Guarantor: Kingdom of Spain
Rating: Aaa/AA+/AAA
Amount: £300m
Maturity: December 7, 2009
Issue/re-offer price: 99.498
Coupon: 5%
Spread at re-offer: 29bp over the 4% March 2009 Gilt
Launched: Thursday October 7
Joint books: Barclays Capital, HSBC
Borrower's comment:
ICO has tapped the sterling market before, in 1999 with a block trade ? which can hardly be classed as a public bond ? so this transaction is really a first for us in the sterling public market.
Our main objective was to expand our investor base. Lately we have mostly issued in the dollar market and most of our bonds are held in the portfolios of central banks, typically in Asia.
We were keen to reach another group of investors. Many accounts in the UK only invest in sterling bonds and we decided to approach them. We visited several of them two weeks ago to introduce our credit and we came to the conclusion that it would be a fruitful market for us. Investors looking for our type of name have few alternatives and it was apparent there would be demand for a credit like ICO.
It is slightly more expensive for us to issue in sterling ? perhaps by 1bp or 2bp ? but we were happy to pay that extra for our first foray in the market. The diversification is well worth the cost.
The issue was oversubscribed. We initially launched £250m and increased to £300m but there were still some unsatisfied investors.
This transaction may be the first step for some periodical increase in order to have a very liquid reference in the sterling market.
We still have more funding to do this year. Almost every year we launch a transaction in November and we are likely to do so again this year. It very much depends on the situation with our private placements.
Bookrunners' comment:
ICO undertook a non-deal-related roadshow in the UK a few weeks ago and this debut public transaction was launched as a result of the positive feedback we received.
ICO has always looked at dollars as its non-euro market of choice but they wanted to expand their investor base and we were confident there would be decent demand for the name, which is guaranteed by the sovereign.
The feedback from the roadshow, which was consistent with our own expectations, was that £250m should be the minimum size. That is what we went out with initially, with price guidance of Gilts plus 29bp-30bp.
The book was over £250m this morning (Thursday), which allowed us to increase the size to £300m and also tighten the price talk to the tight end of the range. Not one investor dropped out at the tighter guidance and, by the time of pricing, the book was over £300m.
Comparables for ICO would be EIB and KfW. EIB 2009s were at plus 24bp and KfW December 2009s at plus 27bp.
ICO is 0% risk weighted being directly guaranteed by the sovereign, which means that it is CP195 eligible. Although insurance companies are not massive buyers at the short end, the fact that there is this exemption status hits spreads across the curve.
As a result, we were able to bring this deal much closer to EIB and KfW than, say, Rentenbank and BNG, which trade at 34bp over in December 2009 maturities, despite the fact that ICO has a lower rating and is less well known in this market.
The bonds closed today (Thursday) at plus 28bp.
The UK investor base absorbed 68% of the issue, Asia 21% and Europe 11%, with asset managers taking 50%, central banks 25%, insurance and pension funds 16% and banks 9%.
Very little paper came back on the switch, either against Gilts or other triple-A product.
Market appraisal:
?...this issue went down extremely well. Investors are looking for triple-A assets and were keen buyers of a new name in the asset class.?
?...ICO achieved a good level in the sterling market when compared to KfW, which trades at around Gilts plus 27bp. It probably cost the borrower a couple of basis points over where it can fund in the dollar market.
As compensation ICO has broadened its investor base away from the usual buyers of its name, ie Asian central banks and government institutions.?
?...we would have liked to see a bit more space between ICO and KfW ? the differential was only a couple of basis points ? to account for ICO's slightly lower rating but this represented an attractive diversification play.?