The one thing most SSA borrowers agree on is that this January’s market is a much nicer place in which to issue bonds than 2012’s January. But there is still uncertainty abound, especially in the dollar market. Even Tuesday afternoon’s announcement that KfW will attempt a 10 year dollar deal on Wednesday is no guide to other issuers looking at tapping the world’s deepest capital market.
The main question marks hover over how the Washington supranationals will fare in dollar markets this year with swap spreads— and subsequently re-offer spreads to US Treasuries — so tight and re-offer yields so low.
The answer is most likely that those borrowers will have to settle for small sizes and will have to pay up a bit compared to historical levels.
The fact that KfW can do a 10 year trade only confirms what we already knew — that demand for top notch dollar paper is rampant, especially when it offers something with a bit of hair on it.
After all, KfW can take advantage of a basis swap back into euros, allowing it to save on equivalent issuance in euros while still offering sufficient spread over the Washington names to look attractive.
For the other European names in the market in dollars — EIB have priced and KBN will price a five year trade apiece this week — they offer even more spread than KfW and so are not a fair comparison with the Washington names.
The Washington credits pay for their funding in dollars and so cannot fall back on the basis swap to save money.
The IFC’s $1bn December 2017 deal from last November, which came at 10.8bp over US Treasuries, is probably the best indicator of things to come rather than, say, the World Bank’s $5bn April 2017 blockbuster from last February (which paid 19bp over Treasuries).
When credit concerns were paramount investors preferred the safety of big-ticket deals and the resulting liquidity. Now, the top names cannot hope to attract such size with the spreads they are willing and able to pay. It may sound like stating the obvious but nowadays it is easier to shift $1bn than $3bn.
This year should be a year of little and often for the top credits in the dollar market.
