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Dutch Public Sector Issuers Roundtable

02 Jul 2012

Dutch public sector borrowers have had an unusually tricky time of it of late. From last November, a combination of the fall-out from Norway’s Eksportfinans debacle, European sovereign volatility, Standard & Poor’s downgrades and a collapsed government have given the country’s sovereign and agency funding officials more reasons to worry than at probably any time since the end of the tulip bubble.

Yet the Netherlands remains something of a safe haven credit and its two biggest agency borrowers, Bank Nederlandse Gemeenten (BNG) and Nederlandse Waterschapsbank (NWB) have enjoyed record order books on new issues this year while another, Nederlandse Financierings-Maatschappij voor Ontwikkelingslanden (FMO) was able to launch its debut dollar benchmark — as was the sovereign itself.

EuroWeek was joined by senior officials from all four institutions and Rabobank in The Hague to discuss the experiences and prospects for Dutch public sector borrowers.

Participants in the roundtable were:

Michiel de Bruin, head of euro government bonds, F&CBart van Dooren, head of funding and investor relations, Bank Nederlandse GemeentenRob Eilering, head of ECM, capital market solutions and public sector DCM, RabobankTom Meuwissen, general manager, treasury, Nederlandse WaterschapsbankPeter Nijsse, head of cash management, issuance and trading, Dutch State Treasury AgencyHuib-Jan de Ruijter, director, financial markets, Nederlandse Financierings-Maatschappij voor Ontwikkelingslanden (FMO) Ralph Sinclair, SSA Markets and SSA markets editor, EuroWeek.

EUROWEEK: How has the sovereign crisis in Europe affected your funding programmes?Bart van Dooren, BNG: In terms of spread widening for the European agencies, it all started with the announcement about Eksportfinans by the Norwegian government last November. We saw an impact on secondary market spreads but also on the offers we were getting from the banks for primary transactions and that affected us all. Thereafter — especially at the end of last year — we were quite concerned about the opening of the capital markets in 2012 but that proved to be completely wrong. Looking back at the first five months of this year, all new issues have gone — with some exceptions — extremely well in terms of order books, oversubscription, pricing within the official price guidance and so on.

During the last couple of months there has been a lot of turbulence given the Greek and French elections, and not forgetting those coming up in the the Netherlands on September 12.

They will also have an impact — though hopefully not too much — on Dutch spreads for both the DSTA and the agencies. So far the news has been explained in a positive way and the market is ignoring negative news.

Will that end? I don’t know. But sooner or later, given the very low yield environment we are in, I’m expecting that in the coming months it will probably be more difficult to raise funding than over the last five months.

Tom Meuwissen, NWB: We have the same view actually. The availability of funds is still there and the spread widening is of course the major thing.

I agree with Bart that Eksportfinans was a very important issue and although there are many differences between ourselves, for instance, and them, it has had an impact. But it’s true that as far as the order books are concerned, well, I can almost say that they have never been better actually.

Huib-Jan de Ruijter, FMO: For FMO the increased basis swap cost into dollars has been an important change as well. Our clients, based in emerging and frontier markets, still predominantly request dollar-denominated funding. FMO has traditionally funded itself in the Japanese and some other non-dollar markets. While these markets are still available to us the basis swap cost has generally made them more expensive.

EUROWEEK: And from the sovereign’s point of view, Peter, what’s your experience been of the crisis so far?Peter Nijsse, DSTA: The main result of the sovereign crisis is that we have been funding larger amounts to meet a bigger funding need. That was already larger because of the earlier phase in the financial crisis but budget deficits have come up somewhat larger than had been expected so that has impacted our funding programme.

But it has made it possible for us to do other things. We had a funding need which was just big enough to maintain liquidity of our debt and of our outstanding bonds so we had no possibility to diversify into other instruments without hampering the liquidity of our outstanding bonds.

So what has changed is that we can now look at other instruments and opportunities like the dollar market.

We increased our longer term funding to €60bn a year from €50bn last year.

EUROWEEK: From the buy side’s perspective, has the sovereign crisis had an impact on the view of Dutch SSA credits?Michiel de Bruin, F&C: Yes, I think we have seen interest for agency paper rise. It has been an alternative to peripheral investments if the spread over the relatively safer sovereign is sufficient.

Having said that you should be sure to consider the country of origin of the agency and this is very important when you consider investing in a Spanish agency or a Dutch agency.

Given the relatively stable environment in the Netherlands still and the good track record of the Dutch agencies, we still see this as a very good alternative in our portfolio and we invest in them.

EUROWEEK: What was your response, when looking at Dutch agencies, when the Eksportfinans news came out?De Bruin, F&C: We looked very much at the spreads versus the sovereign and how this developed. But in general we would still regard them as relatively safe investments.Van Dooren, BNG: I think that’s an advantage that Michiel has compared to foreign investors. They know exactly the shareholder structure of the Dutch agencies so we don’t have to explain it. But we had incoming calls from analysts, from investors all around the globe asking if what happened to Eksportfinans could happen to BNG or NWB.

By explaining that within our articles no one other than central and local governments can be shareholders, we showed we are in a completely different situation to Eksportfinans, and investors gained confidence from this. They know exactly what they are buying. So investors who are familiar with Dutch credits saw the spread widening as a "buy" opportunity in the secondary market.

Eilering, Rabobank: Given what happened at the end of 2011 when markets were stressed by a turnaround towards Europe, the continued volatility combined with strong spread widening introduced unstable conditions that caused some panic around the issuer base. The focus then shifted to telling the credit story including the basic fundamentals to get away from the noise surrounding Europe and Eksporfinans.

At the beginning of 2012 the focus was very much on access to liquidity as the secondary markets were not performing adequately. The LTRO has helped us a lot because that was a shot of liquidity into the market. It helped the bankers and the brokers to perform again in their markets allowing us to carry inventory for a longer period of time alongside better appetite from investors. This meant that all the issuers could focus more on consistency around execution with deals architected for full placement based on genuine demand than just market access. As mentioned, recent deals have been oversubscribed backed by high quality demand and solid after-market performance. But I feel that the secondary market has been broken again. So what’s to come for us? Will there be another LTRO to help us out?

Meuwissen, NWB: Also, although long-term funding spreads have widened, when you look at commercial paper for instance, we are issuing up to six month maturities at negative yields. We are a safe haven to a lot of counterparties so there has been a sort of compensation for the rise in longer term spreads.

EUROWEEK: Your recent €2bn seven year benchmark — that’s not a typical BNG size of deal, is it? Do you think that caught a flight to quality bid?Van Dooren, BNG: Yes, especially as we were targeting 10 years as we have a natural demand for longer dated funding.

The trouble was with a 10 year that we were trading in the secondary market through OATs and if you want to have French investors on board, you have to offer something with a spread over OATs. Therefore we opted for the seven year, knowing that we were trading flat to OATs in that part of the curve.

Then of course you realise when you are starting to take indications of interest, that there was a lead order out of the US. We saw a number of orders out of Asia and all in all we had an order book which was over €4bn.

It’s definitely a flight to quality when you are able to print a larger size than you had in mind and it’s not just due to hedge funds or bank treasuries in the order book. It was really a high quality order book which allowed us to allocate those orders and make sure investors got the bonds they were asking for because we knew they had not inflated their orders.

EUROWEEK: And Peter, have you seen, through your DDAs, similar evidence of a flight to quality continuing this year or has it stayed about the same as what it has been over the last year or so?Nijsse, DSTA: I think the flight to quality has stayed and it fluctuates but in general I think you see an extremely low interest rate for triple-A credits and for Germany in particular and for us it’s a clear sign of a flight to quality. De Bruin, F&C: Core government bonds have negative real yields. You could argue that is not exactly in line with the economic fundamentals so that’s also a sign that there is still a flight to quality and investor appetite for well rated issuers with good track records.Eilering, Rabobank: So Michiel, you are not extending along the maturity curve, rather you are looking for different credits as well?De Bruin, F&C: We generally invest in benchmark bonds where you can take a bigger position. You have to take that into account also. But for most portfolios we can basically take both sorts of debt — sovereign and agency paper — and yes, we would take positions where we like the returns best. Looking at agencies, we especially like the shorter end a little bit more. For government paper, generally we are invested a bit further up the curve.Nijsse, DSTA: I think we saw the same signs of flight to quality as Tom saw with negative yields once in a while on treasury bills or on commercial paper. In December and January we auctioned some treasury bills with negative yields which is, I think, a clear sign of flight to quality that investors are willing to pay a storage fee to have their money in a safe sovereign.

EUROWEEK: You’ve done your first dollar deal recently. What does the dollar market offer Dutch SSAs and what was difficult about getting into that market?Nijsse, DSTA: What it offers is opportunistic alternatives to euro funding. Our core funding is and will always be the euro markets. We are a euro area issuer. And as I said, our larger funding need makes it possible to look at other instruments without reducing the liquidity of our euro issuance.

So what we were looking for in the dollar market was cost savings. The second aim was to reach a wider investor base. Many non-European investors are dollar investors and will be more interested in our name if we come in dollars – especially the investor bases in US markets and Asia and the Middle East.

It was difficult to achieve because we tend to do things very thoroughly and all by ourselves, so we took a lot of time to make sure that we understood the instruments and we how they work. We took at least a year, I think, to find out about all the legal issues connected to issuing in dollars. The US supervisory body requires different things to Europe’s so you have to find out how it works. Clearing and settlement in the US is clearly different from what we do here in Europe so that takes quite some time to sort out. And then the Dutch Direct Auction structure was maybe somewhat new to at least the foreign sovereign and agency markets in the US, so that also took some time to explain, especially with the banks who were our advisors.

The investors themselves were somewhat less surprised. When I speak to US investors they say it’s not that different from how the US Treasury auctions its bonds. They also deal with a Dutch auction and the rules are clear. But it took some time, especially with the banks and with the advisors to sort out how it works.

EUROWEEK: Presumably they lobbied you heavily to do a straight syndication.Nijsse, DSTA: Well, syndication is what banks are used to. It was the same, I think, when we started with the DDA process in euros. In the same way, when you start something new you have to convince some people and you have to overcome some barriers and objections that something new brings a risk and should not be done.Van Dooren, BNG: Was it difficult to get investors on board?Nijsse, DSTA: It was not so difficult. Asian investors, they know our DDAs in euros and from the perspective of the investor, it probably does not make a difference whether they put a bid in through a DDA or a syndicated transaction, although a DDA is more rule-based.

But even in syndications there are issuers who allocate bonds in a syndicated deal in a very rule-based way and then you come very close to what a DDA is; only we want to label it DDA to show that it is rule-based and it is a real auction and the investors determine the price.

As I said, several US investors said, ‘well it was not that different from US Treasury auctions’ is so although it’s not common in the SSA market, the investors were not unfamiliar with the structure.

EUROWEEK: You talked about it as opportunistic funding but presumably you wouldn’t have gone through all that work just to do one trade. So how frequently do you see yourself coming to the dollar market?Nijsse, DSTA: That will depend very much on the cost benefits that are to be made. We will only come to the dollar market when we think it is cost-effective. But clearly we have not invested so much time to have an instrument which we only use once. We have it on the shelf to come back to later. Eilering, Rabobank: FMO also printed their debut dollar transaction, hence there were two inaugural Dutch debut issuers in the dollar market in the same week, while their objectives were completely different. The DSTA launched an opportunistic trade to ease the cost of funds as they also took the benefit of the cross-currency swap. It was FMO’s ambition to find pockets of money in the dollar market to match its predominantly dollar-based assets i.e. they were not mainly driven by the after-swap result dynamics. Therefore, it was not an opportunistic trade because they wanted to establish a strategic benchmark. They focused on a $500m floating rate note rather than the multi-billion, fixed coupon deal that the DSTA printed, as their funding programme is not large enough, and they wanted to attract a specific investor base. De Ruijter, FMO: This was an important strategic step indeed. By accessing the dollar market directly we can raise funding in the currency our clients request and avoid having to deal with the basis swap which I referred to earlier.

Furthermore, given the growth in our activities we aim to diversify and develop our investor base. With redemptions increasing over the coming years and our annual funding need rising from around €1bn to €1.5bn we felt now was the time that we could justify a debut $500m trade. We plan to build a strategic presence as a small issuer in this market going forward.

EUROWEEK: And Tom, what does the dollar market bring to NWB and has it changed at all over recent times?Meuwissen, NWB: It’s exactly as Peter said. There is definitely a cost benefit and up until three years it’s always beneficial to fund in dollars.

We have never issued beyond five years in dollars in benchmarks, but for the shorter term it’s really a very interesting market.

And of course there’s an investor base that you reach that is not buying in euros so it’s very helpful indeed. Last year we added the 144A to our debt issuance programme so now we can also reach the US-based investors. That has really helped in getting bigger order books and diversification.

Right now you see maybe a bit more scepticism in the dollar market when they look at the whole euro area. Last week we were in Asia and we noticed the scepticism. On the other hand, when they are negative concerning the euro area they still see the Netherlands and Germany as positive actually so then you stand out. The buy list of investors gets smaller but when you’re still on it you benefit. All in all it’s maybe a bit more difficult this year.

EUROWEEK: Presumably that limits you to the five year part of the curve and shorter but do have any ambitions beyond that?Meuwissen, NWB: No, not really because we only go to the dollar market when there is a cost benefit. Otherwise we stick to the euro market — that’s our core currency.

So let’s say, we could do a 10 year dollar and it’s the same forecast all-in cost as a 10 year euro deal, I think the euro is just a better market for us.

But then, you can say that we issue two or three dollar deals each year so it’s also strategic.

Van Dooren, BNG: I think adding 144A documentation to our programme in September 2010 meant we were able to print even larger dollar bonds than we were before given the genuine US demand.

Last year we printed $1bn in 10 years. We had close to 40% US investors onboard and I think in terms of diversifying, that’s what we were after.

With the Reg S Eurodollar format you can only have access to US investors after 40 days and by then your bonds are illiquid, there’s an off market coupon, so it really helps to increase the size of your benchmarks. And knowing that liquidity is an important issue for investors I think that’s what we were aiming for and that’s why we printed this three year, $2.5bn more easily this year. It was the biggest dollar deal we have ever printed.

It gives us the opportunity to print larger size, to have access to accounts in the US we have never seen before and I think that definitely helps. I’ll agree with Tom, the 10 year sector is a difficult part of the curve because the number of investors is limited so assembling the first $500m of orders is not a big problem but the second $500m isn’t easy.

Meuwissen, NWB: But was there a cost benefit in the end?Van Dooren, BNG: In the end there was, yes, but it was, at that time we printed in 10 years, flat to euros.Meuwissen, NWB: Ok, so no cost benefit?Van Dooren, BNG: No, more, a different investor base.

EUROWEEK: Do the issuers around the table view the dollar market as significantly altering their funding mix going forward or do you think the balance will be roughly what it always has been?Van Dooren, BNG: I think it really depends on which maturity you are looking for. If you target three years, you know you’re targeting central banks. With five years you’re targeting the US investor base and for 10 years it’s a limited number of investors you are targeting in terms of life insurance companies and pension funds but definitely in terms of size it really helps.

In terms of diversifying your investor base, it certainly helps but you see a change also in the investor community. Where in the past it was the Asian central banks, now it is the North Africans, and Middle Eastern central banks and also Latin Americans participating for a larger share than they did before. The investor community is developing.

De Ruijter, FMO: We have built long-term relationships with Japanese investors which we value highly. We expect these relationships to remain of importance to our funding going forward. The dollar market will gain in importance in our funding programme to complement our funding activities given that this is a natural fit with our asset base.

It is very interesting to see the change in the investor base that Bart refers to. Given our activities on the asset side, FMO is often a well recognised name for these emerging dollar investors in for instance, Latin America. As one of the largest bilateral, development banks, we have always been strong believers in the potential of emerging and frontier markets. It is interesting to see that they are now home to some of the larger dollar SSA investors as well.

EUROWEEK: That brings us on neatly to our next question which is where the new pockets of liquidity are emerging for Dutch SSA paper? Eilering, Rabobank: The amount of SSA paper being held by banks in general has increased tremendously. From a trading perspective the LTROs helped banks to carry more paper. But from an ALM perspective, there’s a fundamental shift going on due to CRD4. That means that banks were traditionally holding massive amounts of asset backed securities or other high yielding paper and they are now all forced to hold sovereign debt and other Level 1 agencies driven by new regulations.

So from that perspective it’s helped counterbalance the receding demand from central banks in Asia. Furthermore, we’ve also seen Dutch retail buyers re-enter the market especially in the more difficult longer dated segment. And lastly, we have witnessed the corporate treasury buyers emerge not only directly into euro and dollar issuance but also non-core currencies such as the Norwegian krone.

De Bruin, F&C: But at the same time, competition has picked up between different agencies. The EFSF is a new issuer, the EIB has been issuing more, and the EU is issuing more. Investors have more choice. So how do you regard that?Van Dooren, BNG: There is always competition, Michiel, I fully agree. Nowadays, it’s the EFSF, the EIB that are competition. But also they receive more questions from investors given the European debt crisis.

We are competing but I think investors, with the spread widening, also want to diversify so in that respect, given the size of our funding programme, we are able to access those portfolios diversifying out of someone like the EIB.

EUROWEEK: Do you find, Tom, that you’ve had to compete for different investors or find new investors?Meuwissen, NWB: Well, actually we’ve raised €7.5bn this year out of the €10bn that we need so availability is not a problem at all. So for instance, last week when we were in Asia, you wished in one sense that you had to do more funding than what you actually have to, looking at the interest of the investors. At the moment there are maybe only two potential benchmarks for the remainder of this year for these buyers.

EUROWEEK: So it’s more of an execution question rather than an appetite question?Meuwissen, NWB: Yes, definitely. And of course the markets are so volatile — especially in the course of bringing a deal — that so much can happen which has a huge influence on the success of the deal and which you cannot do much about. There can be a lot of developments on the way, it can always happen that somebody is saying something that can influence the market.

But Dutch borrowers sort of benefit from all the volatility because investors see our credit as very safe and easy and transparent.

De Bruin, F&C: That’s a good point. In the Netherlands we benefit from uncertainty elsewhere and as an investor, we see the Netherlands as one of the safest countries to invest in.

But at the same time political issues come up and even today there has been a lot of volatility with downgrades to Dutch banks by Moody’s. I think that’s a signal for the Dutch or maybe the European political community to keep up with plans for growth and austerity.

Eilering, Rabobank: From a counterparty perspective, there’s been a wave of downgrades to European banks and as an asset manager you can use derivatives to get duration. But would you be more inclined now to buy, let’s say, a cash agency bond in a longer duration instead of mapping out duration with derivatives because of the worsening counterparty risk? Would that be a trigger to go back into the cash market?De Bruin, F&C: We invest in cash bonds. Credit risk plays a role in our decisions but actually we’ve seen in the case of distressed scenarios, curves can flatten. Currently we like agency paper at the shorter end of the curve, as said earlier.

But in general there’s no straight answer to where to invest on the curve. It really would depend on the situation.

EUROWEEK: Has the investor base been stable in DSLs or have you found that there have been new buyers coming into Dutch government bonds?Nijsse, DSTA: I don’t think there have really been new investors but there are fluctuations over time in the composition of the investor base.

In the past year there were a few investor groups that I think have been more dominant such as non-European central banks. I think they have stocked up reserves and they invest part of that in euros.

Bank treasuries, ALM desks and liquidity portfolios also buy more. But actually we’ve always seen fluctuations over time. In the first part of 2009 and 2010 we hardly saw any hedge funds in our DDAs so we couldn’t see if they were actually in the market.

We have seen them coming back more again in recent auctions

It also depends on the maturities that you bring. We launched for the first time a 20 year bond this year, and as part of the demand that we were targeting there, insurance companies participated in the transaction.

EUROWEEK: So it’s not as if you were compelled to go out and find new investors because of an increased funding requirement.Nijsse, DSTA: There has always been an investor base that at a moment in time can change when the sentiment turns.

The fluctuations in demand that we see in our bonds are clearly visible with Asian investors in our auctions, where participation is determined on the one hand by the maturity of the bond — whether it’s attractive for sovereign wealth funds and central banks — and on the other, whether it is a week where the euro is in demand or not.

It is also important to keep in mind when deciding on currencies where your investor base is so I think that’s why our European euro investor base will always be the core because it’s a much more stable investor base than non-European investors where you have currency competition and you may struggle in spite of your good name.

De Bruin, F&C: The return of Dutch investors may also be because across Europe domestic investors — banks in particular — are investing more in their respective sovereigns.Meuwissen, NWB: That applies to pension funds too. The pension funds — the large ones that publish their portfolios — you can see that before the crisis they were underweight Dutch government bonds and now they have invested more again.De Bruin, F&C: We cater for that by structuring benchmark exposures and traditionally benchmarks were generally market-value rated. That still happens but we now also have alternatives.

For example, we can do GDP-weighted benchmarks so it is not the total debt that is the decisive factor in benchmark weight but the size of the sovereign’s GDP. This gives a more balanced approach.

Eilering, Rabobank: But I also imagine that the spread widening of issuers like the Dutch makes it far more interesting.De Bruin, F&C:We see a split in Europe among investors, where in the north fewer bonds are bought in southern Europe issuers, and more in northern Europe.Meuwissen, NWB: [Italians] can invest in their own BTPs, of course. For them, it’s as safe as the Netherlands is for the Dutch and a good pick-up in yield. We’ve also been seeing Italian investors and it’s a very difficult job to sell your paper there.

EUROWEEK: So how do relatively small SSA borrowers such as the Dutch agencies maintain a presence amid such competition? Internationally, what are the things that, in your experience, investors are looking for that will keep them coming back for more?Eilering, Rabobank: From that perspective, they are doing relatively very well. BNG’s latest benchmark attracted €2.7bn of demand, which is a very clear statement that the smaller agencies in Europe can still maintain that sort of presence.
Investors look at the stability of the credit story and the way that deals are executed, how the aftermarket is performing, and most of the medium-sized or smaller borrowers take care of their programmes because they’re not so much pushed to get large amounts of liquidity in the market. They can focus on the execution quality, and I think that sets them aside from the larger, bigger issuers. They only need go out with a large benchmark deal when there’s true quality of demand and can size the deal adequately.

EUROWEEK: So there must be a positive view towards the Dutch public sector, internationally speaking. Eilering, Rabobank: Yes, and roadshows explaining the credit story is a strong element of that success. I think there’s been a huge amount of noise because of the fundamental problems that Europe is facing and in particular Eksportfinans. Investors will look at the correlation with the euro’s fortunes. We went through that phase in the beginning of the year explaining this, also by roadshowing many European agencies to Dutch investors to clear the story and take away the anxiety.

Internationally, there are a lot of isolated points that come up that have nothing to do with the fundamental stories of the Dutch agencies, but make the meetings more attractive as they cover all aspects of Dutch society. In general, there’s a massive difference with roadshows compared to the old days.

What used to be a struggle has become much easier to get quality meetings in place as investors no longer view it as a homogeneous asset class and show up with large groups... prepared!

EUROWEEK: Bart, do you find yourself explaining more about the bigger European picture on roadshows?Van Dooren, BNG: Absolutely, yes. As Rob was saying, where in the past the only questions were, what is the size, maturity and price guidance of the deal, nowadays, you see a bunch of credit analysts opposite you, and they’re not relying on the reports of the rating agencies, but they do the homework themselves.

They really go through your annual report. They have really detailed questions. They know what’s going on within Europe. I think they are very well prepared before entering the meeting, and you have to be prepared for questions other than those you were asked in the past.

Meuwissen, NWB: The quality of the meetings has improved and it’s much more satisfying actually because the investors really have an interest. So it’s not only about the Netherlands and the economy, and the austerity measures, but about the guarantee scheme, the housing market and stuff like that.

In your question, you pose it as if it is a problem being small, but actually I don’t see that as being a problem. It’s more that investors are screaming for paper to come, than the other way around. On our latest 10 year euro issue, we also had an order book of close to €2bn. We’ve never experienced that before, I can tell you.

EUROWEEK: Small can be beautiful.Meuwissen, NWB: Yes, but also the bigger issuers — like the KFWs and the EIBs — all have their own story and a more European story to tell, while we are maybe a bit more distant from that.De Bruin, F&C: Yes, at the moment you have a very conservative story to tell the investor, and you can present yourself as a boring credit. That makes investors happy and then they want to invest in longer maturities also. As Tom was saying, having an order book which is €2bn or more really helps and that gives you the impression that you are doing your homework well as an issuer.

EUROWEEK: Is there any particular interest from investors in learning about the Dutch story in general or are roadshows still just very credit-specific sessions?Meuwissen, NWB: You can say it’s top down. When investors feel comfortable with the Netherlands, they dive more into the Dutch agencies, and the moment they feel happy with that, they will ask the questions they want to ask.Nijsse, DSTA: It would probably be interesting to hear from Michiel whether he thinks the meetings are more interesting? De Bruin, F&C: Absolutely. And we also like to see liquidity aside from large order books. It shows, I think, that investors generally have confidence in bond issues. Secondary market liquidity is quite erratic at the moment and that’s something, as an investor, you have to cope with unfortunately, and I can only say that it would be nice if it would pick up again. There is much less market making now. It’s really a matter of getting axes, and you have to have a little bit of an opportunistic approach with your counterparties, and you also need more local houses to deal with.Van Dooren, BNG: Investors are so demanding! They want performance, they want liquidity in the secondary markets, they want to have their cake and eat it!De Bruin, F&C: Investors have invested reasonable amounts into the market. So to be able to trade, for an investor, is of significant importance.Meuwissen, NWB: But, when you look at liquidity, is it more the ability to sell or to buy?De Bruin, F&C: Both, I suppose. Liquidity depends on where the positions are. Some people are looking for bonds, some people are offering bonds.Meuwissen, NWB: Well, we always like to think that our investors are mainly buy and hold, so it’s more difficult to buy when you want to buy €50m or €100m of NWB bonds. It’s very hard to get that size, but I can imagine that for an investor, it’s more important to have the ability to be able to sell the paper. That would be my preferred liquidity.De Bruin, F&C: Yes, but it also depends on positions with counterparties, and I’d say market making, more or less, has faded quite a bit.

EUROWEEK: Do you find that liquidity varies from issuer to issuer or from dealer to dealer?De Bruin, F&C: It very much depends on the broader market circumstances. Even with very large issuers we have seen limited liquidity, in say Dutch government bonds, when the coalition broke up in April.

I would like to encourage issuers who hire syndicates of banks to make an effort to maintain liquidity as much as possible. It has always been quite an important measure in markets, and this is a large, liquid market.

Meuwissen, NWB: But how do you do it as an issuer? Let’s say we talk about benchmark deals. You don’t buy your own paper. What can you do about it? It’s really up to the banks and of course, as an issuer, you can put some pressure on that and select the banks, but still, you can’t control the process. Nijsse, DSTA: The different sizes of our debt make it possible to do different things as does a presence in different sorts of markets. But we obviously try to do everything to keep our bonds liquid. We have a primary dealer system, where we judge our dealers on quotation of our bonds, and there is inter-dealer quotation, but at least there is a tradable price in the market, and the investor can see that price, and can use that it. It also means that the investor knows that the bank can always be hit, or it can always lift the price of a bank to obtain a bond.Meuwissen, NWB: Still, it’s up to the banks.Nijsse, DSTA: We don’t buy the paper ourselves. We have to make sure that the banks can fulfil that role, and that they can provide liquidity. We have a repo facility for the banks, in all our bonds, with a penalty interest rate for all our bonds, to borrow them, if they’re not available in the market

We have to make sure that at least primary dealers can fill a short position, and that makes it possible for the banks to take, or another dealer to take, a short position, because he knows at least, if he takes a short position, he can obtain a bond. So we try to concentrate our euro issuance in large liquid, standard maturities, which we bring up to large volumes.

We increased the minimum liquid volume a few years ago to €15bn, to approach more the sizes of French and German issuance volumes, and by being predictable and issuing standard maturities, and issuing large sizes and reopening the deals.. It increases the liquidity, but I’m fully aware, that’s easier to do with a €60bn funding requirement than for the agencies here.

Meuwissen, NWB: Well, we always say that we have the same credit risk as Dutch sovereign bonds but with a pick-up for liquidity.Eilering, Rabobank: We’re now looking at a malfunctioning market. Most banks are willing to put up liquidity and support the new issues, but at the same time we need to know that there is a market out there, that we can sell our bonds and hold a position for a bit longer and not get caught even in this irregular market. Nijsse, DSTA: One thing, that as a sovereign issuer you can do, I think, is to try to limit volatility, because larger volatility makes it more difficult for a bank to hold larger positions on the books. Some issuers have maybe caused volatility themselves around auctions, and that’s certainly not helped in making sure there is a secondary market or liquidity in your bonds.

Michiel, do you see the buy side being involved more around the current business trading platforms? Would you behave differently, or would you be more a liquid provider?

De Bruin. F&C: I’m not sure if the buy side should become a liquidity provider necessarily, but we would of course be very interested to see what buy side trading systems could bring for us. The transparency may help.Nijsse, DSTA: We have to see how it develops still.

EUROWEEK: As the middle man in this arrangement, what can issuers or investors do to help banks provide better liquidity? Banks are operating under growing constraints?Eilering, Rabobank: The regulators are looking for a very safe market and want to de-risk banks, hence no proprietary trading, more claw-backs, and more capital allocated etc. All of that could further fuel future volatility, because banks are not always able to set up the other side of the trade — especially in times when banks are simultaneously forced to lower their long positions.

The knock-on effects — especially on liquidity and volatility — mean everybody is now hoping for the central banks to help us out again, which from a macro perspective is far from ideal.

We need to be honest that there is a fair share of the banks that maintain orderly markets and take large amounts of secondary trading risk.

There needs to be some recognition of what the banks do, that they make the market function, because right now, there is growing downside with increased liquidity and capital cost, with limited upside, especially with the growing high volatility in the markets.

EUROWEEK: It’s been the case recently that there’s been something of a decoupling between Dutch and German spreads, and I wondered if everyone here thought that was justified, and why it had come about?Eilering, Rabobank: I would like to hear the view of the investors here. There is of course a decoupling because the bonds have become awfully expensive, but if you look at the sovereign’s recent DDAs as well as the agency deals in the Netherlands, they’ve been trading pretty much sideways, if you compare it to a swap basis. So from that perspective, I don’t think there’s been a decoupling or that the Dutch have moved out.

It’s more that the Germans have, from a credit perspective, moved in so much. And from that perspective, everybody is focusing on the Bunds versus the DSL versus the Dutch agency.

But from a credit perspective, I think it’s quite neutral, and more a reflection of the core flight to quality and a matter of liquidity.

EUROWEEK: It’s effectively just a liquidity premium then? Nothing has changed between the two credits.Nijsse, DSTA: I was surprised by the question. I wouldn’t consider it a decoupling, even though the spread has widened somewhat.

Bunds and DSLs are all moving very much in tango still. Over the past years, we’ve seen spreads widening gradually, but I don’t see a decoupling.

There was widening only after the government coalition fell, and there was some uncertainty in the market. As soon as it was clear there would be a five party agreement on budgetary savings I think the Dutch spreads came in.

EUROWEEK: Is that the point which you reallocated your exposure to domestic credits, Michiel?De Bruin, F&C:Everything is relative. There’s volatility in Dutch spreads versus German Bunds, but still, relative to the volatility seen in other countries, it’s fairly mild. After the Dutch coalition fell, it showed us that Holland is not isolated to these political events anymore. There was a lot of urgency, I think, in parliament to come up with a new budget It will be very interesting to see how the Dutch market performs when the elections get closer.

As a credit, I would say that we are still relatively constructive about the Netherlands and we see it as a core market. Not so much has changed, but to maintain this reforms and austerity plans and so forth need to be implemented.

EUROWEEK: Given that relative volatility does anyone think it’s better to have a more opportunistic approach to markets, or to maintain a strategic one?Meuwissen, NWB: Where do you see the difference between being opportunistic and strategic?

EUROWEEK: The degree of predictability an issuer offers.Van Dooren, BNG: The predictability in our funding programme is more related to you having the commitment to capital markets to issue benchmarks in euros in fives and 10s and dollars in threes and fives.

It really depends on what investors are asking for and what kind of advice you are getting from the banks. You try to combine those elements as much as possible.

Next to the benchmarks in euros and dollars, you can say the rest of the funding is opportunistic. As we discussed earlier, we have to swap all dollars back into euros so you have to compare it with your funding costs in euros. When you are targeting a 10 year dollar, if you have to pay up one or two basis points, compared to euros, you can see it as an alternative, but the extra cost should not be more than five or 10 basis points, because then simply I can’t justify it to senior management.

De Bruin, F&C: We invest for a medium to long horizon, but have an active tactical approach to our portfolios. So, depending on value, depending on changes in how we see the credit, we change the holdings in our portfolios. I’m not sure if that’s an opportunistic approach.

That is, I suppose, a sensible approach to managing our clients’ money.

EUROWEEK: What works better for you though, as an investor? Is it an issuer that comes with, say, threes, fives and 10s every year, and nothing else, or is it someone who will pick off an opportunity when it’s there for them?De Bruin, F&C: There’s no single answer to that. There can be pockets of demand from certain points on the curve, and if that is being satisfied by an issuer, that’s fine. That’s not a problem.

With regard to government bond issuance, maybe there is a difference. There the aim is to maintain liquidity across the curve.

Meuwissen, NWB: But, it’s a nice question, so for instance, we have issued a 10 year euro each year, normally in January, for the last 10 years. Do you value that as an investor?De Bruin, F&C: Yes, I think predictability — to some extent — is very good. You know where you are.Meuwissen, NWB: But, the predictability then is that it’s a 10 year every year, but you don’t know when. Could be January, but it might also be April, for example.De Bruin, F&C: It’s nice to know where you are with a certain issuer, but if timing changed marginally, I would not be too concerned.Meuwissen, NWB: It also depends on how big your funding programme is. For us, maybe the strategic importance is less than it is for KFW, I can imagine.Nijsse, DSTA: We think that it is very important to be transparent and a beacon of predictability and stability in a market which may not always be stable. Especially in times of crisis, it’s very important to be very predictable.

To manage your issuance so that investors know what you’re going to do — so they’re not so surprised. Many investors don’t like to be surprised.

If you announce that you will do a certain size, but then you suddenly do much more, investors don’t like that. Or if you announce an issue and you suddenly cancel it, investors don’t like that either. They will get their own back in the future. That’s why we have always been predictable but we feel it’s even more important now to announce our programme, and announce the dates long before we issue.

De Bruin, F&C: Transparency is an important thing for us.Van Dooren, BNG: That is the contract we keep to in euros, and of course how we operate in dollars. But in euros, we want to be predictable and consistent and do the same thing. We are more or less boring. We think that’s what investors like to see.Eilering, Rabobank: Investors are used to having a sovereign issue calendar, and that also sets the tone for the agencies to time their new deals. It can help markets to have a very stable formula, and for the agencies, of course, their function is much more to be receptive to where the pockets of money are, and work on that basis. That leaves you with two very complementary sets of issuers in the market. From a banking perspective, we’re pretty neutral to both. But, from an overall market perspective, it makes sense to have two sets of issuers deciding when to issue and when to push the button driven by different terms and under other market conditions.

EUROWEEK: What are your biggest concerns for the next 12 months? Tom, perhaps we could start with you.Meuwissen, NWB: Well, that’s difficult. When it comes to NWB your general concern should be availability of funds but that’s far off being a worry right now. Even if we were not about to issue anything more this year, we could leave it at that.

The general concern is more what’s happening in the world, the whole situation with the euro, the elections in many countries, the austerity measures, the economic growth and the Basel III rules for banks. But when I look at NWB, I don’t have that many concerns at the moment.

EUROWEEK: What about for the Dutch SSAs in general? Are there any concerns?Eilering, Rabobank: No in general the concerns are not so much on the Dutch credit — but it’s more the regulatory side that will hit the banks combined with the recent and future downgrades.

That means banks really need to hold much more capital and larger amounts of liquidity. What kind of impact will this have on the more general markets?

What kind of impact will CRD4, Basel III have on a well functioning swap market and the ability to provide liquidity? The concerns are more general than selling the Dutch story.

Van Dooren, BNG: Normally, at the end of the year, we always look back and say the year wasn’t that difficult getting the funding on board, but next year...

I think the outcome of the Dutch elections, and the way the rest of Europe or the rest of the investor community looks at the Netherlands are concerns.

I think a long period of forming a new government, getting through the polls, is going to be pretty difficult. Then again, I could be wrong. Look at what happened to Belgium, they took I don’t know how long to form a new government and in the meantime, they did pretty well.
So, all in all, I think the debt crisis in Europe worries me most, and of course, next to that, the formation of a new, stable Dutch government.

EUROWEEK: Michiel, if Tom’s not concerned about any availability of funds, presumably your concern must be not being able to get hold of enough paper?De Bruin, F&C: We invest in Dutch agencies, but also in many other issuers from different jurisdictions.

If you look at the Dutch agency market, yes, of course a concern may be sharing with Bart the uncertainty over top-down developments in the Netherlands, to see if there is any reform and stable government. We will also follow closely the development of the Netherlands as a credit.

I broadly share the concerns with many people in the markets — how the euro crisis will evolve in the coming months.

Van Dooren, BNG: Markets are expecting a solution in the short term, but this is the kind of issue which takes years to solve, so we will see volatility in coming years, for sure.

EUROWEEK: Peter, what’s keeping you awake at night?Nijsse, DSTA: Awake at night? Not many of those issues, but I wouldn’t call them concerns, more uncertainties that we have to live with.

Our biggest uncertainties are the European developments – political uncertainties and political decisions and how to move on.

EUROWEEK: It’s not actually having a cost for you as such though is it?Nijsse, DSTA: That’s why I would call it an uncertainty rather than a concern. We’re very strong believers in markets. There’s always a price for which you can sell your bonds, and the price may be somewhat higher or somewhat lower in the current uncertainty.There is clearly a run into core triple-A credits, which has benefited immensely our bonds. But what the future looks like is somewhat unclear. We are very confident in the policy making capacity of the European system of course, but there choices will have to be made.
02 Jul 2012