Many challenges remain as Europe attempts to emerge from the shadow of the crisis. But with rates expected to stay low, few issuers see any reason to doubt their chances of printing at ever tighter spreads. Some of the continent’s top borrowers outlined their views on 2014’s prospects in the Natixis Supranationals and Agencies roundtable.
Axel Bendiek, head of funding, State of North-Rhine Westphalia, Düsseldorf
Carlos Ferreira da Silva, head of euro funding division, European Investment Bank, Luxembourg
Stefan Goebel, head of treasury, Rentenbank, Frankfurt
Tom Meuwissen, general manager, treasury, Nederlandse Waterschapsbank, The Hague
Philippe Noël, head of capital markets, Cades, Paris
Laurence Ribot, head of covered and SSA syndicate, Natixis, Paris
Siegfried Ruhl, head of funding, European Stability Mechanism and European Financial Stability Facility, Luxembourg
Arturo Seco Presencio, deputy chief financial officer, Council of Europe Development Bank, Paris
Gerassimos Thomas, director finance, European Commission, directorate-general for economic and financial affairs, Luxembourg
Craig McGlashan, EuroWeek
EUROWEEK: Last year’s roundtable participants were looking forward to a “peaceful” 2013 — did that happen?
Carlos Ferreira da Silva, EIB: It was peaceful. We had a very good year with tighter spreads and we did what we wanted to do. Our access to duration was very successful — we had our longest ever average maturity in euros at just over 10 years. We raised more than €35bn in euros and about half of that was at 10 years or longer, which is a big achievement.
There was a little bit of volatility in the eurozone in the spring, also after the summer — notably some uncertainties surrounding tapering and the German elections. But we managed to navigate around that volatility with care and brought strong deals.
Axel Bendiek, State of NRW: We printed at very attractive spreads on very low levels. In the first half of the year there was very strong demand across all tenors. By the end of April we had issued almost half of what was planned for the year. The summer was different — conditions became more difficult when the Fed was rumoured to be reducing asset purchases. That was when investors started to have second thoughts. Although interest rates had gone up there was less demand which I believe was due to uncertainty about where the market was heading.
When it became clear in September that tapering would not be on the agenda for some time they returned. In the last few months demand was very healthy again.
Arturo Seco Presencio, CoE: The market was more stable in 2013 than in the years before. There was some volatility, but it was not as important as in 2011 or 2012. Because of the experience of previous years, issuers were ready to print large volumes in the first half of the year, which was possible given constructive market conditions. That meant most issuers had done an important part of their programmes by the end of the first semester, with just a little to do in the first few months after the summer break.
Investor demand was persistent through the year — that was a high. There were no moments of disruption as in previous years, just consistent demand from investors, allowing issuers to have more options when choosing their issuance windows. The timing of deals was less constrained.
The biggest difficulty over the year was probably diversifying in different currencies, particularly for issuers with small programmes like ourselves. In a way, when you have a large programme it’s easier to diversify since you access all your investor bases across the globe in order to fulfil your programme.
As a small issuer, we have to prioritise and market conditions were more interesting for our maturity objective in dollars or euros than in any other market. We focused on benchmarks, selling a pair of five year dollar deals and a five year euro syndication.
Siegfried Ruhl, ESM: Peaceful is maybe not the right description for 2013. At the beginning it looked very challenging, but in the end was very successful. We had to place the ESM as a new issuer in the market. It went very well, starting with a bill programme at the beginning of the year. Later, we were able to do some long term trades, a five year and a 10 year benchmark.
The EFSF had a very ambitious funding programme of €58bn and this also went very well. We received strong investor demand, as highlighted with an €8bn five year trade and a €3bn 21 year deal. There was always strong demand from a very wide investor base, both geographically and by type.
We are exposed to external risk factors. The stepping out of Cyprus, for instance, meant we couldn’t tap existing bonds so had to rebuild a tappable curve.
Laurence Ribot, Natixis: Overall it was a pretty constructive year with not many lows. The big change compared to 2012 was the appetite for the eurozone periphery. Clearly, as we saw with political instability in Italy and Portugal, things that would have been problematic for the market in 2012 are not so any longer. The correlation between peripheral sovereigns’ pricing and political crises decoupled. That’s the most important change.
The low is whether all the risk is priced in. With such spread compression over the year you start to wonder whether everything is correctly priced.
Philippe Noël, Cades: It was a very easy year for us. All markets stayed open and it was pretty easy to drive a rather small programme compared to what we did in 2011 and 2012. We issued around €15bn at the long end, the bulk of which came through the euro market, which was quite supportive through the year. The low yield environment generally helps traditional French and German investors buy at the long end of the curve.
We started the year focusing on the five year part of the curve because we had a gap in our redemption profile in 2018 as we’d opted for a 10 year benchmark in 2012. That was in line with what the market was able to absorb at that time.
Traditionally, a lot of issuers tap the 10 year part of the curve heavily in the first few weeks of the year. That did not work as well as usual in 2013. So it was nice that we had that 2018 target.
But we had to wait for a window for our 10 year. Our spread to French sovereign debt tightened significantly compared to 2012, so the pick-up in secondaries was not very attractive for French investors. We had to wait until the Fed started talking about tapering in May for the 10 year part of the curve to open to us. We printed a benchmark in June then tapped it in November for €750m, achieving our tightest ever spread to the French sovereign on an interpolated basis.
Tom Meuwissen, NWB: It was a good year. Normally we jump in with a 10 year euro benchmark in January but we anticipated spreads would come in so we decided to wait. That turned out to be a good move. We did a three year dollar deal in March and a seven year euro benchmark in July, at tighter spreads than would have been possible earlier in the year.
We put a lot of focus on the German market for long term euro deals. Our main market for those trades has shifted from France to Germany, partly because we traded through French government bonds. We sold an 18 year euro deal targeted at the German market which was also very successful. More than 90% was placed with German investors.
Later in the year we printed trades in short dated dollars just before the basis swap deteriorated, so we were quite happy with that.
Apart from the public market, we raised a lot of long term funding in the Namensschuldverschreibungen market. We printed around €1.5bn of NSVs in 2013, up from €0.8bn in 2012. We’d put in a lot of investor relations work to increase our presence in NSVs.
Stefan Goebel, Rentenbank: One of the highs was being able to raise a record volume of more than A$2.5bn in the Kangaroo market. Also, we issued our first SRI bond, a privately placed Green Bond. We are eyeing this segment closely. It has its ups and downs but it gives us some good opportunities in private placements.
The biggest low was the deterioration in dollar funding arbitrage, mainly because the cross-currency basis swap rose in the last few months of the year. The arbitrage opportunities couldn’t last forever, although it was easy to get used to it. Dollar deals are a little bit less cost-effective as a result, particular past the five year point of the curve.
Gerassimos Thomas, EC: The European Union did not issue any debt in 2013. We’d expected to print around €5bn in the first half of the year but that was postponed.
Ireland has just €800m left, while Portugal will receive about €3.9bn. Our funding is likely to take place in the first and second quarter of the year in two separate benchmark transactions.
The countries’ programmes were performing well, with progress on fiscal consolidation and sufficient cash buffers. Also, we front-loaded our part of the funding for these countries in 2011 and 2012 and as we came to the last part of our planned disbursements in 2013 the EFSF accelerated their part of the total funding. So those disbursements are now set for 2014.
But 2013 was not uneventful for us. European ministers decided to prolong the tenors of the loans to Portugal and Ireland. The average weighted maturity of our lending to these countries will be extended from 12.5 years to 19.5 years. All EFSM/EU loans to Portugal and Ireland will now expire after 2027. While this does not affect the residual funding in 2014, it means we have to roll over the loans we’ve already made as they mature. That means we need to issue in 2015 and in the following years to refinance existing bonds. There will be a number of rollover funding transactions that will keep us active for the next seven to 10 years.
EUROWEEK: Which investors were most active? How did the evolution of spreads between governments and agencies affect strategies?
Thomas, EC: There was substantial activity in the secondary market. We noticed there was little supply from supranationals in the shorter than five year area. That led to a lot of retail and private bank interest in the short part of our curve, which tightened spreads.
We won’t necessarily target that part of the curve because our liabilities are long term. It is not necessarily efficient to issue three year debt and keep rolling it over but we have this option open now if need be.
Central banks, fund managers and bank treasuries are the big participants when we issue in less than 10 years. In 2012 we only printed between 10 years and 30 years which meant insurance companies and, particularly, pension funds were the biggest buyers.
We have a very loyal EU investor base in those long maturities — in Germany, the UK, the Netherlands, Scandinavia, mainly with real money accounts. As we are coming back to the market in 2014 we are running extensive roadshows to update our investor base. Our funding maturities will depend on market conditions when we decide to issue in the first and second quarter.
Seco Presencio, CoE: Our regular investor base of central banks and official institutions were present through the year. There was also an important amount of financial institutions buying our paper. The geographical breakdown did not change much, with good participation from Asia, the US and a little increase in European investors’ share.
Our small programme means we can always rely on investor diversification because of our scarcity value.
Meuwissen, NWB: In dollars, central banks from around the world are the main investors. Bank treasuries are a growing group. Geographically our investor base is well spread all over the globe. We’ve had our 144a documentation in place for two years and 40% of our last dollar benchmark was actually placed in the Americas, which was quite a good result. We visited South America late in 2013 — that is a big part of our investor base, as is in Asia.
Ferreira da Silva, EIB: Real money accounts — including insurance companies and pension funds — showed healthy appetite for our long dated paper. We’ve been able to meet reverse enquiries and tailor our deals through our mini-benchmark programme, also known as ECOOPs. These deals come in sizes normally starting at €500m and commonly grow to €1bn or sometimes several billion. They are placed more regionally, rather than our larger Euro Area Reference Notes which tend to be placed worldwide. We also sold EARNs in new tenors during 2013, including a recent 20 year issue. It’s been a very solid environment.
We had a healthy mix of all types of investors, depending on the maturity and currency on offer. Our short and medium dated euro deals recorded a lot of interest from Asia, central banks and bank treasuries, while further out the curve there were more core European names involved. That’s not strikingly different to previous years.
Goebel, Rentenbank: Bank treasuries were the largest investor group in our programme because of our regulatory status as a 0% risk weighted asset. But their share has fallen from the low 50% area to mid-40% area. The share of central banks and other official institutions went up a few percentage points from 2012. That is mainly due to our upcoming full sovereign guarantee. Some central banks and official institutions put us on their list for the first time while others increased their exposures. So we have broader access and some investors’ pockets are getting deeper.
Noël, Cades: We always answer investor demand. Banks’ large amounts of liquidity drove us to the short end of the curve. The surprise was that bank treasuries — for yield seeking reasons — are investing in longer and longer tenors. That contrasted with 2012, when the big bank treasury accounts stuck to five year deals. That also applied to central banks. The largest Asian central banks, for instance, bought a lot of 10 year debt in 2013 which has not been the case in a while.
The other big change was that fewer and fewer central banks from developing countries were in our books. The drop was mainly in South American investors. They had been one of the main drivers for our short dated dollar deals in 2011, became a little less important in 2012 and were not a driving factor at all in 2013.
Middle Eastern demand is always steady, as are central banks from large Asian countries — although Korean demand fell compared to 2012. But central banks from small Asian countries were more sporadic and took a more opportunistic approach. They usually buy €25m-€50m of orders on one deal but are absent on the next.
Bendiek, State of NRW: Our investor base is usually made up of bank treasuries or pension and insurance funds, depending on the tenor. That was again the case in 2013. What stood out was that when rates were very low in the spring, investor demand was very strong.
That’s when we issued most of our funding for the year. The low rates led strong demand for long tenors and we printed a lot of paper at 20 years plus. It was interesting to see such strong demand in a low interest rate environment.
Ruhl, ESM: The EFSF already had a very diversified investor base both in terms of type and geographical distribution. The ESM, with its leaner, paid-in structure has an even wider investor base. Both had wide bases from the start and we’ve been able to expand them.
Ribot, Natixis: There was a greater presence of UK, Nordic and Dutch investors in 2013 compared with the year before. The big pockets of volume and liquidity, however, are the German, Asian, French and to a lesser extent Nordic investor bases.
Japanese accounts were involved in the first quarter of 2013 but less so later. The rest of Asia was more stable but probably busier in the first half of the year than the second. That could be linked to the evolution of rates, with the Fed tapering-induced volatility in May possibly problematic for non-European investors.
It was also an issue for insurance companies. The expectation at the start of 2013 was of higher rates and it didn’t materialise.
EUROWEEK: Can SSAs expect such low pricing in 2014?
Ribot, Natixis: There will be the same mix in 2014 of limited SSA supply versus strong demand. We are in a market with very low spreads. If yields go much higher than what is expected then spreads will move as well.
But if yields stay low, SSAs will be able to keep pricing at low costs. There is strong demand for core countries, while the regulatory environment, with rules such as Solvency II and LCR, is pushing investors to increase their allocations to SSAs. That should keep the government segment tight, while yields will remain low.
Ferreira da Silva, EIB: We’ve been talking to key investors and we’ve taken home an improved perception of Europe as a whole. We see this cautiously optimistic tone reflected in investor interest in our bond issuance. This seems likely to continue to be the case in 2014.
Seco Presencio, CoE: One of the most significant changes as a small issuer has been the basis swap movements. For the first time in many years a five year deal in euros is significantly more attractive than in dollars. That’s not only in terms of the funding cost but also in terms of the support of the investor base, since it would allow us to maintain a more regular presence in the euro market.
We need to see where it goes in 2014. I can’t see specific trends developing — we will navigate the market and work out which of the euro and dollar investor bases is best to focus on at different times depending on our maturity objectives. Both markets will be open to euro issuers. That means we could diversify a little more between the two currencies — something we started in 2013.
For us, euro deals had always been about adding duration. The US investor base was very solid during the crisis in the five year maturity. For 10 year benchmarks we have done our transactions in euros since dollar demand for this tenor started to be more limited. Last year the euro market also became interesting in the five year tenor.
Goebel, Rentenbank: We don’t expect to be able to achieve Euribor-based funding costs at the same level as in 2013. There might be a slight deterioration in overall funding costs.
Thomas, EC: It is difficult to say, but certainly we have eliminated tail risk and spreads are much closer to fundamentals. But there is still fragmentation and volatility in sovereign spreads in Europe. The conclusion of the asset quality review by the ECB and the related bank stress tests by the EBA as well as progress on the single supervisory mechanisms will help stabilise those spreads.
Preparations for the banking union are running smoothly, the ECB is setting the conditions for the AQR, the European banking authority has published its guidelines and the stress tests are being prepared.
Ruhl, ESM: I don’t see any reason why things should change in 2014. We expect stable demand and good market conditions. The EFSF has €34bn and the ESM €17bn to raise in 2014, so a little bit less overall than in 2013.
Noël, Cades: The big story in 2014 will be that absolute yield levels will stay very low but there may be some re-pricing of spreads relative to swaps. In late November Cades’s spread did not move a basis point while the swap spread moved by 2bp or 3bp for the first time in a year. That will make a difference.
There will also be competition for SSAs in the form of covered bonds, which are pricing significantly tighter to sovereigns. The risk for SSAs in a very low yield environment is that they will have to pay more to attract their usual investors — otherwise those investors might be tempted to go to riskier names.
Bendiek, State of NRW: With the ECB cutting its refinancing rate and low inflation figures, I believe most investors think low rates are here to stay, which makes things good for 2014.
The eurozone crisis has not gone away but it is not as dangerous as it was some time ago. That, along with low interest rates and some positive signs from member states in terms of GDP growth, all point towards a strong market in 2014. If there’s forward guidance from the ECB that its rate will not increase through 2014 we’ll have a stable basis for a good year in 2014.
But rates will not go lower — we have hit rock bottom. Our spreads could go a little bit tighter, as there will be less supply from German federal states. They have to cut back on new debt and balance their budgets by 2020. Less supply might help keep spreads down or even tighten them a little more.
EUROWEEK: How will issuers manage their funding strategy in 2014?
Thomas, EC: We have to do back to back operations — that hasn’t changed. We cannot prefund — we raise what we need and then lend the proceeds to recipient countries. What is new is that we can roll over our bonds on maturity and extend the maturity of existing loans. In 2012 for every long dated loan we had to issue in a corresponding maturity up front. Now we can fund a 10 year loan back to back but then refinance it with a five year bond and upon successful refinancing extend the maturity of the initial loan.
That means we can look at a wider area of the yield curve to take advantage of the most appropriate pricing and investor interest at any point.
It will be interesting to see the development of the yield curve in 2014 and at what tenors issuers come to the market. If we had printed in 2013 there would have been demand at the long end for our paper. Our debt is the least volatile of all the SSA issuers in the 15-30 year part of the curve and our spreads are tight there.
With investors moving into peripheral eurozone debt, there is an argument that there will be less demand for triple-A issuers but we have not witnessed this yet. There is demand across the credit spectrum as can be seen with the new issue premiums paid by our peers like KfW and spread tightening. New issue premiums remain similar to where they were in 2012 so there is no fundamental change to the continued strong demand for these high quality bonds.
Bendiek, State of NRW: Our strategy is very general and conservative. It will stay the same in 2014. We have a large funding need and we like to raise as much money as possible with long tenors to provide a stable basis for our budget, as a hedge against higher interest rates and to keep our gross borrowing at a manageable level. But our benchmarks in 2014 will stay at our usual tenors.
For other currencies or structures we’ll need to judge investor demand. We’re always prepared to issue floating rate notes, although we usually swap them into fixed rates.
Foreign currency deals have to make sense from a basis swap standpoint. It’s always a very short window of opportunity because it’s very hard to foresee where the basis swap is heading, so we have to move fast. We issued a lot of dollars in 2013. We have around €7bn equivalent outstanding out of a total debt portfolio of €130bn. We also have issued bonds in 14 other foreign currencies.
Ruhl, ESM: The ESM’s goal is to complete then increase its curve. We’ll continue the diversified funding strategy for both issuers. It involves printing benchmarks with final outstandings — after tapping — of €5bn plus. We’ll also maintain the bill programme in 2014.
Noël, Cades: Our programme will be similar to our 2013 strategy. We have €16bn of redemptions and have to pay €10bn to the social security system. On top of that we have €16bn of tax proceeds and €3bn-€4bn of interest to pay.
The maturities we’ll target really depend on the market. We have quite large redemptions in 2015 and 2016 so the minimum duration will be three years. The rising basis swap means we will concentrate on the short end in dollars and try to push longer on euros.
Seco Presencio, CoE: We always monitor every market and our duration needs are very important when deciding which markets we choose. We have the intention to maintain our presence in dollars and euros in 2014. Secondary spreads in both currencies have been very stable and we expect them to remain so — that’s an added incentive.
We will very closely follow the sterling and Australian dollar markets. We weren’t present in those markets in 2013 so 2014 would be a good moment to tap them.
For 2014, our borrowing authorisation is €4bn. This authorisation is a ceiling and not a target. In 2013 we had a borrowing authorisation of €4.5bn and we will finish the year with long term funding in the area of €3.5bn.
Meuwissen, NWB: Our 2014 strategy will be very similar. We’ll print in the region of €8bn-€10bn again. The currency breakdown could change as the euro/dollar basis swap has deteriorated. We were very active in short term dollars but a lot of parties are already looking more at short term euros. Normally our funding up until five years is in dollars and beyond that in euros — aside from other currencies — but that can change. The basis swap is a crucial factor because at the end of the day our funding cost in euros is what matters.
Goebel, Rentenbank: We’ll pursue the same strategy as in recent years. We will be backed by a full government guarantee from one of the strongest sovereigns in the world and — as in 2013 — only need to raise €10bn equivalent. There will probably be a shift in currencies and maturities, however, for the reasons I’ve already mentioned.
Ribot, Natixis: Issuers will try to be a bit more diversified in terms of currencies in 2014 because some markets are offering them good diversification opportunities and in some occasions arbitrage. The market will still be with them in 2014 and they know it. That means they will not be aggressive and won’t rush.
EUROWEEK: What are the most important areas to cover when marketing?
Goebel, Rentenbank: It will be important to keep explaining the new guarantee to existing and new customers. The guarantee is effective from January 1 and will cover all obligations. The legislation was finalised in the summer and our investor base has already broadened. We’d expect it to broaden further.
But the main task will be to explain the regulatory background of our guarantee and also that the introduction does not change our promotional mission, our business set-up, or our likely business volumes. We will remain very stable, if only under an improved government support set-up. Investors should be able to reap the full benefit of that but we will not increase our funding programme in any meaningful way.
Ruhl, ESM: The key to successful marketing is transparency and clear communication, for instance with our quarterly newsletter. We like to have a similar style to governments — it’s a key element of our strategy. The investor base we target values primary and secondary market liquidity and also likes predictability. We make sure our marketing matches that. It works — more than 1,000 investors have participated in EFSF deals.
We also extensively marketed the ESM in 2013, covering our main regions of Europe, Asia, and North and South America. The EFSF and ESM have unique structures so it’s crucial to speak to investors regularly to explain the differences, how we act in the market and inform them about our funding strategies. It’s been important for investors to understand the different structures and also that the EFSF will stay as an issuer in the market for the long run with the ESM.
Seco Presencio, CoE: We have done a very significant marketing effort for many years. As we have an open strategy, we need to maintain relationships with different investor bases even if in a given year we do not go to the market. That’s the case with sterling, for instance.
Asia is a very important area and since 2010 we’ve had a global programme so the US is very important as well. We also keep a regular presence in Australia, South America and the Middle East. That’s been the case for many years.
As we’ve issued several euro benchmark transactions since 2010 we plan to increase our number of roadshows in Europe in 2014.
Bendiek, State of NRW: Marketing has become more important. We have strong competition from other fixed income products. Corporate and high yield bonds have been very important recently. We always market by clear communication, always try to meet investors face to face on roadshows or at conferences and other occasions. Although today it’s basically an electronic trading business it’s still important to meet face to face, that’s what I’ve learned over the last year.
Our next roadshow locations have not been decided. Asia is a possibility. In 2013 we only had a small roadshow in London and Switzerland. Our plan is to do more in the future, similar to what we used to do in previous years.
Ribot, Natixis: It’s a key point. There is a premium for issuers that regularly visit investors. There are always some new investors in the market, either because they had not looked at SSAs before, or because they are planning to invest more in the segment than before. Transactions regularly involve new investors so it’s very important to have contact with them. Some investors, like central banks, can take several months to open lines so it’s important to have regular meetings. Many times we’ve seen the benefit of appropriate marketing on investor participation in a transaction.
The regulatory environment also raises new questions. Issuers have to update investors more and more to comply and investors are posing new questions.
Ferreira da Silva, EIB: We have a combined marketing strategy, where we see investors worldwide on a constant basis but we also have targeted, regional efforts. The latter involve going to certain markets and meeting medium sized investors. Sometimes we meet a group of investors at conferences to make presentations. But clearly, key investors need to be met regularly if only to update them on where we stand.
We also use newsletters. We have a large mailing list which updates investors on our funding plans, plus we have a dedicated investor relations team.
We don’t normally do deal related roadshows, because we are such a frequent borrower. If investors have questions about specific deals we can answer those via conference calls.
Meuwissen, NWB: We look at where we have blanks in our order books and try to focus on those investors. In 2013 we visited the Middle East and South America for the first time. In the last 10 years we’d focused a lot on Asia and the rest of Europe, while in the last two years we targeted the US directly, so the Middle East and South America were blanks to fill. We are dependent on our dealer banks to tell us where it’s useful to go, they can see which investors are buying our peers but not NWB.
Marketing efforts do pay off although it’s not always easy to judge the results, for instance most South American investors were already buying our paper before we went there.
EUROWEEK: Did the ECB’s rate cut in November affect your plans for 2014?
Seco Presencio, CoE: It could do. We are very comfortable on duration and our assets and liabilities are matched. But everything depends on the shape of the curve. If it’s very steep then we may have an interest in printing a five year bond. If it’s not as steep we could have an interest in issuing longer dated paper.
In a way, all unexpected decisions are advantageous for SSAs, relative to other asset classes, because surprises create appetite for stable names. What is important is to see stable secondary prices which support primary issuance.
Thomas, EC: The decision shows rate tightening in the eurozone is unlikely for the near future, so investors know there will not be any surprises or reversals in monetary policy in the first half of 2014. The yield curve also remains fairly predictable so this will allow us to take decisions across the curve.
Noël, Cades: The message is clearly that rates are going to remain very low. I don’t believe in deflation, at least in France. Maybe some countries will see it. But there’s no big sign of a Japan-style situation.
EUROWEEK: How will long dated euro volumes hold up in 2014?
Ribot, Natixis: Long dated deals made up about the same percentage of volume in 2013 as in 2012. We estimate about 30% of supply was in tenors of 10 years or above. But long dated paper flow was more balanced in 2013 compared with the year before — in 2012 supply was concentrated in the first quarter because of investors’ hunt for yield.
If the rate environment remains low, some investors will lengthen their maturities to get more yield. We saw that in 2013 from insurance companies. There are more requests for the 15 year and above part of the curve than in the past.
Some transactions in 2013 were solely driven by a desire to offer a 3% yield level — the key level for insurance companies — such as Réseau Ferré de France’s €1bn 3.125% October 2028, the EIB’s €3bn 3% October 2033s and NWB’s €500m 3% November 2031. We’ll have the same situation in 2014.
But investors could also look down the credit spectrum. Some traditional, defensive clients — even central banks — are moving down on ratings in the SSA sector. That will also be the case in 2014.
Ferreira da Silva, EIB: The first half of 2013 was slightly tougher for issuance of longer maturities but the higher yields in the second half brought more interest and we managed to do a 20 year benchmark deal. With the ECB cut and dovish language, expectations are clearly for low rates for a long time. As a consequence, some investors who need to attain an absolute yield level could be tempted to lengthen their maturity profiles a little bit.
Goebel, Rentenbank: Long dated euros offered good opportunities and we capitalised on that. But Australian dollars provided even better opportunities at the long end. The steepness of the yield curve is probably as important for investor preference as absolute yield is. If rates go down further investors may decide to go out further on the curve with top notch borrowers or they might look for fundamentally higher yielding assets. So there is no clear cut response from investors to a lower short term yield. It remains to be seen how they react.
Bendiek, State of NRW: Investors that stick to high quality SSA issuers and need to reach a certain yield level might be forced to longer maturities. The interest rate curve is still pretty steep so it makes sense. But a lot of investors will look at corporate and high yield bonds from other sources to reach performance targets.
EUROWEEK: Do investors pay any heed to ratings agencies? Do downgrades — such as S&P moving France to AA in November — have an effect on your market access?
Noël, Cades: Very few investors had to change the way they invest in our name because of the rating. A lot of investors are doing the job on their own and the advice of the rating agency is something that is clearly important but not as relevant as it was before the crisis. Everything is more or less priced by the market before downgrades happen.
Investors understand the political background in France clearly. They know that there is no growth but it is still a very important GDP generating area and the state has room to raise taxes. That matters more than a rating. Plus there is very little triple-A supply around.
Maybe zero risk weightings don’t exist anymore. Investors think on their own and want to understand exactly how we proceed, how tax is collected and how things evolved during the crisis.
In the past they were interested in the way we approach the market, our liquidity, strategy and guarantee. Now they go into very deep details on seasonal figures, which is quite new.
Ferreira da Silva, EIB: Our outlook changed recently from negative to stable with S&P, but we didn’t notice any sudden shift in our investor base. It was also late in the year for that. Markets tend generally to price rating moves in well before they happen. Also, one should not overstate the impact of individual sovereign rating changes, as EIB’s rating benefits from diversified support that has been amply demonstrated by unanimous support for a capital increase — moreover, there are the intrinsic financial strengths, which are emphasised by the market and analysts alike.
Ribot, Natixis: The French downgrade had no major impact on the market, there was no change in spreads and what we hear from investors is that it was a non-event. Investors are doing their own credit work and even with a lower rating France is seen as a core country.
Bendiek, State of NRW: Investors will probably be forced to loosen the credit standards that they ask for because there is simply not as much supply from triple-A issuers anymore. But the ratings are still important because investors always ask for higher premiums and spreads from issuers with lower ratings. It will remain very important to keep a good rating.
Ruhl, ESM: EFSF bonds are backed by guarantees from our member states so there is a direct link with the rating of the member state. The ESM has paid-in capital of €80bn so there is a less direct link with the stakeholders.
But downgrades seem to have had a reduced impact on issuers over the last couple of years. The EFSF has been downgraded in line with some of its member states, including France, but it hasn’t had any impact on spreads or investor demand.
The improving situation in Europe means downgrades should become rarer.
Thomas, EC: One of the lessons from the eurozone crisis is that investors, rightly so, have paid more attention to the sovereigns’ credit ratings. That was something they only used to do for emerging markets. They have now developed in-house rating abilities and major institutions take their own view on sovereign debt credit risk. A general deterioration of ratings worldwide has led to an overall acceptance of lower ratings. It has not deterred appetite.
EUROWEEK: Do private placements form part of your plans for 2014?
Meuwissen, NWB: We always try to be as flexible and responsive to our investors as possible. Our private placement deals are really reverse enquiry driven. Every bank receives our funding grids and knows where our interest is so we can act rather quickly. Our MTN volumes over 2013 were relatively bigger than in previous years, which is good for us because the cost of funding is lower than of benchmark funding. Meanwhile, the benchmarks stay very important for our name recognition in the market.
Ferreira da Silva, EIB: We print MTNs, Schuldscheine and NSVs. But we’ve sold less of these last two over the past year. Their traditional German investor base has been more active in our ECOOP deals. Instead of buying very tailored deals like Schuldschein or NSV, they’ve bought more liquid products in larger sizes through ECOOPs.
The investors that did not buy much EIB in the past years became more acquainted with us through or Schuldschein and NSV products and eventually graduated into our mini benchmarks and in some cases even our full benchmarks.
Our MTN volumes are also down a little bit. Some structured deals have gone through, but not many. Investors could look at this product for yield enhancement in 2014, but it very much depends on their view on interest rates.
There is demand for club-type deals that are driven by two or three lead orders. This often happens on a reverse enquiry basis, where banks gather a few investors that alone would not justify a deal but together can buy a €250m tap, for instance.
Goebel, Rentenbank: We can issue MTNs and Schuldschein but we haven’t done much in recent years. We sold a lot in 2009 but that was when yields were higher and German insurance companies could buy at 4%, for instance. Our investors expect higher liquidity and that means selling club deals or tapping outstanding transactions. Of our 48 deals in 2013, 26 were taps. A lot of that was because of the Kangaroo market, where it’s typical to start with a modest volume and tap deals to increase the liquidity. But the fact more than half our deals were taps speaks for itself.
Bendiek, State of NRW: We use our MTN programme for foreign currency and structured deals and Schuldschein format for the long deals desired by the German investor base. The format makes no real difference to us but we can do either to suit the investor’s preference.
We print a lot of private placements — they are always very important. We sometimes start with a small private deal and then tap frequently, leaving some of those trades with a lot of volume outstanding. Using that tactic means there is little new issue premium so it makes sense economically.
Thomas, EC: We plan to print €250m-€500m of private placements in 2014. It will be in small amounts linked to our macro financial assistance operations for non EU member states.
We run a tender process and leave it up to the dealers to decide whether the MTN or Schuldschein format is more appropriate to achieve lowest cost of funds.
Noël, Cades: We used to issue in Uridashi and Schuldschein but not in 2013. That’s simply because the demand was not there. The price of maintaining documentation is quite heavy so as long as the traditional benchmark works it’s easier for us to go there rather than in small formats.
Ruhl, ESM: Private placements haven’t been part of our funding strategy so far. But what we did do in 2013 — in the first half of the year especially — was to tap existing bonds based on reverse enquiry. We are always in close contact with our investor base and if we feel there is strong demand for a tap of a specific transaction then we launch a public deal. We mandate lead managers and open books, but the initiative comes from the investor base.
Ribot, Natixis: SSAs could increase private placement volumes — that would help keep spreads tight. There are more investors than ever before ready to buy private placements. That’s in part because they want to access other supply sources than just benchmarks. The investor base is larger than it was and that creates enquiries for issuers. That leads to a tighter funding level than in public transactions so they will try to use it to attract more investors and keep their spreads tight.
Insurance companies have been pretty active in the private placement segment, buying vanilla paper at the beginning of the year and more structured deals — like CMS linkers — towards the end of the year, in order to get more yield.
EUROWEEK: With the euro/dollar basis swap becoming less attractive for dollar arbitrage will there be more euro issuance in 2014?
Thomas, EC: The swap curve for dollars has changed so instead of European issuers going to the dollar market it’s more likely that non-European credits will come in euros. We expect a bit more euro supply from those credits. But volumes from European SSAs will be fairly stable.
Ferreira da Silva, EIB: Everyone is expecting more euro issuance but I’m not sure there will be a meaningful move. Now that diversification does not cost much to non-European issuers, they may be interested in appearing in the euro market once in a while. We have already seen some examples of that but I doubt it will have much impact in the bigger picture. There are so many investors in the euro market that the extra volume should not lead to any strain.
On the contrary, it is positive — it further internationalises the euro market. The more international borrowers printing in euros the better will be the market depth.
Goebel, Rentenbank: There may be a lower share of SSA issuance in dollars in 2014 because of the tight spreads between swaps and government bonds. The rising cross-currency basis swap means we cannot compensate through much tighter spreads versus mid-swaps. Five year Treasuries were just 11bp-12bp through swaps in mid-November and that is a big difference to what we’ve seen in the past, where we’d been able to issue at sub-dollar swap levels and still offer an attractive spread over Treasuries.
It had an impact on our 2013 funding programme. Up until September we’d planned our final benchmark of the year to be in dollars, after selling one dollar benchmark and one euro benchmark earlier in the year. We also identified seven years as the ideal maturity from an asset/liability management perspective. After the increase in the cross-currency basis, we figured euros would be the better currency. The basis swap will probably rise further because stress in the eurozone is easing.
Seco Presencio, CoE: There could be a little bit more euro issuance. But issuers with large programmes will maintain their presence in dollars. Even small issuers like ourselves need to keep our commitment to dollar investors. Even if the euro can beat the dollar in funding costs we will maintain our commitment to the dollar market. Relationship criteria are important too.
Noël, Cades: The basis swap story can evolve quite rapidly. Everyone asks whether euro issuers will be committed in dollars, some have said they will come, others say they don’t mind.
Our case is in between. We are committed to come but we’re not ready to pay a 30bp premium to access the market. We have to fix our limits and try to come when it’s not too painful. But if the euro market is closed for any reason we will obviously go to dollars whatever it costs. In this way the US market remains a strategic market and price is still secondary.
EUROWEEK: Are investors from outside Europe returning? Will more come back in 2014?
Ferreira da Silva, EIB: Yes. About half of our funding is in euros and, depending on maturity, there is a different geographical mix. Short to medium tenors bring in a lot of participation from Asia, central banks and other non-European investors. Bank treasuries also participate. From 10 years and longer it’s much more about core Europe — fund managers, insurance companies and so on, although central banks and bank treasuries have also been very active in the search for yield, especially in the 10 year area.
Seco Presencio, CoE: The question investors asked in 2011 was whether the eurozone would stay intact. In 2012 it was about when growth would start but in 2013 they understood the situation and felt more comfortable.
Noël, Cades: They are comfortable with the mechanism but there is still doubt about politics and how the French and German couple will work. The question is less on a short term basis but more on the long term political evolution in Europe — the progress on banking integration and the next steps of fiscal integration.
But political integration is something different and as long as there is no political integration all the rest can change. So investors are thinking about the long term. The problems of Portugal or Slovenia are rather small compared with Greece, Italy or Spain.
Meuwissen, NWB: It seems investors investigate the eurozone in general and after that they focus on the specific countries in that area. Then it depends on their preference of risk. A lot of investors want to buy the Netherlands and to do so they buy our name. Also in roadshows the topic is more and more about the economics of the Netherlands, the specifics of NWB is of secondary interest, as long as there are no major changes in our strategy or ownership.
Bendiek, State of NRW: GDP figures were not too impressive lately but there were some better numbers from Spain, Portugal and other countries that were in dire straits not too long ago.
There’s a lot of progress on budgets, they need to do more on structural reforms but most of them are on track so the outlook is not too bad. If that keeps improving, international demand will be strong for German states anyway but for euro issuers in general even more so.
Ribot, Natixis: Investors see that the systemic risk is over and there is a feeling of growing confidence. There is still some risk around, but we had more non-euro investors in 2013 than 2012.
That growth mainly came from Asia but overall there is more confidence. Investors know that the problems are not all solved but in some cases they need to invest euros, so their cashflows into core issuers and SSAs benefit.
EUROWEEK: What are the biggest risks to the recovery in 2014?
Goebel, Rentenbank: The biggest risk is that investors have got used to the fact that Europe is always muddling through. We had the topic of a Greek exit, it never happened, then the talk of Spain needing a full bailout on top of banking sector support, now we know the government won’t ask for one.
The worst assumptions never seem to materialise so overall sentiment is getting more relaxed and justifiably so, but you can never rule out setbacks on the road to recovery. It remains to be seen how markets will react to really bad news. Spreads are much tighter, so it’s more difficult for investors to see the large upside that has been there on a number of trades over the past year.
Thomas, EC: The eurozone recovery will be moderate. It’s still external export-based. Domestic demand still has to develop and become a more solid component of the eurozone recovery. Investment has also been hit by the crisis and that is linked to domestic demand. These are the two areas to watch.
There is agreement that fiscal consolidation has been successful so fiscal policy is expected to be relaxed a little. It’s extremely important to have a successful AQR and progress on banking union to improve credit, as there is a risk of a credit-less recovery.
Meuwissen, NWB: The biggest problem I see is that we do need economic growth but all the financial stimulus is not reaching the real economy. I don’t see the US debt ceiling as having a big influence on the markets but too early tapering could harm recovery in the US.
Ribot, Natixis: The lingering question is the difficulties in the banking sector. The stress tests could cause some surprises. Fiscal consolidation work needs to be done and of course there is the state of the global economy. Growth in the eurozone is better but moderate compared to the rest of the world. There’s also a question about increasing deflation — another risk to the recovery.
Tapering by the Fed is causing more concern than the debt ceiling. The timing, how the Fed will change its forward guidance, when it will announce it, what reduction it will make — in my view, that’s what the market is looking at.
Seco Presencio, CoE: There could be sources of volatility — the debt ceiling will be a very important issue. It would be helpful to achieve a greater degree of market stability if this important issue could be given a long-term solution.