Search for spread works well for soft core issuers

Sovereigns just outside Europe’s core and issuers with indirect government guarantees were very popular in 2012 as investors looked for high quality credits that still could offer some spread over the ultra-tight levels paid by Washington supranationals and Europe’s core. Tessa Wilkie reports on how these issuers will capitalise on this popularity in 2013.

  • 21 Dec 2012
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Public sector borrowers in Europe that fund with a spread over Libor are looking forward to a barnstorming year. They ended 2012 with a bang. Investors, caught between the rock of dodgy peripheral borrowers and the hard place of supranationals and core agencies demanding eye-watering levels, piled into borrowers that were far enough away from the periphery but offered a whisper of yield.

"Towards the end of last year core European agencies such as KfW were trading very tightly, and were even subject to some profit-taking," says Kentaro Kiso, head of global MTN syndicate and public sector coverage at Barclays in London. "Investors have seen easing tensions on the likelihood of a possible Greek solution, the technical support from central banks and limited bond supply, which has made them realise that they need to have exposure to SSA issuers across the spectrum on a relative value basis. It has increased demand for non-German issuers and agencies in core countries without a direct government guarantee, and that relative value play should continue this year."

One such issuer is FMS Wertmanagement. The German agency charged with winding down the unwanted assets of Hypo Real Estate is looking forward to picking and choosing its issues in 2013. Having already been able to pre-fund to the tune of €10bn in 2012, it has only €15bn to borrow this year.

"We don’t see any deterioration in our funding situation in 2013 in terms of pricing, especially as the situation in Europe has calmed down a lot," says Jens Remmers, head of capital markets funding at the issuer.

These issuers were particularly attractive in dollars last year, as tight swap spreads meant that the sub-Libor names struggled to pay a decent spread over Treasuries.

FMS sold its first dollar benchmark in November last year with a $2bn five year global that attracted $5.5bn of orders. Instead of starting out in dollars with 144a/Reg S documented trades, FMS pounced straight into the global league, leapfrogging over other issuers in the meantime.

And dollars will be a highly attractive market for these issuers this year, too. Although they will have to watch out in case rates get so low that Washington supranationals and core European agencies are forced to widen their spreads to get investors’ attention.

"Depending on how other funding options materialise, there is scope for the sub-Libor names to potentially widen if these issuers need to return to the dollar market often and/or at the same maturity, particularly if swap spreads remain tight to Treasuries," says John Lee-Tin, head of public sector origination at JP Morgan in London. "There remains a core group of SSA investors that will buy some names at tight spreads to Libor, but to access a wider audience or come more frequently may require some widening in spread."

FMS plans to build on its auspicious start in dollars in 2012 with two to three dollar benchmarks in 2013, to service its $45bn asset base in the currency.

For Dutch agency BNG, which carries an implicit guarantee from the state, an inaugural seven year dollar deal could be in the offing, depending on investor demand.

"We did seven year euros last year and we will look to do a seven year trade this year too," says Bart van Dooren, head of funding and investor relations at BNG. "It could be a possibility to do it in dollars. A lot will depend on yields and whether investors are looking to buy further out along the curve to get yield."

The issuer, alongside compatriot NWB, was placed on CreditWatch negative by Standard & Poor’s late last year. But the move is unlikely to affect demand for its paper.

"I anticipate that issuers such as BNG and NWB will have a very good 2013," says Philip Brown, head of public sector debt origination at Citi. "They somewhat lagged the Nordics last year but I expect we’ll see a correction this year with a further compression of spreads. I anticipate that euro and dollar funding will again provide the bulk of financing for the triple-A Dutch issuers. In dollars, they both started to get more traction through their 144A programmes last year and I expect them to build on that this year."

Fellow Dutch agency NWB also expects a good issuing year. Despite the opportunity to pre-fund at very attractive levels late last year — the issuer had considered an opportunistic December benchmark — it decided the cost of carry wasn’t worth it.

"We expect to be able to fund at good levels this year — as good as at the end of last year," says Tom Meuwissen, general manager, treasury, at NWB Bank. "We’re confident of that from looking at how much investor interest there is and the amount of cash around."

Central bank action should also conspire to keep rates low, says Kiso at Barclays. "Market technical conditions for this year look good. The Federal Reserve is likely to keep low-for-long quantitative easing going until the end of 2015 and the ECB has shown the market it is prepared to do whatever it takes to keep liquidity in the system."

Pastures new

Finland’s Municipality Finance has been very busy building up a public issuance programme since printing its first dollar benchmark in 2011. It sold two public deals in dollars in 2012 — a $1bn five year and a three year $500m floater. Its next step is to take steps towards deepening its investor base in the currency.

"We are strongly considering setting up 144A documentation, which would allow us to access a totally new investor base," says Joakim Holmström, head of funding at MuniFin. "The feedback from our dollar benchmark in April was that there are many accounts which would like to buy MuniFin but can’t because they need the 144A documentation."

MuniFin, which expects to borrow around €6.5bn this year, in line with what it raised last year, wants to expand its public borrowing programme. As a rough estimate, it wants to increase its public funding from 30% of total funding in 2012 to 50% by 2017.

Sterling opportunity

MuniFin also sold its debut sterling deal last year — a December 2014 note that was oversubscribed and priced at the tight end of guidance. MuniFin would like to build up its presence in the UK currency, as long as the pricing makes sense.

The sterling market will provide an attractive opportunity for agencies looking to expand their investor bases this year, according to PJ Bye, global head of SSA syndicate at HSBC in London.

"Activity in 2012 proves that the UK investor base is keen to buy agency paper from top tier, high quality names," says Bye. "There’s plenty more liquidity for Dutch, French and Nordic agencies to print in this market this year. The basis swap is a factor, but issuers should compare sterling pricing to their euro curve, not their dollar curves. This market is an important diversifier and should be regarded as a strategic market, not an arbitrage funding opportunity."

On the sovereign side, those issuers in Europe’s core that offer a premium over Germany were very popular. Austria, for example, was able to innovate last year with a dual tranche note that included a €2bn 50 year clip in January just a week after the sovereign was downgraded to AA+ by Standard & Poor’s.

"Our dual tranche syndication — the first ever such deal from a sovereign — was not only innovative but a very elegant answer to the rating action of one particular rating agency," says Martha Oberndorfer, managing director of the Austrian Federal Financing Agency.

The issuer is looking to capitalise on its popularity with a potentially even longer deal. Starting this year, the Austrian sovereign’s maximum tenor will be increased to 70 years from 50, although any deal it brings will be tailored to investor demand.

"Like with the 50 year tenor, we might investigate the market first with smaller tickets in other instruments before we do a public bond," says Oberndorfer.
  • 21 Dec 2012

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1 Citi 8,935.41 24 14.02%
2 HSBC 7,859.72 26 12.33%
3 Deutsche Bank 7,109.78 16 11.15%
4 JPMorgan 4,850.50 14 7.61%
5 Standard Chartered Bank 3,055.20 19 4.79%

Bookrunners of LatAm Emerging Market DCM

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1 Citi 4,285.53 5 18.23%
2 Deutsche Bank 3,977.43 2 16.92%
3 HSBC 3,768.59 4 16.03%
4 JPMorgan 2,812.07 8 11.96%
5 Bank of America Merrill Lynch 1,803.06 7 7.67%

Bookrunners of CEEMEA International Bonds

Rank Lead Manager Amount $m No of issues Share %
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1 Citi 3,236.25 7 20.59%
2 HSBC 2,253.75 3 14.34%
3 Deutsche Bank 1,703.96 4 10.84%
4 Standard Chartered Bank 1,518.77 3 9.66%
5 JPMorgan 1,341.27 2 8.53%

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Rank Lead Manager Amount $m No of issues Share %
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5 Citi 95.36 35 5.16%

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1 ING 3,668.64 29 9.07%
2 UniCredit 3,440.98 25 8.50%
3 Sumitomo Mitsui Financial Group 3,156.55 13 7.80%
4 Credit Suisse 2,801.35 8 6.92%
5 SG Corporate & Investment Banking 2,478.18 21 6.12%

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Rank Lead Manager Amount $m No of issues Share %
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1 Standard Chartered Bank 126.67 2 7.81%
2 Sumitomo Mitsui Financial Group 81.25 1 5.01%
2 SG Corporate & Investment Banking 81.25 1 5.01%
2 Morgan Stanley 81.25 1 5.01%
2 JPMorgan 81.25 1 5.01%