But even supranational institutions face challenges. Ultra-tight dollar swap spreads mean that pricing a benchmark bond now contains many more nuances than before as borrowers try to ensure each deal attracts enough interest to perform while avoiding paying excessive funding costs. And in a number of markets, growing swap costs are forcing those in the SSA market to find ever more resourceful ways of putting a deal together. EuroWeek invited leading borrowers and bankers in the supranational bond market to New York in mid-March to discuss the key issues and developments.

Participants in the roundtable were:

Jeanie Genirs, head of liquid credit syndicate, Deutsche Bank

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

Bertrand de Mazières, director general, finance, European Investment Bank

Bill Northfield, head of SSA origination, Deutsche Bank

Hassatou N’Sele, manager of capital markets and financial operations, African Development Bank

Ben Powell, senior financial officer, International Finance Corporation

George Richardson, principal financial officer, head of capital markets, World Bank

Jigme Shingsar, managing director, DCM, RBC Capital Markets

Sean Taor, head of DCM Europe, RBC Capital Markets

Ralph Sinclair, SSA markets editor, EuroWeek 

EUROWEEK: Is it becoming more difficult as a supranational issuer to pick the right benchmark trade to do given how tight swap spreads are and how low US Treasury yields are?

Richardson, World Bank: Picking the right benchmark maturity is not the hard challenge, it’s more about determining the right price. There’s always a clearing level, and depending primarily on where swap spreads are, that price will change.

When there’s a period of time when people don’t issue, then it becomes more difficult to determine what that right level is. That, I think, is the only challenge. But it’s not a big challenge. It’s just a matter of following the markets, studying all transactions, listening to advice, getting out there and doing it.

N’Sele, AfDB: It is not as straightforward as it used to be. Pricing a well subscribed five year benchmark well below mid-swaps flat has become increasingly challenging since the end of last year, as a result of the tight swap spread environment. As an example, we did our five year benchmark at mid-swaps less 4bp last year, which was equivalent to US Treasuries plus 33bp. We then issued a similar transaction at mid-swaps plus 5bp, which worked out to US Treasuries plus 20bp this year and this we subsequently tapped at mid-swaps plus 1bp — Treasuries plus 18bp at the time.

With the tightening of swap spreads, we’re seeing investors shift their interest towards those supranational institutions and triple-A rated borrowers that price deals at much wider levels. Some investors are also more willing to go down the credit curve to get a marked pick-up over US Treasuries, while others, in their quest for yield, are looking at the seven year and 10 year spaces, making these maturities a more attractive proposition for supranational issuers compared to previous years, both in terms of pricing and demand.

On top of that, three year trades and short-dated floating rate notes have been the flavour of the month.

EUROWEEK: Ben, compared to how the IFC has issued benchmarks traditionally, you have had to show a bit more flexibility with regard to timing in your recent trades. Is that a result of these tight spreads?

Powell, IFC: Yes. Again it’s picking the right maturity at the right time, but also the right deal size. I think that’s as important.

You have to be very clear on what kind of trade you want. Do you want a tightly-priced $1bn? Do you want to take a little bit more size?

That has made execution strategies a little bit different now. It deserves a bit more attention rather than previously when we had wider swap spreads and it was perhaps a little bit more straightforward to get a $2bn deal.

For an issuer like the IFC, we’ve had in the past the luxury of being able to do $2bn deal sizes at a considerable spread to US Treasuries. As that Treasury spread has diminished, we have had to pay more attention to the outcome in terms of the size we want.

The price break associated with that difference in size is also a little bit larger than it has been in the past — whether you have to pay an extra basis point or 2bp to get that extra $1bn.

EUROWEEK: Jens, the NIB just priced a $2bn deal with its biggest ever order book. Was that experience similar to how Ben describes it?

Hellerup, NIB: It’s is all in the pricing. It is difficult to find the right pricing and to know exactly where you need to price a $1bn or a $2bn trade.

There are one or two basis points between seeing a lot of demand or maybe not getting any momentum in the deal at all. With the tight swap spreads a basis point can make a big difference. It is a challenge there to find the right pricing.

De Mazières, EIB: For the EIB it hasn’t been so much of a problem to successfully launch benchmarks in dollars. Actually we printed our largest ever five year earlier in the year.

It is fair to say that trading levels actually remained wide enough to offset any impact of tightening of swap spreads. Having said that, tight swap spreads are not something new, they’re something that has existed for a long time. What may be a bit peculiar is it comes at the same time as a relatively large dispersion of trading levels throughout the SSA and supranational issuer universe.

EUROWEEK: Has the EIB benefitted from that?

De Mazières, EIB: Well, I would be absolutely happy to see the EIB’s trading levels even tighter, but we are not currently among the tightest, and certainly I think it helped our issuance programme.

Taor, RBC Capital Markets: One thing that has become apparent over the last 12 months is that secondary flows have diminished compared to previous years, and price discovery is perhaps less driven by just looking at the secondary curve and more by engaging accounts ahead of time — particularly when swap spreads and the spreads to US Treasuries have been so tight.

That was very true in January, and while we’ve seen very strong markets across all currencies — particularly January — the environment has continued to be very healthy. Yields are still low, especially in the short end. Putting your money on deposit just doesn’t pay and I think we’re going to see that for quite some time, so reliance on wide spreads is clearly less than it has been in the past.

But in the wider market there aren’t that many investors you need to canvas to gauge whether a deal will go well or not. If you know at what level those investors will participate, you have a lot of confidence they’ll deliver ahead of opening books.

EUROWEEK: So is looking at new issue premia now something of a secondary concern or is that still a relevant number when pricing a benchmark?

Taor, RBC Capital Markets: It’s relevant for investors, but a lot of investors will buy a deal anyway if it is going well. If you asked investors back at the end of December would they buy at the spreads that deals have come at now, some of them would hesitate. A lot of people were hoping to see, or expecting to see, a further back-up in spreads and higher yields. But Treasuries have remained within a fairly static range for the last couple of months. Investors have to put their money to work though and that’s why the deals have gone so well. There’s no alternative for them.

Northfield, Deutsche Bank: The original question focused on the dollar market, but what we’ve seen this year is that successful issuance in the dollar sector owes much to healthy markets outside of the sector, be it Australian dollars, be it sterling, be it euros, green global bonds and so on.

From that perspective that gives the supranationals much greater flexibility in deciding whether or not to actually ask for a $2bn or a $3bn trade or whether they can say "I’m not sure I want to explore that price break, so I’ll start it with a price for $1bn".

Because of the low Treasury yields and the negative yields for certain cash markets, investors are incentivised to get into the SSA markets. That means you have confidence in pursuing a deal and it’s probably already half sold. You can figure out where the competing supply is, plan your timing, and then find your niche to achieve a better result.

The NIB did a larger than expected trade, the EIB has done two $5bn trades and the World Bank did a very large three year and all were very successful. I think each of these trades worked because the momentum was there from the start, thanks to the way that the issuers managed the process.

Shingsar, RBC Capital Markets: In terms of the whole question of whether or not it is becoming more difficult to price dollar benchmarks, it certainly doesn’t appear that way if you look at the results so far. Consider that at the beginning of last year we had five year Washington supra issues coming at Treasuries plus 30bp and we ended the year at 11bp over Treasuries on IFC’s five year. Ben’s point about break points is the other important consideration of course, but it hasn’t been more difficult overall.

Sadly, as swap levels have deteriorated, issuers would rather pay Treasuries plus a higher number if that allows them to achieve a better Libor level. But the track record of how deals have gone would suggest that it’s not become more difficult to price a trade. It’s just the new levels have provided a shock on both sides of the transaction.

EUROWEEK: Bill mentioned green bonds. Might the IFC’s recent experience with a benchmark-sized green bond pave a way forward for future supranational debt issuance?

Powell, IFC: That target audience of SRI funds was why we chose the week that we did to come to the market. It was Chinese New Year. We put out the message through the syndicate that for this deal we wanted to focus as much as we could on that type of investor.

Against the backdrop of IFC having never done a three year dollar issue in benchmark size and with the deal coming at a time when three year deals were extremely well bid, one of the things that we have taken away is that the biggest challenge was the balance between satisfying our traditional, loyal investor base and the new targeted SRI funds.

We were fortunate that we generated a book such that we could have allocated the entire issue to SRI investors, but we also have a very loyal and important investor base in the central bank community as well. This was the balance we had to achieve in allocating the bonds and I think most investors were happy.

Central bank investors were allocated a slightly lower amount than on previous IFC deals and that’s something of a break from the norm. But we were very clear in terms of the investors that we wanted in this deal.

The reason we did a benchmark size transaction was that we have done a lot of work on the SRI investor base and we heard often that they wanted a liquid instrument and fair pricing relative to IFC’s existing dollar curve.

EUROWEEK: Were there any difficult conversations that you had to have with that central bank investor base?

Powell, IFC: Yes. The order book reached $1.8bn so we had not just an outright allocation problem, but an allocation problem in terms of trying to focus on new SRI fund investors but also trying to make sure our central bank investors were satisfied and understood our rationale.

EUROWEEK: Do you think you would repeat the exercise?

Powell, IFC: Yes. We won’t do it every week, but the IFC’s investment programme for climate-friendly financing is about $3bn next year. The amount of green issuance we do will never match that and we don’t feel that there’s enough demand in the green bond investor base to fund that amount each year but I think this type of deal will play a part in our annual issuance programme. Last year we did $500m. This year we’ve done $1bn. So I think somewhere in that range on an annual basis in syndicated dollar transactions will become a core part of the IFC’s funding, yes.

EUROWEEK: Would you say that you are limited by the calendar in that sense with these deals?

Powell, IFC: There’s an element of timing and spacing out issuance. Like I say, we chose the Chinese New Year to try and avoid the Asian investors coming in size.

And yes, we’ll have to spread the issuance out as well, because we don’t want to cannibalise potential interest for our regular benchmark dollar paper.

EUROWEEK: Is there is a bigger market here to explore? Is this a potential new format for issuance on a bigger scale?

Taor, RBC Capital Markets: The interesting question, to be blunt, is whether or not those investors will pay more than fair pricing for a green bond — that has always been the question mark around the product.

There’s enough demand to price a deal flat to the curve. The IFC exercise showed that the central banks would have bought the deal anyway. You could have printed a bigger size and filled those central banks, but that wasn’t the aim.

But is there an investor base that will pay a little bit more for a green bond? I’d hope there is, but I think it takes time to develop that investor base.

De Mazières, EIB: The size of the IFC’s transaction was remarkable. For the EIB we started our green bond issuance — we call them Climate Awareness Bonds — in 2007 with a €650m deal. Since then we have succeeded year after year in issuing green bonds, mostly I would say into Scandinavian or Japanese accounts.

Last year we issued around €350m in the format, so the thing about this IFC transaction is that we welcome it as a catalyst for further demand.

For EIB we expect there to be more demand in Europe and Asia, because frankly speaking, we are not yet thinking of addressing the US as our main SRI investor base. The Americas account for only around 20% of our US dollar sales, so it’s not a large part of our investor universe.

EUROWEEK: Are any of the other borrowers considering a change in their green bond issuance strategy?

N’Sele, AfDB: Yes. We’ve offered ethical bonds to the Japanese retail market, issued green bonds, education bonds, and other themed bonds. And we now want to target the green institutional investors — both in the US and Europe — who want to make socially responsible investments.

For the ethical bonds distributed in Japan, we have committed to make our best efforts to allocate resources equivalent to the proceeds of our issue in the specific area targeted by the socially responsible bond. However, ethical institutional investors in the US and Europe want the proceeds of their financing earmarked to green projects. We’ve been working on our internal processes and policies to ensure that we can earmark bonds to specific projects and hope that green issuance is going to be on our table this year. The success of the IFC deal was quite encouraging.

Hellerup, NIB: We have been issuing green bonds for a couple of years now.

At the moment we do not have a sufficient amount of projects which would support full benchmark-sized green bonds so we continue to finance smaller projects and to issue bonds to the Japanese retail markets and private placements. We placed a 20 year Swedish kronor deal last year with a Nordic investor, so that’s the sort of thing we will continue with.

Richardson, World Bank: We have the good fortune to be the treasury manager for the International Finance Facility for Immunisation (IFFIm) — which was the first type of issue in this triple-A rated SRI field in 2006 — and then we created the World Bank Green Bond programme in 2007.

Every time there’s issuance in the sector, whether it be the Asian Development Bank’s Water Bonds, or the EIB’s Climate Awareness Bonds, or the IFC’s Green Bond, we watch it very carefully, because everything has pros and cons in terms of how we are trying to develop the market.

Our strategy hasn’t changed. Our strategy primarily is to contact and develop the investor base.

And once the demand is sufficiently created the price follows. But that’s not quite there yet. We have been able to issue bonds into specific investors who are willing to value the extra effort that a green bond demands and there should be a price difference between these and normal issuance, but there is not enough of one yet.

So our next step, we think, is to try to get a club deal together where you get a group of these types of investors together.

Northfield, Deutsche Bank: I remember the roadshows we did on IFFIm and people loved the concept of a climate or a green bond. But price still mattered.

We priced IFFIm around 5bp wide of the World Bank back in November 2006, and it was very well received.

Some of the large tickets were from dedicated SRI funds in the US, and we were pleasantly surprised by that. But since then, even as the market develops around the globe, we still don’t have investors en masse willing to ignore price.

EUROWEEK: Is that an argument for ignoring SRI funds and just letting central banks buy these bonds as if they were normal benchmarks?

Northfield, Deutsche Bank: I think that would be self-defeating, because you want to have a product in people’s portfolios. You want to see it’s a bond that’s backed by a triple-A issue. Through having a bond in your portfolio, you’re much more actively tracking the sector. It might be the first time you ever bought a supranational —a World Bank, an IFC or an EIB — bond. So you just automatically are going to be more actively involved in the sector.

That’s good for everybody, as it raises the overall profile of the supranational.

Richardson, World Bank: The green bonds in our case have been really nice door-openers. In many cases you get investors to buy the name for the first time, and then the idea is to get them to buy regular bonds or other products afterwards. That’s worked in some cases, but depending on the investors some are price-sensitive and they will always be price-sensitive.

Shingsar, RBC Capital Markets: I think part of the problem is that whether you are implicitly or explicitly an SRI buyer, a central tenet of socially responsible investing is that you don’t have to accept a less competitive return to be a good citizen.

So it comes down to what your objective is as an issuer and that can be two things. One is picking up cost efficiencies by leveraging specific programmes, or developing markets. And hopefully they converge, but right now those are the two approaches.

If you’ve got a limited green programme that’s very targeted towards Japanese retail then that is the best starting point. But if you want to broaden the market in the US it would be the benchmark trades that are of interest.

De Mazières, EIB: On a pure theoretical basis there are two obstacles to the development of these climate bonds.

The first one is that we more or less all issue them at the moment and it’s money that we raise with certain categories of investors to allocate bonds to. But in the end you cannot manage the balance sheet with sub-portfolio allocations all the time. So there’s a limitation to what you can do in terms of just managing the situation.

And the other possible question mark I have — because I heard it from time to time from a few investors with very restrictive mandates — is that buyers will say they are not interested in investing in our business, because all that we do should be green anyway, so if we allocate to a sub-portfolio then it’s a sign that we’re not so socially responsible after all. In fact, EIB’s business is generally compliant with exacting green EU legislation, suggesting more market interest in green products could be devoted to generic EIB bonds, and showing that the sub-portfolio linked to climate awareness bond is quite a niche product.

EUROWEEK: Are there any other markets that supranationals should be, or are, investigating?

Powell, IFC: We segregate our treasury — or the fundraising — in two. There is the core funding, the proceeds of which is swapped into dollars and there the arbitrage is what counts the most.

So if there is a new currency — and we’ll look at a whole gamut of currencies — what it swaps back to in dollars is really the key as to whether we issue in it or not.

In terms of what we do in dollar funding, it’s really just the swap level that defines whether the market is attractive or not. We are always looking at ways to diversify and we have diversified our funding sources this year. We’ve seen an increase in enquiries for synthetic African currencies, for example. A growing number of investors want exposure to African countries like Ghana.

But in terms of new currency markets, we look at those on the other side of treasury in what we call the client solutions group, which is the local currency financing part of treasury. And there we’re talking about local bond issues financing our pipeline in that particular country.

That department looks at trades in Mongolia, Kenya, Ghana, and so on, which match our activities in terms of the local financing that we do. We did Nigerian naira, and we’ve done domestic issues in the Dominican Republic, for example, which have that local currency aspect, and the investment pipeline financing side to it. We’re looking at the investment programme in Africa, which has grown tremendously. We did $1bn last year and with continued growth that will hopefully lead to more local currency bond issuance opportunities.

EUROWEEK: Where’s the demand for African synthetic deals coming from?

Powell, IFC: European money managers that have a portfolio targeted on emerging markets. It’s obviously hard to access domestic clearing so instead of buying the local government bond, which presents challenges in terms of settlement, they’ll go to IFC or other triple-A rated credits in a linker format using non-deliverable forwards.

EUROWEEK: So there are reasons to deliver that sort of issuance beyond just arbitrage if it’s not developing the local market?

Powell, IFC: I think it’s about visibility. I think it raises the profile of these currencies in the international markets. I think it’s a positive.

Richardson, World Bank: It diversifies funding sources as well. So investors who simply don’t like dollars at a particular point in time or have the ability to choose lower credits won’t buy dollars from a particular high quality credit. But that same investor may buy the World Bank in a different currency, because in that different portfolio, he or she has fewer choices or greater credit constraints. We see that all the time including from central banks who have passed on us in dollars, because they consider us too expensive compared to other credits they are able to buy, and yet give large lead orders in, say, Australian dollars because they have a different criteria for that currency.

But in terms of green bonds, remember that the first two green bonds that had the so-called green earmarking — the EIB Climate Awareness Bonds and the first World Bank Green Bond — were in euros and Swedish kronor respectively. So it wasn’t really dollars that led this sector at the beginning.

Europe in general is much more developed in the SRI fixed income field than the US has been. The US is catching up, but for many, many years there’s always been a keener interest in the use of proceeds from European investors. So it’s not surprising to see currencies other than US dollars lead the charge in new markets.

N’Sele, AfDB: We have done many synthetic transactions in African currencies — Ghanaian cedi, Nigerian naira, Zambian kwacha, Ugandan shillings, etc — and are looking at other currencies on the continent as well. There is indeed a wide array of African currencies to which emerging market investors in Europe and the US want to have an exposure, without taking credit risk.

In terms of pure domestic issuance in Africa, besides the rand, last year we did a maiden Ugandan shilling transaction, with the proceeds used to finance a private sector entity in Uganda. The size of the bond was UGX12.5bn, which is about $5m, a benchmark size for the market. We have set up a UGX125bn MTN programme in the country which will allow us to raise funds domestically to finance private sector projects. We are also looking at the possibility of issuing similar trades in other parts of the continent including Nigeria, Zambia and Ghana.

The AfDB has partnered with the IFC and signed an ISDA Master Agreement to enter into cross-currency transactions to facilitate local currency lending and bond issuance in Africa. The demand for local currency funding has increased, and we are fulfilling clients’ needs.

Northfield, Deutsche Bank: It’s certainly a great development that we’ve seen in the way supranationals have managed investor relations in the last five to 10 years. The presentations used to be about dollars or euros, and now their presentations include what they can do in sterling or Australian dollars, EM bonds or in green bonds.

Every supranational is now creating a much broader platform of awareness for investors, because they know that in any investor meeting there could be several different portfolio managers covering several different markets.

EUROWEEK: Has that been the main evolution in investor relations for supranationals over the last 12 months?

Northfield, Deutsche Bank: I think definitely George has it right in terms of central banks saying "Oh, I may not buy you in dollars, but I’ll buy you in Australian dollars or sterling." We saw that in Asia last October with the IFC.

For the central bank community, it is less about emerging market currencies, simply because their mandate is different. For them, it’s about earning a spread over a government benchmark. In terms of real money managers, we have seen the supranationals tailor their messages to suit this particular investor base.

When supranationals go on a roadshow they are very targeted with their investor relations. For each type of client they are meeting, there is dedicated preparation suitable to the type of investor, the portfolio manager and sometimes the country in which they are based.

EUROWEEK: So you’ve had to diversify your investor relations offering somewhat.

Powell, IFC: We’ve had something of a revolution in investor relations because we didn’t have an IR team until about eight months ago. That team has increased to two people now so it’s an area we have overlooked, and with a growing programme you do have to get on the front foot and get information in front of investors more actively. You have to start to hunt down and look for this investor diversity that we’re all talking about in terms of potential investors in the IFC not just in dollars, but also Ghanaian cedi, for example.

We know there are a lot of investors out there so we’ve certainly changed over the last 12 months in terms of getting a little bit more proactive and looking to attract new central banks for our dollar programme. African central banks reserves are forecast to increase too over the coming years so again we are making sure that we’re on the front foot there and planting the seed early and using our operations in those countries to forge stronger relationships.

EUROWEEK: George, you’ve obviously been going at this for slightly longer than eight months. What has been your recent experience?

Richardson, World Bank: In the last few years, it’s well known that the trend is that investors generally care to know more details. It used to be OK to say that you were triple-A rated or a supranational, and most people would just skip to asking about your funding plans — they wanted to know when a deal was coming.

Now they care about a supranational’s fundamentals — what the callable capital is and all the more detailed information.

On the one hand that is extremely good, because the more time and resources an investor spends on learning about an issuer, the more likely it is they will follow you and potentially appear in your order books.

On the other hand, it also means that we need to spend a lot more time making sure that information, which is really confusing sometimes, is clear. Because you have at maximum half an hour to deliver the right, clear message, and you have to work through a lot of filters, and a lot of preconceptions that sometimes are completely wrong.

It is quite a challenge to write down how to tie a shoe sometimes in a very clear, concise manner, and picking out exactly what part of the credit story is most useful to communicate the message clearly is sometimes not straightforward.

N’Sele, AfDB: For the past five to six years we have substantially intensified our investor relations work. It is true that since the financial crisis hit, investors have become much more wary, coming to the realisation that unlike diamonds, triple-A ratings may not be forever.

They request more regular updates, wanting to learn more about our financial strength, our capital market activities, and our operations — what we’re doing, its impact on Africa and so on.

EUROWEEK: Bertrand, I guess the EIB has had a slightly different experience. You’ve had to go round explaining to everyone what the E part of the EIB means.

De Mazières, EIB: Yes, indeed. When you read the name and the denomination includes Europe, it takes a lot of patience. But, actually our story is not that different from George’s, which is that in investor meetings in 2008 we were just connecting the levels every 24 hours between spreads and that was it. But now investors are interested in what we do — knowing what our institution is about. Fortunately, the reality is that EIB has fared very well, and investors welcome that our results continue to provide evidence of this.

The questions are about the political questions we face. We address these questions every day.

It’s been a positive story to the extent that I think investors worldwide understand what it is that the EIB is and they had to understand that it is not the universal financial emergency vehicle for the European economy.

We have also had some of our own stories to explain to them such as an unprecedented — in this part of the world — €10bn increase in our capital, a very positive sign of shareholder support and a positive development for our financial ratios.

All this requires constant adaptation of our investor presentations. Investors are looking for information on what you do, not just on your funding.

EUROWEEK: Was it trickier than you imagined explaining your involvement in Europe?

De Mazières, EIB: It necessitates that you have a clear understanding of what your institution does. Surprisingly perhaps, in 2008 a funding officer could be relatively relaxed about not knowing so much about what projects his institution was lending to because nobody would ask him the question.

That is no longer the case so it’s certainly forced my team to be much more educated about the facts of the institution they work for.

It certainly forces you to listen to questions. You cannot sidestep the question simply because it was unheard of a few years ago. Even if a question is really challenging, you have to face it, consider it, and come up with the facts. So yes, it can be difficult but, if you ask me, it’s much more interesting.

Shingsar, RBC Capital Markets: Issuers have been very responsive and are better able to anticipate some of the questions now and do a great job in educating investors on how basic things like callable capital work.

Issuers have had to educate themselves as well with regard to things like such subjects. They have accepted callable capital as a key component of the capital structure but have not previously had to question how it really work in terms of protecting the institution. Simple things like when and how will the money come in in the event of a call?

Being able to address these kinds of questions gives investors more comfort on this class of issuer — there’s nothing worse than not being able to clarify a major point when it has become a key focus.

EUROWEEK: What more can issuers do? What are investors not getting at the moment from IR programmes that they want?

Hellerup, NIB: We do a survey every three years with our stakeholders — including investors — and we ask them among other things, about how they want to get information. The bilateral meetings are by far the most important way for them and they want those. But it is surprising to see how technology has become much more important during the last three years. Investors want web-based materials — the webpage, the newsletter and using social media like using Twitter and LinkedIn have become important. Investors have put more focus on these kind of things.

De Mazières, EIB: Let’s face it, this evolution of investors — in terms of due diligence and investment choices — is not merely driven by performance imperatives but has also partly been driven by regulators. It is globally positive for the financial industry, including for ourselves.

I am asking my team — not only on the funding side but also in the treasury — to be much more innovative about what they do and invest into compared to the past. We are all in the same mode there and that was mandated by our political masters.

N’Sele, AfDB: Some investors refuse conference calls and prefer face to face meeting. Some want to see us every two years and while others request annual visits. Even though we have all the information available on the website, they still want to have that extra information from you.

De Mazières, EIB: Yes.

EUROWEEK: Do any other dealers think there are areas of IR that issuers could be exploring more?

Taor, RBC Capital Markets: The face-to-face meeting makes a huge difference. As a bank, we wouldn’t lend to a company unless we sat down across the table with them. It is the same with investors. They want to see the people who are actually issuing the bonds. I think all the issuers around the table, since the second half of 2011, have done a tremendous job of selling their story.

There has been a change from what was previously an investor reliance on ratings to now where there is a bit of ratings fatigue.

We saw when the UK, France or the US was downgraded it actually didn’t make a great deal of difference because investors understand the credit nowadays. It’s the same for supranationals and agencies. There hasn’t been a great deal of spread movement when issuers have been downgraded because the fundamentals behind the rating are what are important now.

Genirs, Deutsche Bank: I’ve also seen investors put greater importance on issuers’ maintaining a curve. Investors want different liquid data points across the curve. Having that transparency is a great barometer of how the market feels about your credit.

And so when investors do have questions or when we issue a bond from a less frequent supra who we haven’t seen come to the market for some time, figuring out what that fair value is for an issuer is a lot easier if we have some liquid benchmarks across the curve — a three year, five year, or a 10 year.

These data points allow us to demonstrate quite easily to investors that the market has already determined the credit curve for supranationals.

This should help both ease and quicken the investment decisions. We don’t have CDS-like levels for the supras. So existing curves — with identifiable roll-down behaviour — are becoming more critical in getting investors to participate, especially in some of our dollar issues.

EUROWEEK: Changing topic, have any of the borrowers had their ability to execute cross-currency swaps impaired by the increasing costs of capital for their bank counterparties in the last year?

Richardson, World Bank: There has definitely been an impact on cross-currency swaps, depending on the currency. We have had situations in smaller markets with a smaller number of dealers who have an advantage in providing those cross-currency swaps where we see a large rise in charges to do that swap.

It does narrow down the opportunities in terms of who we can swap with but at the moment the problem is not very significant. If the problem were to grow sufficiently that it begins to affect our entire funding programme then we would do something about it.

At the moment, the effect can be seen, for example in the pie chart that we have in our roadshow presentation that shows the currencies done each year and the volume in each. The effect we are talking about is making the dollar wedge bigger than it used to be or that it would be if these swap charges were less.

We still manage to do a lot of non-dollar issuance, where we have certain advantages or have the flexibility and ability to do, book and settle smaller, niche frontier currencies markets.

De Mazières, EIB: Overall the deal execution for EIB has not been impaired overall by this issue of swap costs but certainly in some cases the circle of counterparties you can discuss trading with effectively on the spot has become shallower. This is particularly true in our non-core currencies — that is to say, anything that is not dollars, euros and sterling.

In 2012 the share of the EIB’s funding in this non-core space was under 10%, which is a historic low. I am not saying that that is the explanation for it — there are other explanations as well. For example, when there is a risk-off mood our experience is that people tend to concentrate on the major currencies anyway so that is also part of the story.

Northfield. Deutsche Bank: What is interesting is how the process has evolved by which the supranationals gain access to these non-dollar markets. Swap intermediation appears frequently now, for the first time in almost 20 years. For the last 10 or 15 years we have been used to presenting a package proposal — swap and bond. Now, in the last year or so, we’re finding that when the asymmetric CSA charges are far too high for the trade to be economic for either party, we have a few instances where the borrower will call back a day or two later and suggest we get in touch with another bank. And these are banks that don’t have full-scale capital markets operations, on the same scale as the top 20 houses. But they have, for whatever reason, an axe from their trading desk — be it trade flows or whatever — and when we put the two parts of the trade together, we are able to execute a trade that makes sense for all four parties — issuer, investor, originator and swap counterpart.

What it changes is the process by which you get to a trade that might have been a 12 or 24 hour deal before — here’s a deal and here’s a term sheet, you’re done and dusted within 24 hours. Now the time it takes to put the whole package together lengthens the process so it’s no longer an easy 24 hour process.

Access to liquidity is still there and for the most part it’s just getting the package together. It takes time, and in that time markets can move against you. That is always the risk.

N’Sele, AfDB: We’ve been successfully seeking new swap partners. However, the way we plan for a swap has changed. Indeed, the universe of counterparties that are able to provide competitive quotes has shrunk. In the choice of lead managers — in addition to distribution capabilities, coverage, etc — the ability to provide swap at a competitive level has become more important than two years ago.

Hellerup, NIB: We still get competitive prices when it comes to the swap — I don’t feel that we are paying a significant amount more than before. It might be like one or two basis points so I think there are ways for us to get around the charges the banks are facing.

EUROWEEK: So is that the resolution, then, to the two-way CSA debate — that swaps will just have to be intermediated now?

Taor, RBC Capital Markets: Well, on the one hand, we’ve been saying that investors are diversifying the currencies they buy because they’re looking for yield. However I think it’s also fair to say, as Bertrand commented, that the execution in some currencies — long-dated cross-currency swaps in particular for those currencies — is clearly more challenging given the swap pricing model and the inability of a wider range of banks to quote competitively on the swap, which makes the product uncompetitive in some circumstances.

It’s clear that in the short end of the curve, in single-currency swaps that pricing is still very competitive but it’s not true across the whole curve in every market.

There are some banks that are clearly — for whatever reasons — stepping in to do some of these swaps, banks that are not necessarily bookrunners on the deals, but I’m not convinced that it is a long-term solution. There could be many reasons why they’re doing it, some good and some bad. I think it’s too early to say whether or not that will continue. It’s very clear that some of the larger banks are less active in swap pricing, and there’s an obvious reason for that, but that hasn’t filtered down to other banks.

EUROWEEK: Has that call for two-way CSAs become less urgent? There seems to be a grey area over whether or not issuers might be exempt from needing to post collateral to banks.

Powell, IFC: Not that I’m aware of. The key really, is whether or not we want to go down a particular route when the regulatory environment is not yet defined?

The supranational family has certain exemptions from other regulations but we should be prepared and are getting prepared to make that step but I don’t think we’re willing to go the whole hog until we have a firmer handle on what the final regulatory environment will look like.

The intermediation that we’re talking about is a stopgap. I think it just requires a bit more flexibiIity in terms of deal execution.

EUROWEEK: And veering towards the grittier end of pragmatic realism in the SSA market, is anyone worried about another bank doing what UBS has done and leaving the market altogether or was that strictly a one-off?

Taor, RBC Capital Markets: It’s very disappointing for many reasons that UBS pulled out of the market. They were tremendously good at what they did and it doesn’t help the market as a whole if it’s not strong. A lot of banks are finding life harder.

I don’t see any other banks pulling out in the same way but it’s pretty clear that all banks are going through a process of looking at individual businesses and their return on capital and that’s not going to change in the short term.

EUROWEEK: Presumably that hasn’t filtered through to any of the borrowers yet.

De Mazières, EIB: No, we haven’t seen anything dramatic. Actually, last year the EIB worked with more than 40 different banks as lead managers, which shows that there are still quite a lot of institutions still willing to act.

Granted, the economics are not the same, the banks’ strength, their skill is not the same so I’m not saying that all is rosy, that all is well and everybody is equal. But at least the appetite to work with us is still very strong.

UBS seems to be more of a one-off than a trend.

Hellerup, NIB: I agree, the UBS story was a sad story but what started with UBS closing down its SSA bsuiness has led to new banks coming to the market — such as in Australian dollars, but also in the dollar SSA market — with a vision to grow their business and show more ambition than they had before.

EUROWEEK: So can we conclude then that the business model on which it runs at the moment is still sufficiently rewarding for everyone to continue with no worries, or are there any pressing concerns that we haven’t already touched on?

De Mazières, EIB: The banks always say that it’s not rewarding enough.

Northfield, Deutsche Bank: What’s interesting, though, is — and I feel UBS was a very credible competitor — it seems to be an even more competitive market since they dropped out of the sector. I wonder if part of that is because management at some of the remaining houses are basically trying to make sure that their businesses are indeed economically viable.

They’re all pushing extra hard, getting into new markets more, pushing clients to work with them for the first time in years, just because they want to save their own skins.

Richardson, World Bank: From that point of view, what we want to do is prevent some of the mistakes that led to UBS’s situation from being replicated elsewhere and some of those we as issuers can help prevent.

It’s making sure that the business that we do can remunerate dealers even just a little bit and not cost them money.

That’s one big step, which is hard to do sometimes from an issuer point of view. But it’s something that, in the long term, if you pile up enough non-rewarding business on to one bank, eventually that bank’s going to figure out that it’s not a winning business and therefore close it down.

So a lot of it has to do with how we behave and it’s good to see that the people at UBS, who were of a very high quality, have almost all found jobs elsewhere and hopefully they all will.

And the ones that have gone elsewhere have added significant value to the groups that they’ve joined and upped the game of those institutions.

De Mazières, EIB: Just a reaction to what you said about the fact that we need to strike an economic balance that’s sustainable with the banks, George. I think that’s something that is absolutely clear.

But part of my eternal job is to explain to our shareholders that it’s normal to pay a fee to a bank and that the level of fees is OK and so far it’s worked well.

I have to say that I’ve been a bit concerned of late about all these stories about Libor fixing and so forth. Unfortunately, in the minds of some of our shareholders, it re-raises questions about whether we pay banks too much and so on and so forth.

I do hope these events are rapidly put behind us because they create a bit of noise and I have to explain that it was indeed normal to pay fees but still our shareholders asked why we paid banks while you could see what they were doing with Libor.

Richardson, World Bank: And unfortunately it’s a slippery slope. One issuer who does a transaction will take the fees off and that’ll become known in the community because the community’s very transparent. But that adds pressure to the next issuer to have that or better.

Sometimes banks, for their own competitive reasons, want to get the business and sometimes they’re willing to do it for free or sometimes they’re willing to do it and pay to do it. But in the end, that’s going to end in tears.

Taor, RBC Capital Markets: The overall number of people employed in the business has gone down sharply so while maybe some of the ex-UBS employees have found jobs, many other people have lost their jobs too. The industry itself is weaker just by having a far smaller number of people in DCM, syndicate, distribution, trading, etc. We haven’t seen the end of it and that is a concern I have for the industry as a whole.

Richardson, World Bank: Is that an SSA phenomenon or one across financial institutions?

Taor, RBC Capital Markets: No, it’s not just an SSA phenomenon at all, it’s an industry phenomenon.

But we were referencing UBS, which cut an entire SSA business and, to be blunt, nothing’s really changed since then. Fees are the same, and the number of one-way CSAs between banks and supranational borrowers hasn’t changed. And there is probably as much, if not more competition. Banks are probably still finding life very hard.

Richardson, World Bank: Well, if league table budgets were to go down, that’s an improvement in the right direction.

Taor, RBC Capital Markets: I agree.

Richardson, World Bank: Right, so we still have room for those budgets to become zero, meaning no subsidised business. So we have some room to clean up. Then we can talk about fees.

EUROWEEK: I don’t know whether we can agree but if we were to agree that the eurozone crisis, or at least the deleterious effects of it upon everyone’s market access, is in abatement then is that going to herald the end of a golden era for supranational borrowing costs?

Northfield, Deutsche Bank: Not because of euro volatility but because of tight swap spreads in dollars.

It’s not because of credit concerns or the unwinding of credit concerns. We don’t get stiffer competition because EIB is 10bp or now 5bp wider than the World Bank. Funding costs deteriorate because of tightening swap spreads.

N’Sele, AfDB: The risk-off mode has increased demand for supranational names, and we have welcomed many new investors to AfDB paper, who are becoming repeat buyers. When market sentiment improves, you may see less demand from these new investors, particularly when they choose to go down the credit curve, but still, we have our solid core traditional investor base that we can continue to rely on.

Genirs, Deutsche Bank: I would also add that with respect to what you term a golden era there is certainly not an end in sight. Supranationals are still enjoying unprecedented access to the dollar market specifically — and will for the foreseeable future.

The amount of dollars out there that need to be invested by investors globally and the resurgence of categories of investors like bank treasury liquidity portfolios is a powerful force which will bolster demand for several years. That investor base alone will help secure a lot of access to capital markets.

But the market will eventually start to focus on higher rates in a bearish interest rate environment in the United States. We are likely to see a preference from investors for higher yielding assets as a buffer against higher rates, which of course the kind of people at this table do not offer investors.

That is not for the near term though, given the amount of money that needs to be invested in high grade assets. Our immediate challenge remains that more supply is needed. We still don’t have enough of them to buy.

Hellerup, NIB: Maybe some investors want to go down the credit curve but to a large extent many don’t want to do it. What we have seen is that investors diversify their portfolio in other ways — by currencies, for example. An example is in the Kauri market where there have been many more international investors this year. Three or four years ago it was basically a domestic market.

Taor, RBC Capital Markets: And underlying yields are low. German Bunds in three years are at 0.1%. Overnight rates in Europe are less than two basis points.

Unless we see a turnaround in growth, which is, to be blunt, less than likely, core yields are going to stay low. But investors need to put their money somewhere.

If this isn’t a golden period, then what is? I don’t think it’s going to go away tomorrow.

Northfield, Deutsche Bank: It’s not necessarily true — particularly in dollars — that there are higher yielding assets that people just haven’t bought because of the eurozone crisis. Look at corporates in the US. High grade corporates in the US are trading at extremely tight levels. IBM two year paper is at mid-swaps less low single digits. It’s not like there’s a huge relative value play here necessarily.

Powell, IFC: Let’s not forget, as the crisis abates the cross-currency market also tightens and maybe that will create opportunities for us in euros, especially in the longer dated tenors.

That’s for a little bit further down the line. We’re not quite there yet.

EUROWEEK: The EIB has seen such a sharp improvement in its spreads and has done some huge trades already this year at much tighter levels than previously. Do you feel now that EIB is as immune as all the other supranationals from the effects of the eurozone crisis?

De Mazières, EIB: Investors fully understand now that we are not part of the crisis. They also understand that even after a few years of crisis the share of impaired loans on our books accounts for less than 0.3% of our loan portfolio.

So yes, we are and have been separated from the world of institutions directly linked to the eurozone crisis. But of course, 90% of our business is in Europe so the developments in Europe cannot be totally inconsequential for our yields and spreads.

EUROWEEK: What are the panel’s biggest concerns for the supranational sector over the next 12 months?

Hellerup, NIB: On the funding side, swap spreads are an issue as we are a Libor-based issuer. Compression with corporate spreads makes it harder for supranational issuers to pass on costs of borrowing to their clients.

Genirs, Deutsche Bank: The challenge for Libor valuations is derived from the resulting tight nominal spreads. I would also add price breaks for size to the list of near term concerns because it is a notable development. The need to be able to identify these potential price breaks is critical to managing the process, the outcome, and the overall execution risk of the transaction.

De Mazières, EIB: There is a slight risk that regulatory reforms get out of control and that the regulatory environment totally diverges in the US from Europe. That could create bizarre situations where we would be less in a position to work with American-based institutions, for example, or vice versa. For example, there are discussions in Europe about a financial transactions tax.

Globally speaking, whatever the changes in government, the general policy line has not changed much and that is that there is a proper realisation that financial strength and prudence must continue to be nurtured.

Shingsar, RBC Capital Markets: We’ve talked about pricing and swaps and these are obviously very important technical considerations for issuers’ funding programmes. But regulatory uncertainty — just the sheer weight of it, the uncertainty about the pace of implementation or even what is going to be implemented versus what’s been talked about — is huge. And then most importantly, what will be the unintended consequences.

Northfield, Deutsche Bank: From a European perspective, the regulatory uncertainty is concerning for many counterparts. Also, the current European macro political environment may have some long term implications.

At this roundtable a couple of years ago, we were talking about the European crisis and how that affects market access and we all felt increasing comfort with the launch of the EFSF and the ESM.

That’s fine but the one thing we said could not be modelled was social unrest. That is an unknown variable in any democracy and the shifting application of austerity programmes may constrain economic growth such that the pain becomes too much for the populace to bear.

From the broader perspective, these developments could unsettle the markets again.

That will contribute to gap risk, and gap risk in the trading pits contributes to decreased appetite for risk overall, which could contract secondary trading to such a degree that it just makes the new issue process more difficult.

Where’s the new issue price discovery going to be if you don’t have an active secondary market?

The last thing that I would say is that some of our colleagues are sensing this could be the year for reallocating funds into equities away from fixed income markets, because the debt markets might not offer enough return.

Powell, IFC: For the next year for IFC’s funding programme, it’s about getting that line right between doing enough benchmark sized transactions in public markets and paying the right price to get that size but also staying on the right side of the line in terms of having access to more cost-efficient markets.

And as Jeanie says, the price break of getting size is about picking the right size and term in public markets now that US dollar benchmark funding has become so expensive.

A few years ago you could do a dollar trade and with the help of a wide three month-six month basis, you’d swap back to pretty juicy numbers, in terms of your funding targets. Now that’s disappeared so you have to use your dollar market access quite sparingly because those deals are some of the most expensive trades of the year.

Taor, RBC Capital Markets: The political bank-bashing rhetoric seems to be getting louder as the economies seem not to be growing and the political will to push through measures to effectively make the ‘banks pay’ will have unintended consequences which could severely harm the market.

The financial transactions tax is something I’m against and the implementation of it — and from what I’ve read it will be a 10 cent tax on each side of each trade — would have huge consequences.

The general ill feeling towards the banks and capital markets doesn’t look like it’s going to go away any time soon and I think that it will have a long-term effect on the market as a whole.

N’Sele, AfDB: Our concern is the evolving regulatory framework, particularly Dodd-Frank and extra-territoriality. Even though supranational trades are exempt from Dodd-Frank, the counterparties they will face on their swaps are not. Hence, if the lawmakers enact extra-territoriality, transactions with the UK arm of a US bank for example will among others, force us to go through central clearing.

Richardson, World Bank: Things to look out for are how regulations will develop, how they will impact the banking sector and ultimately issuers and investors in the capital markets. But, let me end on a positive note by saying that we are currently enjoying a period of stability, and there is no better symbol of that stability that the health, prominence and permanence of our panel member Mr. Northfield’s beard.