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SSA

Agencies: a strong year but still hoping for a return to normal

Some of the big names in Europe’s agency sector sat down with GlobalCapital in late May to discuss the funding landscape and its future, touching on political risks both in Europe and across the Atlantic, monetary policy, arbitrage opportunities and green bonds.

Participants in the roundtable were:

Tim Armbruster, head of group treasury, FMS Wertmanagement

Stefan Goebel, head of treasury, Rentenbank

Rodrigo Robledo, head of capital markets, Instituto de Crédito Oficial

Martin Svedholm, manager, funding, Municipality Finance

Petra Wehlert, head of capital markets, KfW

Craig McGlashan, moderator, GlobalCapital


globcap
: How big are your funding programmes, compared with previous years?

Stefan Goebel, Rentenbank: We have raised €6.7bn year to date, and we are aiming to raise roughly €12bn. That is slightly less than 2015, when we raised €13bn and 2016, when we raised €12.7bn, but is very much within the range of €10bn-€12bn that we have raised for the past 15 years.

It’s business as usual regarding volumes, but one notable difference is that the euro accounts for almost two thirds of our entire funding, year to date. In 2015 and 2016, the dollar accounted for 50% of our year’s funding, while the euro was limited to 22% and 32% respectively. The shift towards euros is due to the very good access to long term funding available in euros and the absence of attractive long term funding in dollars.

Martin Svedholm, MuniFin: We are also funding roughly the same volumes as last year. We have funded, year to date, €5.3bn out of a €7.5bn programme.

Last year our programme was €7.5bn and we funded €7.3bn, so there’s no growth on the funding side. In the big picture, we’re moving more and more towards the public markets, away from retail and private placements. It’s partly a strategic choice, and partly driven by the markets.

It was definitely a choice to frontload during the first and second quarter. We have been active in euros with a 10 year trade, in sterling with a four year and in dollars, we have a five year trade. All have been a success so far so we’re happy with our position.

Currently, we’re on the sidelines. We’re not funding actively, but maybe at the end of this quarter or the beginning of the next quarter, we’ll start funding again.

Petra Wehlert, KfW: We have a sizeable annual funding programme to manage — this year it is around €75bn. The level has been stable at around this range over the last few years. So we regularly issue in the SSA market in euros and in dollars and in a couple of other currencies.

Euros and dollars usually account for about 80% of our overall funding programme, because most of our investors invest in liquid bonds in these two core markets.

At the end of last year we considered increasing our euro funding in 2017. Looking at it today, markets are supporting this move because the euro market is in extraordinarily good shape.

More than half of our funding this year — overall around €44bn — is in euros.

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Rodrigo Robledo, Ico: In our case, we have a larger funding programme than last year. Last year, it was €4bn and this year it’s around €6bn. We are in a different situation than the rest of our colleagues here because the bulk of our needs are in the second half of the year. So far, we have netted €1.5bn and we expect to accelerate our activity in June, because, as I said, the larger needs are after the summer break.

We plan to do a couple of transactions in euros and we will also look for possibilities in dollars after coming back to that market last year. The situation in Spain has changed a lot and we are receiving good support from our traditional dollar investors.

In brief, we will focus on our core market, which is euros, but complement this with some funding in dollars and other currencies in order to continue with our philosophy of diversifying our investor base. 

Tim Armbruster, FMS-W: Our plan is similar to last year: roughly around €16bn total term funding volume for 2017. Like most colleagues here, we have done a lot of frontloading this year which was mainly driven by the natural funding needs arising from our asset portfolio.

Generally speaking, our funding activities are more or less equally split between euros, dollars and sterling, but to some extent also depending on the actual needs in each currency as well as demand dynamics. 

The frontloading of our euro funding needs to be seen in this context. We have raised about €7bn so far.

So are we looking for opportunities in the other currencies as well. If investors have appetite for sterling, we’re happy to issue. We funded more than usual in sterling in the first half of the year — close to £3bn. However the focus for the rest of the year will be more on the dollar sector.

globcap
: People mentioned frontloading. Are people further ahead in their plans than they were this time last year?

Armbruster, FMS-W: For us, there were two sides of the story. One side is, of course, that right from the start, we have had a specific purpose [as a wind-up agency]. Last year, the German parliament passed a law for the reorganisation of the German Financial Market Stabilisation Fund and in this context will allow FMS-WM to access euro term funding of up to €30bn from the German Debt Agency as early as 2019. 

So, what should we do in terms of our remaining euro term funding needs until 2019? We look at investor demand, and the shape of the euro market and think; when is a good time to bring both sides together? We are of the opinion that in the first half of 2017 we were finding a good balance between what investors asked for, as well as attractive cost of funding for shorter dated euro transactions for us as an issuer.

We’ll wait a little bit to see if that’s still the right decision. But for now, it was our objective to frontload. What we have seen is that the political risk environment in the first quarter meant that investors, especially the central banks, had a strong interest in paper both in public and private placement format in euros.

Robledo, Ico: In our case, it’s a bit different. We are not worried about liquidity problems, because time is moving in our favour. We are linked to what happens in the Spanish economy, and the news is very positive. It is likely Spain will grow around 3% in 2017 and this is the third consecutive year with these good figures.

And the news on the investor side is also positive. The majority of those investors, who were on the sidelines during the financial crisis, have started to buy our paper again. So, that’s the reason why we are confident that we’ll have no problems in meeting our funding plan this year. Personally I’m confident that we’re going to have access to the majority of our traditional investor base in the second half of the year. 

globcap
: Now the French election is out of the way, does the horizon look clear for the rest of the year? Is there anything raising its head?

Wehlert, KfW: It does indeed. The week before the French elections we issued a new global bond, a very successful €5bn five year deal. It was very good timing — the book was highly oversubscribed because investors were looking for safe haven assets. But looking at the current situation, the outlook overall is much more positive.

With respect to frontloading, we usually fund about two thirds until the so-called summer break in mid-July, and we will not change this strategy for this year. The horizon is much brighter now and there will be good funding opportunities in the last quarter and limited supply. 

In general, we always frontload in the first half of the year simply to follow the investors, who tend to invest more at the start of the year. That is, at least, what I have learned in capital markets. They invest mostly in the first quarter when demand is supported by a high amount of redemptions. 

On the other hand, our aim is to pick the best issuance windows — when market conditions are stable and investors globally are able to participate. That’s the battle we fight throughout the year to ensure our bonds perform well and that investors like buying KfW bonds.

Svedholm, MuniFin: I guess, in your case, because you have such a big programme, you have to fund throughout the year. You can’t pick, like us, which quarter. You have to go every quarter. 

Wehlert, KfW: Yes, every quarter but not every week.

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Svedholm, MuniFin: Fortunately not. We looked at the issue from two different points: our redemption profile, and political risk. We had a lot of redemptions at the beginning of the year, and we felt the execution risk was fairly low at that point. 

The political risk, arising from the elections, was definitely there. Brexit and Italy remain question marks for the rest of the year. But if one would be bold enough to leave everything to be funded in the fourth quarter, I guess the funding costs could be a bit lower but, from an execution point of view, people can’t do that. It’s always a balance.

globcap
: Investors still talk about Europe having sluggish growth but the GDP expectations are now higher than the US and the UK as well. Do you have to hammer that home to investors, or are they starting to pick it up themselves?

Wehlert, KfW: The elections earlier this year weighed heavily on the market. Investors were rather cautious on Europe. Now there are far fewer critical questions about Europe on the road. Everybody is more positive now. Consumer confidence is at a very high level and at the end of the day, the ECB policy might have helped, too — even though the Germans criticise the approach and don’t like negative rates, we can’t deny it’s been of some help.

However, a return to a more normal interest rate environment would be helpful in the mid-term.

Robledo, Ico: Early in the year, questions were more focused on the French elections. After the elections, the mood is very different and it seems we will have a period of stability in capital markets for the rest of the year.

globcap
: There was quite a relief rally after the first round, but the wave of issuance didn’t really come until after the second round. Were people waiting to be absolutely certain?

Armbruster, FMS-W: The outcome of the first round was, from the investor side, more important. It was more difficult to predict the outcome given the close ranking in polls. The worst case scenario seemed more realistic. 

What I see is that Europe is definitely looking better now. With regard to certain countries, there still is risk adversity. We have some political elections approaching. The German election and Italy is also coming up. This is something that is seen as a certain risk factor in the future. We have to wait for the outcome of that.

Goebel, Rentenbank: There is absolutely no reason to get carried away. After the unexpected outcomes of Brexit and the US presidential elections, markets thought that anything was possible. Further shock events got priced in with a much higher probability.

In Austria, with the presidential election between a green and a right wing candidate, arguably we got pretty close again. That has triggered a sentiment where we don’t know what’s next.

Suddenly, we have a bit of a relief rally and some very good news from countries like Spain, Ireland, even Portugal. The situation in Italy is far from resolved and, with upcoming elections there, it needs to be watched. Not everything will be easy going for the next couple of years.

globcap
: The political outlook looks better. Are there now concerns that the ECB is looking to taper QE? It has reduced the size of its purchases per month. Is that the next risk event on the horizon?

Svedholm, MuniFin: Yes, that will be the next big topic to discuss. There are a lot of question marks remaining but I have to come back to the fact that Europe is growing and there is a lot of potential so, at some stage, the ECB has to start moving. It has built something that is quite difficult to take away. It’s a big topic coming up.

globcap
: FMS-W is not in the public sector purchase programme. Have you noticed a marked difference in spreads?

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Armbruster, FMS-W: We do not benefit to the full extent from the PSPP. The ECB cannot buy us as we are a wind-up agency, or what is called a bad bank. Of course, we have also seen a positive trend following general euro market dynamics. 

As the euro SSA market has tightened, we have partially tightened with it. For the same duration, the secondary market difference is between 10bp and 15bp sometimes in euros. In dollars, it’s below 5bp at the moment in secondary markets.

So generally speaking, we have benefited but not to the same extent as we would have if we were part of the PSPP.

globcap
: In dollars, we have seen the Fed raising interest rates for the first time after a long cycle of low rates. Has that been smooth? Or have there been difficulties in handling this?

Wehlert, KfW: Swap spreads are the most relevant factor in the dollar market. At the beginning of the year, we had unexpectedly wide spreads and so could show attractive US Treasury spreads. 

The dollar market is still the most interesting market for international central banks. It’s their core currency to invest in. We also see them coming back into the euro market, which is a good sign. Given the euro market is performing even better than the dollar market — despite the basis swap market being favourable — the breakeven is very short. The maturity where there’s a funding advantage in dollars is around three years. 

Last year, the dollar market was much deeper than the euro market but we haven’t observed the same this year But that doesn’t mean there isn’t enough demand in the US market — it is just that the euro market has returned.

Svedholm, MuniFin: There is always a cost of using the cross-currency derivative. People will start looking more and more at euros if their cost difference is low. That’s our thinking. We haven’t done anything yet, but it’s something we’re considering all the time.

Goebel, Rentenbank: We have been raising dollar funding at reasonably cost-effective levels for the past 20 years under a variety of setups. Until 2007, the cross-currency basis swap was basically zero. There were no distortions like we have now. We were issuing at Treasuries plus 40bp, so much bigger spreads than nowadays and still, the funding cost was below dollar Libor. Swapped into Euribor, often dollar funding was at better terms than direct euro issuance. 

Now, the parameters are completely different. Six year Treasuries are trading swaps flat and even yielding swaps plus for longer maturities. The dollar euro basis swap is in the mid-30s across the curve and our credit spreads are mid-swaps plus.

So what happens if the cross currency basis swap tightens and our credit spreads don’t follow? Our credit spreads can only tighten if Treasuries outperform swaps. 

If Treasuries are at swaps minus 5bp, Rentenbank cannot trade at swaps minus 10bp because investors are not going to buy Rentenbank at these levels. Hence, a tightening of the dollar euro basis swap poses some risks to the attractiveness of dollar funding and to our presence on the dollar market. Still, over the medium term, because of the way that investors take advantage of global cross-currency arbitrage opportunities, dollar funding will continue to make sense for us.

Wehlert, KfW: What is interesting here is that it’s not really long ago that we were talking about negative swap spreads as a structural feature because banks did not have enough balance sheet, which put pressure on government bonds, while on the other hand the fully collateralised swap business was considered to be risk free.

Swap spreads were really wide at the start of the year. I wouldn’t consider it to be unusual if spreads tightened again. But overall, it’s really difficult to predict where swap spreads are going — even for bankers.

Armbruster, FMS-W: We have the same experience when it comes to views on future US swap spreads. It’s a question of getting used to high volatility in swap spreads. From our point of view, a significant portion of our asset base is in dollars, so we don’t necessarily swap the dollars back into euros because a big part of our funding needs are in dollars. Because of the volatility, it makes it very interesting. 

It was very profitable to swap back into euros in the first quarter. Holding dollars was expensive, so it’s interesting to decide how to steer the position and what the internal benchmark is.

Robledo, Ico: Our experience in the dollar sector is a little bit different. Most of the SSA players have been using the dollar market to issue in the short term as it was difficult for them to print in short term euros because of the negative yields at those maturities. This is not our case as we are still paying some positive yields in euros in short to medium maturities. This didn’t happen for three years till last October when it opened again for us and we printed $500m. 

This year, we are monitoring the dollar market again. We have seen some deterioration in the basis swap in the last months, so we haven’t done anything so far. We are confident we can print in dollars this year but we need to achieve similar levels to those in euros. 

globcap
: Is it correct that US companies selling in euros and swapping back to dollars has had an impact on the basis swap? 

Goebel, Rentenbank: That’s been a factor contributing to the cross-currency basis, making it more attractive for us to issue dollars. So, in a way, it’s interesting to see that it’s very affordable for US investors to borrow money in euros, and then pay 40bp of basis swap costs, and still end up at a better level than issuing directly in dollars. 

It speaks volumes about the artificially tight credit spread environment in the eurozone. 

globcap
: Does the sterling market offer good arbitrage this year? Has there been any reaction to the Brexit negotiations?

Svedholm, MuniFin: There was a scarcity of supply in the sterling market last year. And at the beginning of this year, the numbers looked extremely good for an issuer to print sterling then swap it back to euros. But that deteriorated quite quickly when people started issuing. 

There was a huge issuance amount in January, but back then, people were saying: ‘There’s January, February — a couple of good months — and then there’s Brexit. So, go before it’s too late.’ Obviously, banks like this kind of thinking. 

We felt that there was a good window in the first quarter, and we used it. It’s up and running again now though, so I don’t know. 

Armbruster, FMS-W: This year, we’ve funded about £3bn, similar to last year. In 2016, in the investor meetings we had, there was a clear sign from investors that they wanted to have more diversification, and that drove demand for sterling.

But Brexit was a factor and larger issues could be affected. This was also, partially, a story on the street. What we have seen is that there are more investors getting in contact with our side, because they want to have a more diversified base in that area. 

The UK is, of course, now positively benefiting from the currency exchange rate but, as Petra said, it remains to be seen what the larger scale outcome for Brexit will be.

globcap
: Is arbitrage important for you?

Armbruster, FMS-W: The total term funding we have done so far this year is about €14bn equivalent. We’ve probably done about 10% of our funding based on currency arbitrage. We tend to use the standard arbitrage from dollars into euros, for example. In the other core currencies — dollar, sterling — we don’t use it very much, and not at all this year, simply because we have natural needs in the currencies arising from the asset side.

Goebel, Rentenbank: Sterling sometimes plays a significant role in our funding programme, but not every year. This has been, at least for the past couple of years, largely due to the fact that we’re looking, on average, for seven to eight year funding. And sterling issuance quite often is only cost-effective up to five years. 

Therefore, it lacks a bit of the special attraction that the US dollar, the Australian dollar or the euro market have for us.

globcap
: How is the Australian dollar market this year?

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Goebel, Rentenbank: Last year, Kangaroos took a fairly low share of our overall funding as we were reassessing our strategy on the smallish, almost private placement-style taps of the 10 year plus lines, where you have a constant trickle of demand from Japanese life insurers.

This year, we feel more comfort again with the market. The long end has worked reasonably well, but we also saw very strong demand for transactions in the belly of the curve. So, overall, we’re quite happy with how Australian dollars have been going this year. 

Svedholm, MuniFin: We haven’t looked at the shorter maturities in Australian dollars. We have kept ourselves to the 10 year sector. And, to be honest, it is quite tricky. As Stefan said, it has changed in character. It’s not a bookbuilding process anymore, where you open up the books and you have a reasonably nice book, and maybe even an allocation problem. 

Nowadays, it’s more private placement-style, based on reverse enquiry. There’s a couple of buyers, and every bank is competing for those investors. It might pick up again, but currently, it’s a tricky market.

globcap
: Has the Kauri market picked up a bit? Or does it fade in and out with the Aussie dollar market?

Goebel, Rentenbank: It’s a very interesting market with a very strong proprietary domestic investor base. A lot of our transactions get placed with a significant share onshore. We were roadshowing there in March, and see continuing investor demand. 

However, pricing doesn’t necessarily always work. Currently we are a couple of basis points away from where a transaction would make sense. The Kauri market quite often enables us to get funding in the critical part of the curve, i.e. seven years plus.

Having said that, it’s sometimes a bit puzzling. It’s the market where we offer the widest spreads over governments of any currency where we issue. It’s also a market where this coincides with the widest spreads against domestic swaps of any currency we issue in. 

And still, that doesn’t mean that if pricing needs to go 5bp tighter to allow us make our euro target, investors are happy to give up those 5bp. 

globcap
: Have there been any other currencies that have been particularly attractive for arbitrage this year?

Goebel, Rentenbank: We did a Singapore dollar trade a couple of weeks ago based on bank treasury demand. We also see that potentially materialising in Hong Kong dollars. So, the bank treasuries from the region seem to be quite interested to add triple-A HQLA paper to their portfolios. 

And that’s exactly what we needed to make Singapore dollars work, because it is a market where the bulk of the investor base is typically interested in higher yielding product.

So, that is a positive development. Because in recent years, we’ve seen our portfolio of issuing currencies becoming narrower and narrower. 

Svedholm, MuniFin: We post euro targets, so our niche currency borrowing is based on reverse enquiry from the investors. Turkish lira has come back again this year; we have printed quite big tickets there. But I have to agree with Stefan, the universe of currency is not what it used to be. There is still demand in different currencies, but it’s limited.

Wehlert, KfW: We have issued in eight currencies so far this year, compared to 13 last year for the whole year. Our record year was issuing in 26 currencies, so obviously the product range is shrinking. However, it is notable that we are still very active in the yen market having done the equivalent of €600m so far.

The business with Japan usually is very active until the end of the Japanese business year at the end of March. We are a regular issuer in the Uridashi market, having offered 36 different lines in 2016.

We were also able to do some transactions in Mexican peso and offshore renminbi CNH private placements, which is very pleasing.

But my impression is that it’s a harder market to do business in these days. You need banks that really push for it. Sometimes some new banks appear, like in Asia, and they bring new ideas in currencies. 

Banks overall are still in a process of streamlining their business models. I hope it will be finished soon and that the focus will be on business areas that will trigger some opportunities. 

Overall it’s very important to have diversified products and different channels for funding. A shrinking product spectrum is not a good development. We have to bring together the demand from investors, the capabilities from the banks and finally our own requirements. And if changes prove necessary, then we’ll have to adapt.

Goebel, Rentenbank: Did the Icelandic króna event mean that you don’t feel comfortable issuing in that currency?

Wehlert, KfW: We decided not to issue, yes.

Goebel, Rentenbank: That’s something we also consider. We are always hedged with a swap into Euribor, but Icelandic króna deals have shown that investors are not in that same situation, and that is certainly something we have to consider from a reputation perspective.

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Wehlert, KfW: Icelandic krónur is the best example. We have only one transaction in the currency, which matured in the week beginning May 22. In the end we have to make sure that the relevant legal and security framework is in place.

But you can’t foresee everything — that’s why we stopped being active in Icelandic krónur. In any case, there is no demand from investors in that currency for the time being.

Robledo, Ico: We have seen these opportunities in currencies like Norwegian kroner and Japanese yen, but they are mainly in seven years and beyond. We are mostly active at the short to medium term of the curve, so we haven’t done anything so far.

Wehlert, KfW: If you look at the core currencies, there is domestic demand for Namensschuldverschreibungen and Schuldscheine. But this is very much related to the absolute yield level, so this business is up and down. At the beginning of the year, the business was very active. Later, it disappeared.

On the dollar side, the market for callable dollar bonds is very competitive. It’s challenging in the private placement market, which delivers us favourable results and is priced with a spread to the public curves. But given we compared the possibilities to our euro funding curve, it doesn’t make a lot of sense for us to do privately placed dollar callable bonds in longer maturities and pay up massively what we would pay in euro markets. So it’s also much more difficult to generate this business this year.

globcap
: With private placements, as we move out of negative yield territory, is that changing investor habits?

Wehlert, KfW: We all try to issue at the longer end of the euro curve to avoid negative yields and to thereby attract a broad investor base. KfW has issued two €5bn global bonds with a negative yield, about minus 20bp, and five year maturity.

We even did a €1bn deal at the short end. It had a maturity of two years and a yield of minus 48bp. Investors are getting used to the environment.

As an issuer, you try to get the broadest amount of investors, so long term issuance in negative territory feels a bit weird. But it works out and for KfW I can say that investors are still following us. It’s not 100% of your usual investor base but it’s close to it. It works when the market tone is positive. I don’t think you want to hold those bonds forever.

Goebel, Rentenbank: That’s a very important point here. Certainly, investors can look at buying out of a €5bn KfW deal at Bunds plus 20bp. If you need to have a certain share of triple-A German content in your short term euro portfolio anyway, rather than buying a new Bund at minus 86bp, you buy a two year KfW at a better spread. That is a rational investment decision, but it’s probably, as you said, Petra, something that you don’t want to buy and hold. And switching out of a larger sized KfW deal probably makes somewhat more sense than doing it out of a €1bn-€1.5bn Rentenbank transaction. So, we don’t really feel very comfortable with issuing at negative yields. We haven’t tried it in benchmark size yet, and we’d be very cautious to do that.

Robledo, Ico: We have been benefiting directly from this because some of the large core European ALMs cannot buy paper with negative yields. Last year, we saw them very active in Ico bonds, helped by the positive recovery of the economy. As a result, we placed more than 90% of our funding needs outside Spain and more than 50% of our investor base were ALMs, mainly Europeans. 

In some cases, the levels of private placements we printed were almost flat to the Spanish curve and in public deals we have reduced the spread versus Spain to 7bp-8bp.

Armbruster, FMS-W: If we look at the first quarter, we saw strong movements in the two and three year Bunds. Of course, we saw investor demand for the product, but from a limited investor group. I fully agree with what has been said here. 

With tapering of quantitative easing ending in maybe two to four years, if you look at banks as investors, then, from an ALM perspective, it’s very hard to buy at current levels. So, that is why I think there is only one or two larger investor groups that are able to buy at these negative yields.

Svedholm, MuniFin: It’s definitely tougher to be a German issuer looking at short maturities, than, say, a Finnish or Spanish agency, looking to issue at seven or 10 years. So, from that point of view, we chose to issue a 10 year euro deal this year but obviously the negative yield wasn’t there anymore, even at issue.

But in our previous 5-1/2 year, which we did in 2016, we were pretty flat. Even then, we lengthened the maturity to get it to a positive yield. So, from that point of view, I guess there is a certain fear on the issuers’ side of going into negative territory especially if you haven’t done it before. But once you have done it, once the market is comfortable with it, then maybe it’s not an issue anymore.

Armbruster, FMS-W: We saw this in the second half of 2016 when we did our first euro benchmark with negative yields. This was also a test for us. We weren’t 100% sure what the outcome would be, but at the time it was well received. This support allowed us to continue with the strategy in 2017.

Wehlert, KfW: What I’ve learnt in this process is that investors look at relative value, particularly — but not only — the usual trading orientated accounts. Overall, it’s still a stable investor base. And potentially, these days, people have to look for opportunities.

In the secondary market, for example, it’s very unusual — investor flows are going up. Why are they going up? They rise in euros, potentially, because there’s the PSPP programme. But they are going up in the other currencies, too. 

And one of the reasons might be that people have to look for opportunities. They even find a basis point an interesting opportunity to trade around. That might be one of the arguments.

Armbruster, FMS-W: It’s also a question of the internal benchmark. Like you said, if the Bund is going in terms of swap spreads towards minus 50bp and investors can buy a surrogate around 30bp cheaper to that benchmark, this can be interesting. 

globcap
: Rodrigo, Ico has been working a lot on social bonds? Can you fill us in on the latest developments?

Robledo, Ico: We started in the market two years ago. We decided not to issue a green bond and to focus on the social bonds because they fit better with our business model and with our activity on the lending side. We set up some criteria for issuing social bonds — lending to SMEs as they are the ones creating the majority of employment in Spain, they have to be located in Spanish regions with a GDP per capita below the national average, and we excluded those sectors not considered socially responsible like tobacco and alcohol. So, with these three criteria, we received a second opinion, and we issued, two years ago, our first social bond which was very well received. Last year we issued our second social bond with even better participation from SRI investors.

Last week, we had our third Ico Sustainable Bond Forum in Madrid, with a focus on sustainable investors and we realised that the number of issuers of social bonds and investors buying social bonds has increased a lot in the last 12 months, and this is going to continue.

We are members as well of the social bond working group under the ICMA umbrella, and all being well, social bond principles will be released at the general meeting in June. Last year we helped to release the Guidelines for Issuers of Social Bonds. We will do our best to keep a relevant role within this group and, if possible, in the future executive committee when social bond players will be allowed to join.

We also have some good support from other participants, for instance, the Luxembourg Stock Exchange. They have just created a platform for releasing social bonds. They already had a platform for green bonds, and now they have one for social bonds. Ico has had its social bonds listed in this platform since the very beginning. 

It’s good to have more paper on the SRI market. We feel very pleased with what we have achieved so far. We need to continue working, because we know that reporting and transparency is crucial to get more conservative green bond buyers involved. Obviously, the way you approach a green bond is different to the way you approach a social bond and this is something most of the investors understand. In this regard, we expect to issue our third social bond probably at the end of June or beginning of July after meeting some SRI investors. We are confident of getting a good participation from SRI investors like in the previous trades.

We are aware there’s still a lot to do in this market, and we feel fully committed, ready to continue working and very optimistic for the future.

globcap
: Would you look at issuing social bonds in the future?

Svedholm, MuniFin: From MuniFin’s side, we are sticking to our green bond framework and programme. We’re a fairly small organisation, so we can’t go too fast on this SRI path. So far, we are quite happy with the green bond development and the development of green loans in Finland. I don’t know if there would be room, currently, to start looking at social bonds yet, but I’m not ruling anything out. 

Wehlert, KfW: We are a big supporter of the green bond market. On the investor side, we have just doubled our portfolio from €1bn to €2bn. And our last green bond was €2bn in size.

On the loan side, KfW is one of the largest financiers of climate and environmental protection projects. Our goal is to have a green share of at least one third of our assets — with 44%, we exceeded this last year.

For our green bond issuance programme we only picked out our renewable energy programme as an underlying. It is about €3bn-€4bn a year and this puts us in a position to be the largest issuer in the green bond market in Germany.

We follow a specific market approach. We give a higher allocation to green investors, but our aim as an international issuer with a global investor base is to involve our traditional investors more and establish sustainability further in capital markets.

Look at China — it has been very active in green bonds in the last year. We try to leverage off our global investor base for the green bond market. We also hear that liquidity is a concern there. You might wonder, if you buy a green bond, why investors need liquidity, but at the end of the day, it’s simply a market approach. 

The green bond market is very small compared to the global market. And the social bond market is just a fraction of that. Therefore, we intend to keep it simple. We’ll concentrate on a product strategy.

The green bond market has developed to become more relevant, and we hope that will continue throughout the next few years. It has raised more considerations about sustainability, which was a niche area that is moving into the mainstream now. This is our main goal.

globcap
: Has the green bond topic really penetrated the investor mind-set?

Robledo, Ico: I have to admit, I was very surprised when meeting investors in China in the first quarter this year. We didn’t include any information about our SRI policy because we thought that they were more interested in the credit and in the Spanish economy. Surprisingly, every single investor we met wanted information about our social platform.

They were very interested. It’s true that they are still more focused on green than on social but I am confident this will change in the near future. It is a matter of having more social bonds in the market.

Thanks to social bonds, Ico has been able to diversify its investor base. Some asset managers that were not interested in Ico paper two years ago started buying as they wanted to add Ico SRI bonds to their portfolios. I truly believe that in a world where the recent financial crisis has helped populist movements, especially in Europe, SRI bonds and social bonds in particular are a way to prove that public entities like Ico can generate a positive impact in society. In our case, our focus was on the labour market, by helping employment creation and preservation. 

Svedholm, MuniFin: For us, talking about the green bond programme is now a standard part of the investor presentation. Investors, especially in places like Japan, are asking more and more about green bonds. I don’t know what the trigger was that started getting people more and more interested. 

The US is obviously a bit quieter. Our investor base doesn’t ask so much about the green stuff. They are more interested in the conventional bonds. But in Europe, it’s something that investors always ask about, particularly if you go to France or the Netherlands. You can’t do a meeting without talking about green bonds. 

Wehlert, KfW: If I do a specific roadshow for green investors I usually take somebody from our sustainability department, because investors show up with their experts too. Then you have a very different meeting. 

And in the US there are some big green investors that ask only green questions. The other investors are more focused on performance. But there are also some good stories to tell about the performance of green bonds so far. That’s a good thing. 

The green topic isn’t everything, but it’s much more in focus than before. Without that, we wouldn’t have achieved anything. 

The Green Bond Principles are covered by the investor side at KfW. Obviously there is a lot of talk going on about standardisation, which is pretty important. I think it’s the only market where we have a successful, unified market approach between banks, investors and issuers. There are no other examples of this. 

One of the challenges is the importance of having strict rules and avoiding greenwashing and balancing this with the internationalisation of the market. The aim is not to exclude people too early. For a sustainable market development we need to have certain quality standards, but not too complicated, because then people shy away. 

globcap
: What’s the big worry that you see for the rest of the year into 2018?

Armbruster, FMS-W: 2017 is done in terms of risk. The German elections are going to be a non-event. We will probably get something positive out of it. But I don’t see a lot of downside risk.

As I said before, we shouldn’t get complacent just because it feels good now. There are enough things we have to resolve. For example, unless Europe and the US come to a solution on global corporate taxation in a couple of years’ time we will all be in deep trouble.

Svedholm, MuniFin: It feels as if Europe is a less volatile place, at least in 2017, and hopefully, in 2018. But what’s going to happen on the other side of the Atlantic Ocean? What’s going to happen in Asia? Those are the talking points currently. So, it’s comfortable to be in Europe right now, but as Stefan said, you never know what’s going to happen in the next year.

There will be some market-specific issues. Some markets will grow again. Some markets will be less important. It’s hard to judge, but it feels much safer than, say, in December 2016, when we were looking ahead to 2017.

Wehlert, KfW: First of all, I hope that we will return to normal markets soon, because that’s the business that we like to do. Markets are in an extraordinary situation at the moment. All the central bank buying has reshaped the structure. 

There is a lot of regulation — especially for the secondary market — to be implemented next year. All the MiFID rules that are coming up might force banks to position themselves differently, so I’m really curious to see how that will end up. 

But I look at it more from a positive angle. We are going back to normality and somehow, markets will be shaped for a better future, hopefully.

Robledo, Ico: From my perspective, we don’t see any concerns on the domestic front. The financial system is under control, Spain is on the right track in its efforts to reduce the deficit so as to achieve the European Commission’s targets and we are getting very encouraging figures in the labour market.

This is very positive for us as, thanks to the explicit guarantee of our credit, Ico is fully linked to everything that happens in the Spanish economy. As a result, we are confident that the rating agencies will upgrade Spain soon. It’s very difficult to understand why we still have the same rating that we had in 2015. When you compare the situation we had two years ago to the situation we have now, it has much improved.

At a European level we are very optimistic in the short to medium term. We will closely follow the political situation in those countries that are holding elections this year and also the news from the financial system in Italy. 

Finally, as my colleagues have said, we will keep an eye on the news from the other side of the Atlantic, especially in the US.

Armbruster, FMS-W: I fully agree that the macroeconomic picture looks better. But if we look around in the world at what’s going on, there are a few events that could drive those factors up in the future.

But political risk is not really priced in, thanks in part to central bank actions. We still have some elections coming in Europe that we need to keep a close eye on in 2017 and 2018.

Volatility will return as markets get back to normal once central bank involvement is reduced.

globcap
: There was some talk of banks pulling back from the SSA business. Is everybody around the table happy with the service from banks?

Svedholm, MuniFin: We are pretty happy with the service. There is still some over-banking in some sectors, a few too many mouths to feed, especially from a small agency’s point of view. For a large agency or sovereign, it might be easier to distribute the business.

But, for us, it’s always a struggle how to appraise banks, to make sure that we get the service, and in some way, to reward the business we need to get. But I do hope that these events, like with UBS and Credit Suisse, won’t happen again. But then, what happens with Brexit? How will London look in five years? Who’s going to operate from there? Who’s going to operate from Frankfurt? Who’s going to operate from Paris? So, that is a concern, but not for the upcoming year. That is for a timeframe of five to 10 years. I don’t know if you share the view. 

Wehlert, KfW: Yes. A lot is changing in the banking business, from the inside and from the outside. And with Brexit, every bank has a different approach. While everybody has different views on where to go, in any case the concentration in London will probably not be as high as it is now. Overall, we are still fine with the service. Apart from the Swiss banks, there is no bank that has rejected the SSA market. 

Perhaps I would differentiate between euros and dollars. There are more banks in the euro market than in the dollar market. Therefore, it’s harder for them to differentiate themselves from each other — especially if they are not active in as many fields like private placements and so on. It’s harder to show a difference these days because the market is in such good shape and there is such a big buyer in the market.

So I think it will probably be tougher for them in the coming years, and also different for us. But how that will be? We’ll see. 

Robledo, Ico: In our case, we have changed our approach when mandating banks for public deals. Before, we had a large funding plan which allowed us to work with most of the banks. Now with a smaller funding programme, we prefer to work with only those banks which demonstrate a real commitment to us.

Rotation was key for us before, but now we are taking into account different factors like secondary activity, coverage, arbitrage and their ability to offer us competitive levels in the derivatives market. We have no problem in using the same banks if they really deserve it

Armbruster, FMS-W: The total term funding we have done so far this year is about €14bn equivalent. We’ve probably done about 10% of our funding based on currency arbitrage. We often use the standard arbitrage from dollars into euros when we need euros. We raise the other core currencies — dollars and sterling — directly. We don’t use arbitrage very much, and not at all this year, simply because we have natural needs in the currencies arising from the asset side.   

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