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SSAs: still winning despite shortened windows

The heightened borrowing requirements of public sector borrowers across the world since the global financial crisis of 2008 do not appear to be falling back to 2007 levels anytime soon. That, coupled with more issuers entering the syndicated market and increased political risk eating up issuance windows, has made the skill of planning borrowing calendars more difficult than ever. By Craig McGlashan.

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It seems that every year public sector borrowers are in an ever greater rush to fund early — and 2017 is no different.

“More and more, especially with all the political risk in the world, issuers want to be 75% through their funding programmes by the summer,” says a head of SSA DCM in London.

“Plus, a lot of the big issuers are having to do more and more syndications. The European Investment Bank and KfW might do a five year, 10 year and 15 year in euros, then several three and five year trades in dollars.

“That’s a lot of syndications that they didn’t do in the past when they had fewer requirements and there was more opportunity to get into niche markets. All these big issuers are focused on the main markets because they have such big requirements.”

A quick look at Dealogic’s figures for syndicated public sector benchmarks backs up these claims. Using a rule of thumb of a minimum $1bn or €1bn for a benchmark deal, there were 41 dollar benchmarks in the first quarter of 2017 — pipping the previous record of 40, set in the first quarter of 2015 and matched in the third quarter of 2016. 

Looking at the year as a whole, with $243.8bn raised over 125 deals, 2016 was by far and away the busiest year so far. Only once before had syndication volumes topped $200bn — with $205.6bn in 2009 — and the previous largest number of deals was 105 in 2015. 

The driving force behind these dollar numbers can be seen in the funding habits of the World Bank, which raises the vast majority of its funding in the currency. Over its 2016-17 financial year, which began on July 1, the World Bank plans to raise $50bn-$60bn — a far cry from the pre-2008 years of this century, when it typically raised $10bn-$20bn.

Euro syndications have also risen in size and number since the financial crisis. In the first quarter of this year some €119.8bn was raised over 44 syndicated benchmarks. While that fell short of the record quarter — €154.0bn over 55 deals in the first quarter of 2009 — it was the largest number of trades since the 48 printed in the first quarter of 2012 and the biggest volume since the first quarter of 2009.

Much of the boost in euro issuance has come from the creation of the European Stability Mechanism and European Financial Stability Facility, which in 2017 need to raise a combined €57bn.

Such an increase in issuance requires issuers and their syndicate banks to be ever more careful when picking windows and also requires a degree of nimbleness.

Some, such as ESM and EFSF, frequently use dual tranche trades to tap two parts of the curve at once, and this has led to an increase in the average number of tranches on trades. SSA bankers see this trend continuing.

In 2016, euro and dollar benchmark sized deals had on average 1.24 tranches, according to Dealogic — up from 1.07 a year earlier and 1.03 in 2014.

Some issuers, such as the European Investment Bank, are now combining conventional issuances with the green bond market — a tactic the EIB first adopted in May 2017.

Smaller borrowers, such as Export Development Canada, are also changing their approaches — in EDC’s case, dropping in 2017 its traditional “no-grow $1bn” language and printing larger trades.

Populist problems

Aside from the sheer amount of traffic, outside forces have also made issuance windows ever more precious for SSAs.

The rise of populist politics in the Western world, with the election of Donald Trump as US president, the UK vote for Brexit and Marine Le Pen’s lead in the polls for much of the French presidential election race in 2017, has created uncertainty that has made public sector borrowers keen to frontload issuance ever more.

“If the market closes for a month or two, it can completely change the picture on how far issuers are through their annual programmes,” says a head of SSA DCM. “It hasn’t happened for years, but there are a lot of political risks.”

In May, there was a strong rally as Emmanuel Macron eventually comfortably beat off the challenge of Le Pen to take the French presidency. But almost as soon as Macron moved into the Élysée Palace, another potential threat to European stability started brewing.

Austria looks set for an election later in the year after the ruling coalition between the Social Democrats and People’s Party broke down. That raised the prospect of another period of concern over the potential election of a far-right government in Europe, with the Eurosceptic Freedom Party riding high in the polls.

The SSA market also faces another potentially damaging knock, this time from the technocrat, rather than political side.

With major central banks either already on a tightening path or slowing quantitative easing, the tidal waves of liquidity that have driven down yields and tightened spreads over the last few years are on the way out, in the medium term at least. How those issuers in the eurozone periphery in particular will deal with the change in circumstances could come to define the market for the next few years.

But despite these challenges, SSAs have enjoyed a remarkably strong start to 2017 and for the moment, it looks like that trend will continue.

Issuers have frequently knocked out deals at the top of the size target ranges and, particularly after Macron’s election, often at spreads close to or through their secondary levels.


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But while the market has demonstrated its resilience to the huge financial shocks of the last few years, the greatest risk to its reputation could yet come from the inside.

With much of the financial world under great scrutiny after several scandals such as Libor fixing, the SSA market had maintained its whiter-than-white reputation.

But that could change, with the US Department of Justice in late 2015 launching an inquiry into alleged manipulation in the dollar SSA bond market.

Several US pension funds have now decided to sue dealers and individuals, alleging that participants shared information to avoid competing aggressively on pricing.

“When multiple cartel members had received the same inquiry, for example, the group would typically decide which trader would take the lead on the trade and how the other traders could provide cover and support,” says the suit. “The cartel members often agreed to match each other’s quotes so it would appear to investors that the quotes were representative of a market consensus.”

In April, the allegations spread to the primary market, with the suit claiming that traders were able to front-run new issues that had either not yet been announced or were in bookbuilding phase. The names of Citi, HSBC, RBC Capital Markets and TD Bank were also added to the original banks on the suit, which were Bank of America, Crédit Agricole, Credit Suisse, Deutsche Bank and Nomura.

While the lawsuit is still in its initial phase, the SSA market could yet find itself making headlines far different to the positive ones it has achieved for many, many years.

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