EBRD: We’re going to see quite a lot of moves from different players. Universities are getting involved that are looking at how pricing works, if there is a premium and so on. You get a whole range of players discussing different aspects, looking at impact reporting and other parts. We’re going to see quite a lot of innovation at all different levels and with many different types of players.

It’s a very busy forum, which is great. But it is madness to say you don’t have lines for a dedicated social portfolio. That people sometimes make these artificial divisions seems utterly pointless.

Kreivi, EIB: There was some confusion at the beginning. Some thought that as they weren’t a green or social investor, they couldn’t buy the bonds. This may take a bit of time.

Powell, IFC: There’s an element of education. But it’s getting a lot easier and questions are incoming rather than from the issuer side.   

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