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SSAs urged to explore new flavours of vanilla in MTNs

By Gerald Hayes
10 Jan 2014

Sovereign, supranational and agency credits are eager to use a greater range of private placements to diversify their funding plans, but investors are holding out for plain vanilla paper. Borrowers will need to be inventive to achieve their objectives, writes Kathleen Gallagher.

Sovereign, supranational and agency borrowers plan to increase the volume of private placement deals they issue this year and hope to do so by diversifying beyond the plain vanilla formats that have dominated the MTN market. But bankers warn borrowers will need to look beyond the familiar structured notes they have used in the past and to explore new avenues of plain vanilla funding.

“For SSAs there are no windows closing,” says Eric Cherpion, managing director and global head of DCM syndicate at Société Générale, in London. “The volumes will be there. But borrowers need to think about timing in terms of issues and flexibility in terms of maturity.” 

Borrowers should consider the Schuldschein and Namensschuldverschreibung formats, say MTN bankers. Schuldscheine are bilateral loans, privately placed and generally governed by German law. Similarly, the Namensschuldverschereibung format is a registered bond governed by German law. 

Like MTNs, the formats allow for smaller sized and structured payouts customised to an investor’s desires. Investors like them because unlike regular bonds, they do not have to mark the securities to market — they can be treated as loans or held-to-maturity assets on investors’ balance sheets. It also means access to a new range of investors.

“Schuldscheine is a diversification area,” says Cherpion. “We’ve seen SSA borrowers experimenting with the market using the format to fund themselves privately. It offers a different investor base.” 

Supranationals have taken note. “We have particular interest in the Schuldschein market,” says Hugo Sarmiento, chief financial officer at Corporación Andina de Fomento (CAF) in Caracas. “It has advantages for investors and issuers. There is a growing demand for this kind of deal and we expect more this year.” 

Meanwhile, Rentenbank plans to diversify by issuing socially responsible investment private placements. “We issued our first SRI bond in 2013, which is an interesting market segment,” says Stefan Goebel, managing director and head of treasury at the German agency in Frankfurt. “We expect it to be an interesting platform to diversify our investor base and increase our private placement deals.”

MTN bankers expect socially responsible private placements to take off in 2014 following a year when SSA issuance of public green bonds and other socially responsible investments rocketed. 

Currency change up

Alternative currencies also offer diversification opportunities to top-rated credits. “A wide range of investors are looking to get local currency exposure,” says Amaury Gossé, MTN director at Citi in London. “They will place bets on niche currencies but they want to avoid credit risk and hence favour AAA issuers.”

A number of local currency markets are still in their infancy but bankers are urging borrowers to establish themselves in these markets early. “We are seeing more local currency debt issuance, specifically out of Africa, Latin America and eastern European countries,” says Cherpion.

These alternatives will allow borrowers to entice new investors who have an appetite for vanilla bonds over complicated but unfashionable structures. 

Appetite for structured notes has been shrinking since 2010. SSAs issued $58.4bn worth of structured private placements in 2010, falling to $26.7bn by September 30 2013 according to Dealogic. 

“We are seeing a continual decline in structured private placement issuance as more investors shy away from structured risk,” says Gossé. “Banks as well are more reluctant to put exotic risk on their books.”

“Over the last year we have seen less complicated structures than before the financial crisis,” says Petra Mellor, director of SEK’s funding team in Stockholm. “Regulations have made complicated structures even more complicated. Last year the largest part of our funding, by amount, was in plain vanilla bonds.” 

Municipality Finance has seen a similar trend. “We saw more demand for plain vanilla product in 2013,” says Joakim Holmström, vice president and head of funding at MuniFin in Helsinki. “They made up 60% of our issuance last year compared to 40% in 2012. We expect this to be the case this year as well.”

But overall, 2013 was a busy year for several SSAs in MTNs and borrowers hope to continue to use private placements to test different markets this year. 

CAF almost doubled the funding it raised through private placements in 2013, for example. “Last year private placements covered about 40%-45% of our funding plan instead of the usual 20%,” says Sarmiento.  “We hope to maintain this level in future years. Private placements have offered a great way to reach new investors and cover new markets.”    |

By Gerald Hayes
10 Jan 2014