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Agencies work harder to keep relationships sweet

01 Apr 2012

The agency sector has had a better start to the year than anyone dared imagine in the last quarter of 2011. Two rounds of European Central Bank long term refinancing operations have left the market awash with liquidity.

Issuers came out of the gates apace in January, swallowing large chunks of funding to get ahead in what could be a volatile 2012, and now many are comfortably funded for this point in the year.

But the crisis has provoked a change in attitudes. Investor relations are tougher, in particular following the junking of Norway’s Eksportfinans after the government withdrew its implicit support in November.

Participants in the roundtable were:

Lee Cumbes, head of frequent borrower origination, Barclays

Holger Dohra, head of investor relations, Erste Abwicklungsanstalt

Stefan Goebel, head of treasury, Rentenbank

Eske Hansen, head of funding, Kommunekredit

Joakim Holmström, head of funding, Municipality Finance

Willem Littel, senior manager, capital markets and investor relations, Bank Nederlandse Gemeenten

Petra Mellor, senior manager in funding, SEK

Tom Meuwissen, general manager, treasury, Nederlandse Waterschapsbank

Bill Northfield, head of sovereign, supranational and agency origination, Deutsche Bank

Samantha Pitt, group treasurer, Network Rail

Kai Poerschke, head of origination, capital markets DZ Bank

Patrice Ract Madoux, chairman of Caisse d’Amortissement de la Dette Sociale (Cades)

Rodrigo Robledo, head of capital markets, Instituto de Crédito Oficial (Ico)

Ulrik Ross, global head of public sector debt capital markets, HSBC

Marius Ruud, senior vice president in international funding, Kommunalbanken (KBN)

Raymond Seager, co-head of public sector debt capital markets, Bank of America Merrill Lynch

Sean Taor, head of debt capital markets, Europe, RBC Capital Markets

Petra Wehlert, head of funding, KfW

Toby Fildes, managing editor, EuroWeek (moderator)

Ralph Sinclair, SSA markets editor, EuroWeek (moderator)

EUROWEEK: How can issuers market themselves to investors better?

Petra Wehlert, KfW: The key to reaching investors is to react flexibly to new developments. For example, investors increasingly visit us during their trips to Europe.

Another trend is that they typically don’t want to talk about KfW. Everybody seems to be completely fine with our business, our positive results, and most importantly our direct and explicit guarantee. Typically the discussion is about Europe as a whole, where investors want to hear our view. Hence we reacted and amended our presentations accordingly and at times also include our economists in those meetings. Obviously we also keep on marketing our name, our business model, and our credit during roadshows and on conferences.

Finally we feel that every transaction is marketing — and we typically approach the market in a fair and responsible manner. We care about placement, liquidity and performance and find that investors appreciate it.

Samantha Pitt, Network Rail: As an issuer it has become more important over the last six to 12 months to focus on investor relations. Certainly we’ve stepped up our investor relations activity, having done roadshows in the US, Asia and most recently Australia. You have to differentiate your credit. We have emphasised that we, as a UK government guaranteed issuer, are outside the Eurozone. Issuers also have to make it very clear as to the form of their government support, whether you’ve got a direct government guarantee (as Network Rail has) or implicit government support. We are getting more and more questions from investors and we will continue to be more focused on investor relations.

Patrice Ract Madoux, Cades: Investors have to do their job, their own work themselves, instead of looking at what the rating agencies come up with. They have to check the credit. We have to answer their questions so that they are able to check our credit and see that we may be better than what some rating agencies say.

EUROWEEK: Are you suggesting that in the past they perhaps didn’t do their work properly?

Ract Madoux, Cades: We have come from a world where everybody was rated triple-A, so there was no work to do when you were an investor — you just had to choose among the triple-A names with a throw of the dice. Now you have to look at what issuers really do and what kind of job they have, if they are going to pay back the money you are giving to them. We have no problems with investors on this side.

Rodrigo Robledo, Ico: For the Spanish issuer, investor relations are key. It’s very important to speak to investors face to face, to let them know what is happening in our economy. Investors are demanding more and more information. It’s crucial for us to identify investor needs, to focus on those investors who are willing to buy our paper and to give them the right information. We are doing more visits than ever, complementing them with further information afterwards. We send out a quarterly newsletter with key information on Ico: corporate, funding activity and also the Spanish economy.

When the government undertakes new reforms we send investors information because, for a Spanish issuer, it’s more important than ever to keep them posted.

As I have mentioned, investors are asking more and more questions because they want to know not just about Ico but about the underlying economy. The government is attaching a great deal of importance to transparency. A year ago, when we met some investors, they told us: "I like the story, I like the name but I cannot buy." Now they are saying: "I know what’s going on and there is a price," so they are prepared to take on Ico risk.

Tom Meuwissen, NWB: There’s definitely more explaining to do. In the old days it was quite an easy story where the rating played a leading role. Now investors are looking more into your business model and at the broader picture as well. The Dutch economy is much more in focus, so we spend more time in our presentations on that, and investors examine the quality of assets in a much more thorough way. They look at what the nature of your guarantee if any is, as well as the involvement of your shareholders, especially since Eksportfinans. Yes, it’s tougher but that’s also interesting.

Petra Mellor, SEK: It’s very important to meet investors face to face, to explain the credit and to be very transparent. Investors want to know more, they want to know what kind of exposures we have, what our assets and liabilities are, and it’s very important to meet them and explain these issues.

We have seen an increase in that trend since Eksportfinans. Being from the same region and in the same sort of business as them, it has been important over the last few months for us to explain the big differences between us: we are 100% owned by the Kingdom of Sweden, we have a more diversified export industry and we comply fully with the EU Capital Requirement about large exposures.

EUROWEEK: Is that something any other Scandinavian borrowers have found and how has investor perception changed since November?

Joakim Holmström, MuniFin: Unfortunately the Eksportfinans event also had an impact on our bonds, causing our spreads to widen and so forth. Investors raised a lot of questions, especially in Asia where the whole of Europe is seen as one region. Scandinavia has benefited from a safe haven image in the past and MuniFin has benefited from that. MuniFin as an agency is a completely different entity, so we managed to explain our credit to investors and give them more comfort that, first, our bonds are explicitly guaranteed and, second, we have a strong ownership structure and the owners are committed to our institution.

Marius Ruud, KBN: It was important to go out and meet the key investors and tell our story again to all investors. There is a vast difference in the connectivity between government and KBN versus government and Eksportfinans. That goes beyond direct ownership but also concerning governing bodies, mandates and oversight. On the same date as the seven notch downgrade of Eksportfinans on November 22, the ministry of local government came out with a statement confirming no change in the government’s policy towards KBN.

Willem Littel, BNG: You have to try to distinguish yourself from other parts of Europe. You have to be very careful with stories like ownership. Before you know it, it ends up in some kind of a conundrum about how you’re talking about guarantees. Explicit guarantees are simple but an implicit guarantee doesn’t really exist.

What is very important is to explain your business model — to explain not only the quality of your assets but also your risk management process, how you manage credit risk but also operational and liquidity risk. That works, but you need to be transparent.

EUROWEEK: We haven’t heard from our German issuers. Has it all been plain sailing for you guys in the last 12 months?

Stefan Goebel, Rentenbank: Being a German agency with stable triple-A ratings and limited funding needs is quite a benign position to be in. I fully echo the comments from other issuers, though.

Even before Eksportfinans, investors felt compelled to look through the ratings and to better understand business models. However, before Eksportfinans, questions about the business model were asked in a rather automated manner but after Eksportfinans, the validity of the question for the agency sector became very obvious. Only if your business model is sustainable, if you’re really making an understandable, sustainable, long term contribution to government purposes, then investors can rest assured that you will be around for the lifetime of their bond holdings. Today, all questions surrounding business models matter, whether you’re triple-A rated or sub-investment grade.

Wehlert, KfW: KfW as a Bund surrogate has benefited from investors’ requests for safe haven assets throughout the year. However, our spreads did widen to some extent in the fourth quarter of 2011, partly due to investors’ European debt crisis concerns but also due to year end effects. Dealers closed down books early, liquidity in the market was quite thin.

The Eksportfinans case happened in a critical situation in the markets, fortunately in an illiquid environment — but certainly took the market by surprise. Although the event had little to no effect on us as an issuer, we noticed elevated concerns on the European SSA market talking to investors, especially in the US and Asia. But ever since the risk-on sentiment returned to markets in 2012, the issue has become less important. We’ve had, for example, a very good start in the dollar market this year and continuously placed bonds with US accounts.

EUROWEEK: Holger, you’re a relatively new issuer, of course.

Holger Dohra, EAA: We have been issuing for just one and a half years. As a new issuer, there is a strong link between meeting investors and them showing up in our order books. It’s proof that personal direct contact is very much appreciated by investors.

We have to invest a bit more time these days because we don’t just have to explain about our credit, we also have to explain what’s going on in Europe, particularly when we go to the US or to Asia. To answer the question about what to do to improve investor relations: I would like to split myself in half.

EUROWEEK: What can banks do differently to engage their sales forces and investors?

Sean Taor, RBC: I agree with all the comments so far, particularly around business plan and ownership structure, which wasn’t really a question for most investors a year or so ago. The timing of Eksportfinans was particularly unfortunate because it happened when the market was already struggling. It was another nail in the coffin, which is why the markets at end of the last quarter looked so bleak.

Things have improved dramatically and even with Eksportfinans there is good news. They fully paid a $1bn dollar deal down that matured in February and there’s a lot more confidence that they’ll continue to do what they have always said they would do — pay down their debt in full.

As a bank we’ve had to dig into the issuers and what they do, the exposures they have, the ownership structure they have, and articulate that both internally and externally.

One of the obvious points over the crisis is that there has been a lot of change of personnel, both on the investor side and on the DCM side, and relationships and experience count, particularly in challenging markets.

Issuers have embraced going back to basics with specific clients explaining what they do, what their model is, not just what their rating is and what their funding programme is. The banks have embraced that as well because, frankly, the art of selling new issuance had diminished over the years.

EUROWEEK: Has your job got harder, Bill?

Bill Northfield, Deutsche Bank: My job has become a lot more interesting. Yes, the Eksportfinans issue narrowed the focus on ownership but the trend of investors focusing on asset quality and quality in risk management policies was prominent before that.

Our role as intermediaries between issuers and investors hasn’t changed, but it’s much more intriguing. It’s about credit differentiation — issuers aren’t all triple-As together anymore, we have to justify in greater depth why are we pricing a new issue relative to another name and how we will position it. These relative value discussions with investors or our sales people are a lot more interesting than three or four years ago.

Raymond Seager, BofAML: There are different methods in which you can convey information now where the banks act as agents. In investor meetings now, it’s often more important that you meet a credit analyst than the portfolios managers.

Time and time again you get a portfolio manager who says: "I’d love to buy", but an asset allocator or a credit analyst has said: "Europe’s out", or "explicit guarantees only". A bank can add value by seeking out exactly what part of an investment firm you need to meet to get approval on a name.

The relations part of investor relations has been pushed to the side and it’s become much more about updating investors through real time delivery of information. So, banks can add value through conference calls where you can get the issuers directly involved, or by having a much more educated sales force about the issuers so that you can deliver that information in real time.

Northfield, Deutsche Bank: That’s something the borrowers have helped us with. Our sales people are ambassadors for any borrower sitting at this table and we have to make sure that they’re up to speed on everything, the minutiae of what the relative credit differentials are.

Borrowers have been much more responsive and more proactive in working in partnership with us, and that’s a welcome challenge.

EUROWEEK: Have banks had to find new ways of getting sales people interested? Have there been any new concerted efforts to engage sales people in the SSA sector?

Taor, RBC: Banks have gone back to the old ways. A lot of aspects were taken for granted when everything was generic and are now not so.

Pricing is harder, underwriting risk is harder, balance sheet is tougher to find, but it is more rewarding when you get it right. We’ve all been pleasantly surprised just how good the year has been so far. But the market was ahead of itself back in 2007 when everything was more generic.

Now you just have to put a bit more work into deals than you would have done years ago.

Kai Poerschke, DZ Bank: Investor relations work for SSAs has come closer to the investor relation work of other asset classes like covered bonds. Investors are drilling more down into the risk structure. Issuers have to go back to the basic groundwork, and they are willing to do that.

But it does depend on what kind of investor base you are marketing to. If you are meeting Asian investors you will need to have a much more global approach and explain in greater detail what the economic situation is in Europe, and then — as a next step — go into the respective business model. In contrast, if you are travelling around Germany the investor focus is on an issuer’s credit profile, its guarantee structure and asset quality.

Ulrik Ross, HSBC: Investors have become a lot more professional in asking more detailed questions, especially about minority ownership stakes. It can be a challenge to align stakeholder interests with public policy roles.
The Eksportfinans case is a unique example. The majority of global issuers are well aligned in terms of ownership and public policy roles.

The sales force is also evolving based on its dialogue with investors, who are starting to ask questions about ‘what if’ scenarios and how to handle difficult situations, instead of a historical focus on credit fundamentals and the prudence of business models.

The technicalities of the discussion are evolving — the rating agencies are going through a tough period where they are reviewing their rating methods. This is a natural evolution coming from investors’ needs and a changing regulatory and macro environment which is filtering through to the issuers.

This recent uncertainty and volatility has created a lot of value for investors.

The question for investors now is what will the year look like? I can see a year of two halves, but driven by different factors. Right now we are in a liquidity driven market but in the second half we could return to a focus on macroeconomic fundamentals and the impact of the real economy on borrowers.

Lee Cumbes, Barclays: Engaging sales people is vastly different to four or five years ago when our sector was very reliable, trading in a narrow range, bought for its rates propensity. Now the sector — or the government issuers that are closely related to the sector — are at the centre of everything.

The level of interest is so high that investors don’t wait for the issuers to come to them. We’ve had experiences where investors go on reverse roadshows. Investors don’t want to just talk to the government, which has one side of the story, but they want to talk to other important institutions for the economy too.

Everybody here has been working on how you best present yourself to the market for a long time. One to one meetings, emails and use of websites are successful. It’s not a static situation though. Issuers need to adjust to suit their situation.

One area that we might take for granted, but is hugely important in investor perceptions, is being consistent around execution. When I talk to sales people, often what sticks in their mind is the nature of the execution. An issuer that is able to show a degree of performance potential in their deals — an issuer that is consistent in how they execute with an investor focus — that stays in the mind of the buyer.

Meuwissen, NWB: When you meet an investor it is important who is in the meeting on the investor side, and sometimes there is room for improvement there.

You can see a particular investor but you might only have seen a very small part of the institution and it might not have been the most relevant part. For instance with a big investor you see the person for the dollar portfolio but you also might like to see the person for the Australian dollar portfolio or the euro portfolio. Of course the credit analyst is also important. So having seen one investor doesn’t mean that you have covered that one properly. It relies very much on how they spread your information internally.

Here is an important job for the sales people. They should know who should attend the meeting. As an issuer it’s tricky. The banks always want to take you on the road and then you sometimes feel that they have to beg to get you in. Especially as a triple-A I can imagine investors think: ‘It’s triple-A, we have lines for them, why bother to see them?"

You don’t know what’s behind the scenes before the meeting has been set up and of course we understand that investors can be busy.

Seager, BofAML: There’s no uniform approach from investors. Not to generalise too much but often they fall into two camps, one that wants to sit on the desk, wants to do their analysis in their time, then one camp that wants to meet investors and get the information that way. That is not uniform among the investors, not even within types of investors as to how they operate. On the whole, it’s clear investors want more updates from issuers now and to involve more parts of their institution, which means issuers should be on the road more. But it’s true, we do run into trouble on availability now with such volatile and busy markets, investors can be reluctant to leave their desks.

Northfield, Deutsche Bank: Tom raises an interesting point about a single investor having many different portfolios interested in meeting the same issuer or, indeed, the issuer wanting to meet several different portfolios because they have access to several different markets. That’s something we didn’t have 10 years ago. Back then, if investors were running dollar or euro portfolios, it’s likely they didn’t also have sterling or Australian dollars or non-core currencies like Norwegian kroner or Swedish kronor. These days it’s a quality challenge for us to try to deliver several portfolio managers at times when, as Raymond says, people are often busy. Schedules are packed. You have to work roadshows around priorities. But it’s a welcome development that you’re in demand across many different portfolios.

Ross, HSBC: Some investors even have limitation on how many meetings they can have in a year. It can be challenging if you have recently had the CEO in town and now the funding or investor relation team wants to meet the same investors a few months later. We are aware of the different constraints on the investor side, however they are keen to learn more if there are any potential credit questions.

We have to listen to the investor feedback, and to work with issuers on where they spend their time the best and then try to direct the effort where it gives them and the investor the most value.

Typically when you do go on a roadshow you want to see all the biggest investors. If you go there twice a year and have no big changes in your credit story, I can understand that the investors sometimes give the feedback that one update a year is enough. I understand the frustration as an issuer. A bank can’t control an investor but we can make sure that we communicate clearly between the investor and the issuer to optimise the best use of time and effort.

Northfield, Deutsche Bank: It’s a good point about optimising access. As Sean was saying, it’s back to basics. Sometimes travel budgets or time slots aren’t helpful, so you resort to conference calls or have your local team picking up on it or you educate your sales force better in the local office. There are many different ways to solve a problem.

EUROWEEK: Are the agencies around the table coping better than expected this year in the face of the sovereign debt crisis?

Wehlert, KfW:
Yes, 2011 really ended in doom and gloom. In 2012, investors had to invest their cash and the spread environment was considered attractive again.

KfW is now the tightest name out there and has been benefiting from safe haven investors. In markets like the Australian dollar market where spreads were at highs, we could open the markets very early — we had not expected such a quick recovery.

In all currencies there is now a convergence happening with all the credits performing well and new issue premiums going down. Our funding is currently at €27bn with an average maturity above the annual target. We have issued the whole curve — that is three, five and 10 years in dollars and on the euro side a €4bn 10 year and €5bn five years already. All bonds performed in liquid size between $3bn-$5bn in dollars.

Robledo, Ico: Yes. It’s clear when you look at last year’s outcome. In a challenging year like 2011 we were able to complete our funding for €22bn and at the same time frontloaded €5.5bn.

If at the beginning of last year, somebody had told me that we would be able to do that I would have thought it was very optimistic.

Our philosophy is always the same. You have to be nimble and flexible. First, you identify windows and, when there is one, take the opportunity to print. Looking at what we achieved last year, I feel rather proud, quite optimistic and really confident about the future.

On the other hand, there is always room for improvement — we need to continue being transparent and providing information, letting the investors know about Spain’s reforms. We’re moving in the right direction. So far this year, we’ve netted €8.5bn in six weeks.

The good news is that international demand is returning. There are some key European investors that have now come back to our paper. What’s more, others are asking more questions, so we think that they see that there is value in our story.

EUROWEEK: What do you think has switched them back on again?

Robledo, Ico:
The general feeling is that something has changed in just two months. The government has made impressive reforms in different sectors. This change is being perceived by investors who had gone elsewhere but are now coming back.

Ract Madoux, Cades: The difference between last year and this is quite strange. At this time last year we were finishing roadshows in the US to sell our new 144A programme and then everything stopped in June. All the US buyers stopped, both for long term and for short term debt.

At the same time we had decided to visit new investors in Germany because we knew that something strange was happening, that France was drifting away from Germany, that German investors who would never have bought French paper changed their minds when they saw spreads of around 100bp between KfW and us.

We decided to make a specific effort towards German investors, even small German cities.

This showed when at the beginning of the year we sold two €4bn bonds and in each of those, a short one and a long one, more than one third of the book was German investors. This was great for us, it showed that German investors were happy to take 100bp of spread but at the same time they believed that French risk is not as horrible as people could think.

It is spread-driven but we are happy to print a lot of paper. Even though our spreads have gone wider, German rates are extremely low, so if we compare the financing costs we have now to the ones we have had since we were established in 1996, we are clearly getting the best level rates since we were formed. As we have to operate to 2025, I think it’s better to go fast and get these rates while you can.

We have almost raised more than the target we had announced at the beginning of the year but we are still going to issue lots of bonds up to 2013 or so.

Wehlert, KfW: Patrice, for KfW it is the other way round. The good thing is that French investors never played a big role in our programme, but certainly this market is harder for us to approach when KfW trades through OATs. However, I still hear from French banks that they need to diversify into German credits, which sounds a bit odd from our point of view, but those flows are happening.

EUROWEEK: But are you also, at the same time, giving thanks to Mr Draghi every morning? The LTRO, let’s face it, changed the attitude of almost everyone in this market.

Wehlert, KfW: Indeed, with banks showing increasing interest in zero risk-weighted paper and the fact that there is a lack of collateral and the drought of paper in secondary markets, we have seen a strong backing for new issues. Nevertheless, there has been broad demand for our euro benchmark issues this year, especially in the five year euro transaction which attracted over 40% of central bank participation — in absolute numbers €2bn.

Ract Madoux, Cades: The moves Mr Draghi has taken have clearly improved the situation. Not only on short term paper. We have had exactly the same type of success with the 12 year bond we issued, as with the short term. So it’s not totally due to the amount of three year money which is put in the market by the central banks, there are some other positive things which are in the European market.

EUROWEEK: Would anybody say that the influence of the LTRO has been a little bit overdone in this sector?

Littel, BNG: You can see it in the shape of your curve. If you look at the one to three year bracket, it’s easy to get your money on board but when you go longer, the curve steepens dramatically. Looking at the first half of this year, you have to make a distinction in currencies. The euro market has been very deep, maybe because of the help of the ECB. On the other hand, the dollar market is a completely different story and curves are much steeper there as well, especially for ourselves. In terms of tenor and currency, there are large differences between the markets.

In our respect the less good performance of the dollar market is because of two factors. That’s the Eksportfinans story and the European story. The further you get away from Europe, the more difficult it is to explain how Europe is built up and what the real problems are and where the measures are getting to and if they are helping.

The further away from Europe that investors are, the less they appreciate the nuances.

Goebel, Rentenbank: The impact of the LTRO is very much at least medium term, if not long term. Let’s just remind ourselves for a minute of the discussions we had towards the end of last year: that the banks would find it extremely difficult to refinance €200bn-€300bn of senior unsecured debt in the first quarter of 2012 and that they would have to tap the covered bond market instead which would push spreads for our asset classes wider, too. But it has been quite the opposite. Investors are going to get crowded out of senior unsecured debt because when that becomes due, if banks haven’t reduced their balance sheet by then, they’re just going to go back to their three year LTRO money and substitute large amounts of senior unsecured debt.

So, where are investors going to go? They are going to look for other assets yielding something: covered bonds. They have to move out along the curve to get reasonable spreads, following the flush of issuance at generous spreads in the first couple of weeks of the year. But issuers are getting more reluctant to pay steep issue premiums.

The money has to go somewhere. It’s in the system — which is probably exactly what the markets need short term — but certainly the controversy is rather what the long term effect is going to be.

Meuwissen, NWB: But maybe the interesting part is, of course, when you have access to the LTRO yourself, as an issuer. It’s an interesting debate. I don’t know about Stefan but you cannot get your three year money as cheap as through the LTRO.

Wehlert, KfW: The LTRO is medicine for the sick man and my first impression was that this could not help in the long term, but I’ve become more optimistic. Buying time is helpful to implement reforms and can be a long term help. The question is how much of this money will find its way to the real economy. For KfW spreads the performance is very healthy and our aim now is to bring down new issue spreads because we cannot observe high spread sensitivity.

EUROWEEK: Samantha, you’re obviously not a euro issuer as such. Sterling is your first currency, but you must have benefited generally from this improvement.

Pitt, Network Rail:
We’ve definitely benefited. You do sometimes have to remind some of those international investors that the UK is outside the Eurozone. We have benefited as investors currently perceive the UK as a safe haven and obviously that’s been evident not just for our name in sterling.

Our primary focus is probably strategically in dollars. We’re seeing more demand from international investors for our name in dollars but we can’t currently satisfy all of that demand with the size of our funding programme.

The other interesting dynamic since the beginning of this year is in sterling. There has been a lot more issuance in sterling, not just from ourselves but many other issuers around this table and that’s a reflection of many investors diversifying out of euros into sterling.

Sterling is become more of a currency of issuance for others around the table. But we are realistic. Our rating follows that of the UK sovereign and the UK is intrinsically linked to what’s going on in Europe — you can’t escape it.

We are mindful to keep a close eye on what happens in Europe, but we have benefited from the UK being set apart. When we did our dollar deal at the beginning of the year, we priced that two basis points inside KfW. It would have been unthinkable a year ago that we would price and trade around flat to KFW. It’s just a reflection of where the UK is seen versus Germany and where UK CDS trades versus Germany.

Mellor, SEK: It’s the same for us in Sweden. We have also benefited from being outside the euro. That’s something that we have to explain to investors, or remind them of, as well.

Taor, RBC: If we look back to the end of last year, when the banking sector was on its knees, many people weren’t sure that every bank could get through year end unscathed. Banks had to deleverage. A lot of people were looking into the future and predicting a banking crisis where many couldn’t fund, with some banks going under and resultant state ownership.

The LTRO clearly helped prevent that happening — if it was ever going to happen — and stabilised the banking system. It has improved banks’ equity performance, it has improved banks’ access to the markets, it has improved banks’ secondary spreads, and it has improved overall market confidence.

It has also meant that the banks do now have money they can put to work and to a degree the carry trade — banks buying government and agency debt — has happened.

The confidence that it has brought getting the banking sector stabilised initially and the secondary effects from it have been tremendously important — not just in the euro market, it has been important across all markets.

The dollar market has been tough for European issuers because many investors were unsure that what they’re buying will be trading where they bought it tomorrow, next week, next month. Not necessarily in terms of capital payback — the issue for investors is mark to market volatility.

The liquidity conditions in November and December were particularly tough. Spreads blew out on very little volume. That wasn’t unique to dollars but the dollar market suffered more than most, so seeing that market come back has been important.

Confidence has improved, secondary stability has improved, secondary turnover and volumes have improved. It’s a slow process but it has definitely improved. That’s why all of us have a lot more confidence now about access to markets in all currencies than we had in the first week of January when the euro market was looking good but away from that it wasn’t easy. The first deal in the market was from a Washington supranational, not a European issuer, as would be more often the case.

Cumbes, Barclays: There were definitely seasonal impacts to the difficulties at the end of last year. The market was thinner, which is usual, but to an increasing degree over the past two years. We may have to get used to that because some of the regulatory changes will reproduce it. As well as thinner liquidity, some key investors had stepped back in dollars and euros. When we came into the new year, the market was heavily short risk and so we were set up for some sort of improvement, if nothing else because liquidity had to improve. But the fact is that the rally started from December, around the LTRO, so it was a big event for everyone.

Ross, HSBC: On top of that we have €400bn of government guaranteed bank paper mainly redeeming in 2012. This, together with the LTRO, creates a wall of money out-matching the volume of supply.

EUROWEEK: Are any issuers seeing the benefit of that government guaranteed paper being reinvested in their bonds, as Ulrik is suggesting?

Goebel, Rentenbank: We are hearing back from the German domestic market that, for example, savings banks bought a lot of paper when it was issued and now that it is being redeemed they are reinvesting that largely in German agencies.

Wehlert, KfW: Yes, we have seen some flows, but given the strong demand for German paper in general and the LTRO, it is hard to say how big the impact from the redeeming bonds really is — but in general it is clearly positive.

Ross, HSBC: And central bank reserves are close to, if not at, all time highs. That is also being put to use in a good way. Bank deposits on central banks are also probably at an all-time high. This is a sure liquidity drive and without that LTRO support we wouldn’t have had the confidence back in the market.

We were questioning last year whether European issuers could sustain access to financing in the turmoil of the Greek situation. Now we are sitting back and saying it’s a non-issue because we have the LTRO.

Northfield, Deutsche Bank: The LTRO was extremely important because it showed that Europe and the Eurozone could take care of itself. In the second half of last year, a number of our investors in Asia were not interested in anything European, be it inside the Eurozone or not, and so the steps taken with the LTRO have given a great vote of confidence to the European system. That’s brought back on board investors in the Americas and investors in Asia for European sovereigns and their agencies. That trickle down effect can’t be underestimated.

Seager, BofAML: Most European issuers came in euros first this year. It was an important step that the issuers managed to fund successfully in their domestic markets first. And this was followed by performance.

For the non-euro investors, there were compelling relative value arguments as to why you should have been buying dollar SSA paper at the start of the year, but it was a question of having the confidence to put that relative value to work and riding any volatility. Issuers funded in euros first, to show investors that they could fund and well, that their domestic investors believe in them and that trickles through to dollars. It’s worked for some SSA issuers more than others. It’s working its way down the spectrum of the SSA borrowers. The LTRO engendered the confidence to enable that transfer mechanism to work.

Poerschke, DZ Bank: We have seen a lot of new investors, especially from small German banks, we’re seeing new names in order books. Definitely one of the reasons for that is the LTRO.

Another reason is regulation and the liquidity coverage ratio. Lots of banks are already positioning themselves in view of that. From that end there is a tendency to shift around treasury portfolios from, for example, senior unsecured bonds towards SSAs. That is also bringing in demand from investors which before hadn’t looked that much at the SSA segment. Solvency II creates a similar behaviour among investors from the insurance sector.

EUROWEEK: Given there have been few, if any, short dated SSA deals since the second LTRO, are the effects of the second LTRO going to mainly be felt in secondary markets?

Cumbes, Barclays: The LTROs have shifted the confidence dynamic. Adding more money will make it play out for longer. There’s a lot of money on deposit in the ECB which is going to take time to be put to work, however that plays out, in bank bonds, money markets or sovereign paper. I don’t know whether you get another super step up in confidence again. What it does is make it sustainable for longer. That time is key.

Taor, RBC: At the end of last year most European banks were suffering — their cost of capital was above their return of capital, they had to get their balance sheet down and that meant trimming costs and trimming capital, trimming headcount. That’s why secondary liquidity was so thin, which made volatility so high. That confidence has returned which means that secondary volumes are now a lot healthier. The secondary volatility is much less across all sectors but particularly in SSAs.

There’s a lot more confidence. But it also means that banks are more able to take secondary positions, and hold paper. It gives the market much more confidence when there’s a good two-way secondary flow, a return to normality in terms of primary and secondary trading. It makes primary underwriting easier because there’s a more defined and stable curve. It makes investors more confident because they can see the new issue premium and that has come down dramatically since the early days of January.

Having a healthy secondary market is crucial to a healthy primary market. Banks were so unwilling to underwrite in the old sense at the end of last year because they weren’t confident they could sell bonds and they were under a huge amount of pressure to make sure they had a clean balance sheet — that has now changed as well.

For most banks — but not RBC — year end is December. That was another big problem. Not only could those banks not necessarily fund, they had to get their balance sheet down for year end — at a time there were no buyers.

EUROWEEK: So, does that mean that all the discussions we were having with banks at the end of last year about the cost of capital and CSAs, derivatives and underwriting, is that no longer such a big issue?

Taor, RBC: It’s a different part of the same issue. If an indirect effect of the LTRO is a healthy and more stable secondary market, that’s hugely positive for the primary market.

All the longer term issues about return on capital, capital cost, Basel III etc, are not going away. One of the open questions is: has that affected issuers’ cost of funds, will it affect it in the future and will it change the industry? That’s one of the challenges the industry has, both on the bank side and the issuer side.

EUROWEEK: From the bankers’ view, what is the latest state of play with regards to CSAs and cost of capital use in the underwriting business? There were some compelling arguments for not underwriting and for getting issuers to sign two-way CSAs last year. Has that changed?

Taor, RBC: Well, from the banking side, I’d still say it’s the top of our wish list. It’s not what every issuer wants to hear, but it is still top of our wish list, because it’s a problem that won’t go away just because the markets are in better shape today.

Northfield, Deutsche Bank: We don’t have an option. We have to pass the cost on, and that’s something we’re locked into by regulation. A few years ago competitive forces meant we lost trades for it. But now it seems like everyone realises we’re on the same even playing field and everyone has to pass on the cost.

Wehlert, KfW: These are two aspects. One concerns the costs in the derivatives business. We are aware that costs of capital do affect cost of borrowing, especially in long tenors. But apart from the funding charges the credit charges, which are calculated from banks, are quite annoying, especially if you are a zero-risk weighted issuer.

We are seeing a diverse picture among banks due to valuation models of different charges varying among banks, different CSAs, as well as different regulatory environments for individual banks.

Being proactive and entering into open discussions with banks has been rewarding. We have been offering two-way CSAs since the financial crisis and are open to review existing contracts.

Secondly on the underwriting — no, we haven’t seen that banks are more restrictive this year, probably also due to the fact that there hasn’t been paper to take on the books, given the market environment — the real test will be if the market deteriorates again.

Pitt, Network Rail: Every bank has its own black box in how it prices derivatives. Some of them are complying with Basel III, some of them aren’t. We are seeing our cost of hedging increase.

Most banks want issuers to move to two-way CSAs. But we’ve also got to be mindful of the costs as well as the benefits of moving to a two-way CSA. Yes, we’re going to get cheaper hedging costs, under Basel III, from what banks are telling us, but we’ve also got to be mindful of the additional costs — there’s a finance cost associated with posting any collateral. And I’ve also got to be mindful of the additional work that places on resources from an operational perspective. We are undertaking that cost benefit analysis of potentially moving to two-way CSAs.

Ross, HSBC: Even more important from an issuer’s point of view, if you have to finance additional collateral postings it will be additional volume of financing you need to raise. This can be a challenge in markets where investors are sidelined. However, for most high grade clients this should be a non-issue.

We will move into an environment where we have more two-way CSAs, because that benefits both parties in the mid to long run. But we are in a transition phase, where everybody’s being scrutinised, especially on the pricing side. This will normalise at a new equilibrium over time.

Meuwissen, NWB: We see a lot of variety in what banks charge us for CSAs.

Ross, HSBC: Banks have many more parameters they need to price internally. And then the question of how to determine your financing costs as a bank for different business units can be complex.

Some issuers are focused a lot on pricing rather than volume or access to volume. Concentration risk is important for some issuers, less so for others, and again, there will be banks that operate in one way and others in different ways. At some stage there will be an equilibrium as a large borrower will quickly exhaust those "out of the money" lines over time.

Meuwissen, NWB: And it also depends on how you use your derivatives as an issuer. I mean, do you also have your asset liability management swaps on the other side?

Robledo, Ico: Over the last two years we’ve had pressure from some international banks pushing us to go to the two-way CSA. We still have a one-way CSA. It’s true that some international banks posted uncompetitive levels sometimes with large differences among them, and that is difficult to understand.

At the same time there is a group of five banks, both domestic and international, that are still providing good levels. As a result, we have signed a one-way CSA with them and we are still comfortable.

There might be a time when we’re able to sign two-way CSAs. Nowadays, competitive banks consider not only the direct cost charged but also the global revenue from a frequent, high volume issuer.

We are in a comfortable position for the time being, although I don’t deny that if the situation continues deteriorating, we will have to consider two-way CSAs.

Holmström, MuniFin: We have two-way CSAs in place, although with uneven thresholds, but even in our case we see differences in swap pricing. It depends on the bank and their views on regulation. Some banks are Basel III compliant already, but all banks will be more or less compliant in a couple of years, and the market is moving in the direction that all issuers will eventually have to accept two-way CSAs and zero thresholds.

Eske Hansen, Kommunekredit: I agree we are in a transition period and with some banks it feels like they are using a black box model.

It’s similar in Denmark as in Spain. More of the banks are maybe not adapting that quickly to these new accounting standards, and also to implementing the more sophisticated ways of going about this issue.

It is a tough situation. We are unsure whether we should proceed down the two-way CSA road, or whether we are better off waiting and then seeing if things are moving in this direction.

Goebel, Rentenbank: The fact that the magnitude of the problem is not perfectly transparent is no reason to claim the problem does not exist, and I still believe that part of agency world is in denial about that problem.

We introduced two-way CSAs some time ago, initially with fairly large threshold amounts for Rentenbank. We lowered them to a rating pattern which applies to both sides, so if someone else is triple-A they will have the same threshold amount as Rentenbank, which typically means, given we are triple-A, that we will have a few million euros more of threshold amount than our counterparties. Even in that situation we feel there are huge distortions in pricing among banks. It depends how big their liquidity costs are, how sharply are they calculating the regulatory cost coming up under Basel III, and how much hedging are they doing via the CDS market to cover their calculated exposure. That depends on the risk systems inside a bank and it certainly also depends on the individual ratings and funding costs of the given bank.

What that means is that in particular, in markets like structured MTNs or non-core currencies, where you do a lot of package deals, those banks that can probably deliver perfectly well on the primary market, get crowded out because they are uncompetitive on the cross-currency swap.

The difference even under our fairly benign set-up can make probably 5bp-15bp, and we are often discussing a fraction of a basis point in the mandating process.

So are we going to accept that in the long run our group of banks narrows down to those which have the highest ratings or the weakest risk model? I would say not.

Ruud, KBN: KBN has two-way CSAs in place with all active swap counterparties. The question we get from banks is the size of the thresholds we have on the CSA. The focus for the banks will be the size of thresholds and it will be our focus internally as well.

Mellor, SEK: We have had two-way CSAs in place for some time as well. However, it is clear that it will be more cost-efficient to do plain vanilla FRNs and structured trades are going to be more costly from a capital point of view.

EUROWEEK: Is there uncertainty about what sort of all-in costs you’re going to be presented with on a given deal, or have you not found that to be the case as issuers?

Littel, BNG: That depends on how you negotiate with your banks. If you have a good relationship with the syndicate managers, you can get a good indication of all-in pricing. In a broader perspective, the cost of hedging will increase anyway.

The central clearing will also, for us, not be cost-effective. What people are referring to as the black box, you can negotiate that.

EUROWEEK: What are your feelings about how the dollar benchmark market will develop over the rest of the year for borrowers?

Northfield, Deutsche Bank:
We’re encouraged by the liquidity that’s been available to date, and we’re encouraged by seeing old favourite investors, the central banks, return to buying European names again.

We’re keen to see whether or not the dollar market can match the euro sector in providing duration, because that has been a great development for the health of the euro market in seeing 20 and 30 year deals — even a 50 year deal from Austria — successfully placed.

The dollar market hasn’t been consistently able to offer duration for anyone. It hasn’t been longer than five or seven years consistently.

We were hoping that with more clarity from the Fed on its "low for longer" rates strategy, that we might see some steepening of the curve, and that could entice investors out further.

We’re confident about the three and five year market. There are no problems there because with rates so low, investors can double or triple their yield against treasuries by buying bonds from issuers around this table and others.

Seager, BofAML: Some of the challenge on duration is that investors have got more sophisticated at looking at other markets. There are still clearly distresses in the cross-currency market, which means that you have these huge discrepancies between dollars and euros. This is partly basis swap-driven and partly about European issuers having more difficulty accessing international investors, which means dollars, by and large.

Those two effects mean that you’ve got a huge discrepancy in value between euros and dollars. Some of the international investors do that cross-currency asset swap equation and they see dollars as theoretical pricing and the duration being very rich. Not many of the dollar investors have a natural ALM need for those sorts of assets from international issuers that you do in euros. When you add to that the pricing differential and credit concerns that investors in the US have, then inevitably you’re going to have a difficulty accessing duration in dollar markets As long as international investors have issues around the European credit story, then they’re going to be happier at the short end than they are at the long end.

Taor, RBC: In dollars you have two main investor types. The central banks which traditionally like shorter duration, and will continue to do so. And the US-based real money investors. They’re often still very sceptical, or uncertain about the future of Europe. We need to see stability for a longer period before confidence comes back and before we see a large volume of duration issuance in dollars.

There’s still a lot of uncertainty, particularly in the US where there’s a bit less knowledge about what’s happening in Europe, and they often see more of the bad, less of the good. The headlines are generally more negative, it just takes an long time for confidence to return.

But the market will improve. The US economy is performing above expectations, the yield curve will steepen and investors will invest longer. But it’s going to be challenging to see anything like the volume of issuance at the longer end in dollars as three or four years ago.

Cumbes, Barclays: The dollar market is functioning relatively well. Investors have been largely receptive in the early part of this year, much better than you might have felt from hearing some people’s views at the end of last year. But there are areas that are not delivering aggressively just yet. It’s a matter of time. Investors followed a lot of stories in Europe and perhaps developments didn’t work out exactly as they expected, and then it takes time for trust to come back. Always with global investors, they feel that the geographical gap might mean some sort of information gap as well. So, we’re back to the marketing question, and making sure that investors are updated and comfortable before approaching the market with a well designed execution.

EUROWEEK: It would be interesting to hear from issuers who have done dollars this year.

Wehlert, KfW:
We had a very successful start to 2012 in terms of dollar funding. Our dollar benchmark volume is up by 39% compared to last year. Especially interesting is that we were able to issue in all benchmark maturities up to 10 years. The dollar share in our overall funding reached nearly 50%, whereas the year average is 30%. The market tone has been improving over the past trading sessions.

Cheaper names that have lagged the tightening bias that KfW has experienced since the start of the year are catching up.

There is the scenario where demand may outweigh the supply, especially given that GSEs are still reducing their activities and other important European issuers are already over 50% funded for 2012.

We have seen our spreads performing — especially in the front end this has been significant with the recent three year trading 18bp tighter on an asset swap basis versus where it was issued.

Ract Madoux, Cades: Dollar demand for our name was very good last year until June, then the market more or less closed. It’s opening again on short term paper, and also on longer term paper, but the demand is mostly from central banks rather than US investors, there’s still some work to do with those investors to see that demand at the longer end again.

Pitt, Network Rail: We’re getting more demand in dollars from US domestic investors. Certainly, when we did our dollar deal in January, about 40% of that went into the US. Most of the enquiries we’re getting for our name in US dollars are from US domestic investors.

It’s partly driven by the UK being outside the Eurozone, we’ve been putting a lot more effort into the US investor base anyway, and since updating the programme for 144A 18 months ago, we’ve done a lot of marketing.

The US investor base is expanding in terms of wanting to invest in SSA product. Yet from an issuer’s perspective, I’m less concerned about duration in US dollars, I quite like the shorter dated stuff.

Ruud, KBN: We sold a three year dollar benchmark at the beginning of February. The challenge was how the market would react to KBN paper post-Eksportfinans, especially because there were concerns in the US and Asia over European names. Of course it gives KBN an advantage being a Norwegian agency outside the Eurozone and not an EU member. About 37% of the book was directly from the US, which is around the same as in previous trades.

EUROWEEK: Are agencies such as Network Rail starting to benefit from US agencies issuing less, and therefore that money has to go somewhere?

Taor, RBC: That has been the case for several years, particularly in the short end where central banks were the big buyers of US agency paper. That regular issuance has diminished and is one reason why so many European issuers embraced a 144A programme. They could see that increasing US demand would be on its way.

Ross, HSBC: It’s also to do with relative spread levels. You offer good value in Europe right now, better value than fundamentals allude to. And when you go to the US and have less supply coming out of the US, together with more value from Europe, then normally that should mean increasing interest from this investor base.

EUROWEEK: Given the recent 20 year deals from the EU and the DDA, is the 20 year benchmark just a flash in the pan or is it a new benchmark opportunity?

Littel, BNG: It’s just a function of the shape of the curve.

Poerschke, DZ Bank: There are also some structural changes. Covered bonds are being replaced by SSAs, and German insurance companies and pension funds come into SSAs with large size and lots of orders.

So, yes, it is a function of the shape of the curve, but also some structural influence. We have been experiencing demand as long as the coupon is around an attractive level now. And 4% is the magic number from the German insurance companies’ point of view, but we’ve also seen demand with lower coupons. The psychological threshold, which needs to be captured, is coming down.

Sometimes you start a deal and everybody wants a certain coupon, you start the book building, but the market moves and you arrive at a lower coupon. But still most of the investors are OK and stay in the book at the re-offer spread, so it’s a moving target at the same time.

EUROWEEK: Which currencies are issuers eyeing as opportunities away from euros and dollars this year?

Wehlert, KfW: We’ve had a very good start in our non-core currencies, especially in the sterling and the Aussie markets. In sterling we started the year with a successful four year transaction. Due to the interesting Gilt spread of 90bp over the September 2016 Gilt at the time we attracted almost two-thirds domestic demand. With regard to our Kangaroo issuance, we’ve been positively surprised and we are proud that we could open the markets with a A$250m tap of the 2021 line, followed by taps in the 2017 and 2018 maturities and a new line in the 10 year sector.

After a subdued end of last year with deteriorating spreads in the fourth quarter and an unfavourable basis swap, the wind has definitely changed. We’ve issued almost A$1.5bn year to date.

Holmström, MuniFin: We did our inaugural sterling benchmark this year and because of liquidity constraints we did a small deal but we want to be more active in that market. It all boils down to all-in cost of funding, and at the time sterling was much more competitive than, for instance, Swiss francs, where we have been active in the past.

EUROWEEK: Rentenbank has traditionally had quite a large Aussie dollar programme. Is that something you’re seeking to revive after a slight hiatus last year?

Goebel, Rentenbank: We were glad to print an eight year Kangaroo in early March. It’s A$250m to start with, which is a good size, and we want to grow it for liquidity. The Kangaroo market is going to offer good opportunities throughout the year. A combination of positive parameters just continues to be there: it’s high yielding and the economy is supported by a stable currency and the commodities market.

The relative valuations are great for investors, for example if in eight years you would have offered a spread over Bunds of roughly 60bp in euros, in Australian dollars, that was Commonwealth government plus 158bp, so a staggering difference,

Looking at the spread in euros, eight years would probably now be doable for us with a small premium to Euribor in Australia that was swaps plus 84bp.

Investors get a great absolute yield, great spread versus government securities and versus swaps. We can still make ends meet because the basis swap into euros is systemically distorted to our benefit by the fact that the large Australian banks have to raise large volumes offshore to fund their balance sheets. That drives the basis swap in one direction, and we can capitalise on that and share the benefit with investors around the world by doing the opposite trade. That opportunity isn’t going to go any time soon.

EUROWEEK: That market was shut down for a lot of last year. When it returned had the make-up of the investor base changed at all, or was it the same guys back again, just after a nine month hiatus?

Goebel, Rentenbank: The domestic take was rather higher than on our last deals in 2011. About 82% was domestic investors this time — mainly bank treasuries and asset managers. The Asian take is not back to where it was before, but that’s just a matter of tenor. All types of investors are going to be back in that market soon.

The Australian dollar market was one where secondary market valuations had been distorted a lot towards year end. The distortion of that market was particularly high, and it took some time for the nervousness to calm down. Now we are back in a more stable environment.

Wehlert, KfW: The investor landscape changed — already in the second half of last year.

KfW was able to keep issuing under its strategic commitment to the market during this period and had a market share at the end of the second half of 2011 of around 50% in the segment. Usually this is about one third.

KfW issued at times with 100% offshore demand and 100% asset manager demand. This trend continued into 2012 where we have seen an average of 78% asset managers in the four deals we issued since the start of the year.

EUROWEEK: What about the renminbi market? Are any issuers looking at that seriously, not as a major currency but as a semi-regular currency?

Ract Madoux, Cades: I’m obliged to give this answer to Chinese investors often. Cades is obliged, by law, to swap back everything it prints in a non-euro currency, so as long as there is no harmonised swap market from renminbi to dollars or euros I am not able to issue in renminbi.

Wehlert, KfW: We have been assessing the dim sum market. And so far it has been mainly multinational corporates coming to the market. They need the renminbi, for example, to invest in mainland China where they have subsidiaries. If we issue in the dim sum market, there are two alternatives for us: either to swap the proceeds into our core currencies, euros or dollars and to use it for our general funding purposes. However, the swap market is currently not liquid enough. Thus, for the time being the funding costs, if we issued in renminbi and swapped into euros, would be substantially higher than if we did the funding in euros. The other alternative for us is to use the proceeds to grant loans in China. This process is more complicated as more parties are involved. But it is an interesting and sustainable approach, which we are discussing.

Mellor, SEK: We issued in renminbi in January and we on-lent the proceeds to a client. It’s a great capital market for us, it’s a growing market, not only renminbi, but a number of local currencies, to fund ourselves in that market, and then on-lend directly to our clients. Our clients find the lending good value for money, and we can also get long term financing, which could be difficult to get through the swap markets otherwise.

Ross, HSBC: The renminbi is going to be a world currency. At some stage I believe it will be a part of the general reserve currencies. It’s only a matter of time before this starts to play out in full detail. It’s too big a market to ignore, but it’s in its infancy.

We are developing it every day, the swap market is getting more and more liquid, despite not being able to meet the pricing of this whole group as of yet.

This will be market where you need to establish yourselves very quickly. That also links into the bigger question about investors’ change of behaviour, where they’re opening up to a lot more currencies in their portfolio than they have done in the past.

They are diversifying because they are seeking value in local currencies, seeking value in coupons outside the dollar. They are buying Canadian dollars, they are buying Aussie dollars, they are buying the Scandi currencies, as well as the renminbi. That trend of currency diversification is manifesting itself more and more in investors’ core investment policies.

When we do go out marketing a dollar deal, including in the UK, fund managers often come back with a question on whether that borrower can issue in Australian dollars, or sterling as well.

We have to be mindful not to be too concentrated on any given area of issuance, but focus on offering the full product palette. The renminbi is definitely a key component.

Northfield, Deutsche Bank: You can see the growth of the south/south trade as China expands its own international economic ties, be it to Latin America or to south Asia or Africa.

Liquidity in the swap market, the basis swap market, and the IRS market is expanding and moving out along the curve, and the depth and number of players is expanding week by week. That gives us great confidence in speaking to a broader range of potential issuers, not just sophisticated European names, but those that might start doing business with onshore China, and therefore need the outright renminbi.

EUROWEEK: Is retail a coming force for issuers? Are we going to see more retail targeted bonds over the next few years?

Meuwissen, NWB:
We do issue a retail bond once in a while, and of course it’s a totally different market. So we experienced the famous steepeners in 2005 and we got a lot of new experiences from that. Since it is not a professional market the information to the investors is very important. For that you have to depend on the private banking people — how well they inform the end investors.

So it’s not only the leads but also other banks which bring your paper to the attention of investors and you don’t have control over those. Since your name is on the bond the investors turn to you with questions and remarks and that is not how it should be.

We have learned from this experience and become even more careful in bringing retail targeted deals, especially insisting on good follow up and available information on a website by the leads.

So it’s once in a while, it’s a nice differentiation, but it’s small in the total perspective for us.

Of course a lot of your normal deals can end up with retail investors, especially in secondary markets, but that doesn’t make a difference compared to institutional investors.

Wehlert, KfW: The bulk of KfW paper is sold to institutional investors worldwide — on the other hand KfW´s liquid bearer notes are accessible for retail investors. Some markets target retail investors. In Japan, for example, we were able to more than double our Uridashi offerings to €2bn equivalent via 39 transactions in 2011. The Norwegian krone market has a very good take-up from retail investors as well.

But it is fair to say that, due to regulatory requirements, extra expenses, and current yield levels, the retail market is not our main focus.

Mellor, SEK: The retail markets are important to SEK. We have been active in the Uridashi markets in Japan since the 1980s, as well as the US market where we have an SEC registered programme, also since the late 1980s. We’re active in these two markets, among others, not least for diversification reasons.

Dohra, EAA: EAA often has to explain during our investor meetings that according to our constitutional charter, we are not allowed to take money from either retail or corporate clients. So we are committed to both the German Banking Act and the EU banking directive, which does not allow us, as a non-bank, to take money from those parties. So it certainly is interesting, just not for us.

Pitt, Network Rail: The sterling retail market is not as developed as others elsewhere in the world, and the London stock exchange is making a big push to develop the sterling retail market. We’ve looked at it, because it’d be great, if you could go to and buy a Network Rail bond. However, from a legal disclosure perspective, including from the UK government, it’s a lot of extra legal work that we’re not prepared to do at this point.

Ruud, KBN: KBN is probably the biggest issuer in the Uridashi market in Japan. We’ve seen good demand and focus on KBN since 2008. We’ve been there many years but the volume we have done the last couple of years has been around $8bn-$10bn every year. We’re not involved in the retail market in Europe because the basis is unhelpful.

EUROWEEK: There has been such disruption to the benchmark markets over the last year, are retail markets a coming force?

Littel, BNG:
There should be a distinction when talking about retail markets. It could be defined as Uridashi or you could define it as Nkr100m or an Australian dollar deal. You could also define retail as being the private banks from Switzerland buying into your benchmarks. That’s a different kind of retail. You could say it’s institutionalised retail, done by asset managers in private banks. That is enhancing the performance of benchmarks enormously.

The part of retail participation in benchmarks is often underestimated. It’s an important part of the market — look at the whole Swiss private banking sector.

Robledo, Ico: We have seen some private banks in our benchmarks in euros whose final goal was retail distribution. Even so, we don’t do specific transactions for the domestic retail market. As far as the international market is concerned, the Uridashi market has been a key player and continues to be an active market for us in terms of diversification and cost-effective deals.

Holmström, MuniFin: For us as well it’s an existing force. We do a big part of our funding in the retail market. Like our Norwegian friends we operate in Japan, but we also have a domestic debt programme, where we issue euros to domestic retail clients. We’ve also been active in the retail markets in Denmark and our bonds in certain emerging market currencies have been sold into Switzerland, as well as into various other European investor bases. The Swiss private banks are a big investor base. If you look at our inaugural sterling issue, which was very well received, we had over 30% sold into Switzerland and the private banks.

Ract Madoux, Cades: We have price targets in all kinds of currencies in Japan, and we also have specific pricing levels for the Swiss market, which tend to be long term bonds going to Swiss private banks. These are the only two markets where we have a retail investor presence.

Taor, RBC: Investors are much more vocal about what they want to buy and the process of how they buy it — particularly the process. They are much more involved in discussions around book building, around disclosure and around marketing.

That, in the short term, is where we’ll see more change. In the future there’ll be a smaller number of large investors that will be more forceful about the new issue process.

EUROWEEK: I’d like to go around the table and ask everyone what they think the one big fear is for the rest of the year.

Pitt, Network Rail:
This year’s opened up extremely positively for UK Rail, but investors are fickle so it’s difficult to know when that investor sentiment will turn, or if we’ll go back to where we were at the end of last year with the Eurozone crisis.

I’m not convinced that Greece is resolved yet. We could be in a very different position in six months. So that’s the unknown — how that’s going to impact all of us around the room.

Ross, HSBC: It’s all about the impact of the austerity measures on the macro situation we’re facing in Europe. Right now we have a liquidity frenzy that is carrying the financial institutions. But again, it will be the delivery on the austerity programmes and whether we get growth back that will determine the future of the Western world, so it’ll be a macro focus that will be the key factor for the second half. And that is on both sides of the Atlantic, so it’s a global problem.

Dohra, EAA: The most imminent fear for me is political elections, any changes in the environment which could influence the political situation. My impression from investors was that confidence is coming back because there have been decisions taken in Europe. My biggest fear would be if we were to fall back from that, and go back into these never-ending stories of decision making processes.

Cumbes, Barclays: It will be about the politics and growth. If the US continues to do well, plus China is doing OK and coming towards a soft landing, then people are more forgiving towards Europe and other areas.

In the near term, markets are thinner for regulatory and competitive reasons, with some large investors then being more powerful. We still often see more activity in primary than in secondary. I fear that in the slower holiday periods of inactivity we might still see some tests of market sentiment.

Robledo, Ico: What concerns me most is that we find ourselves in the same situation as last year, when that volatility was in the market.

We may consider two main challenges, the European one, discussed previously, and the domestic one. The Spanish government is totally involved in three main reforms: the labour market, the financial sector and the attainment of the deficit target, so for us it’s important to convey to investors the message that we’re committed to doing whatever it takes to continue gaining investor confidence.

Overall, I feel positive about the future.

Wehlert, KfW: I am concerned that markets are overenthusiastic and the risk of a rebound is increasing. Given the political situation, I hope that the south of Europe will recover medium term. For business I am most concerned that banks are too restrictive given the regulatory environment. For us the relationship and the support is crucial, given the size of our funding programme.

Holmström, MuniFin: The biggest concern is lack of growth. All the focus is now on deleveraging. For instance, the discussions in domestic politics in Finland are all about raising taxes and cutting costs, everything is focused on keeping government expenditure down, cutting down debt levels and forgetting all about the growth which feeds everything.

Ruud, KBN: The Norwegian economy is going well, so our focus will be to see how the situation in Europe, especially on Greece and all the other countries, goes. I’m not 100% convinced that the situation there is a solvable problem.

Meuwissen, NWB: The only way out is economic growth, and all the measures that are being taken are against economic growth. Not only the measures by the government, but also Basel III for instance. It’s very counterproductive. That is my main concern.

Mellor, SEK: We want to see the European area united, the Greece situation isolated, and we want Europe to show the world that it is working. We are not in the Eurozone, but we are close, so of course we get affected by the European debt crisis. We’re also concerned about all the new regulations.

EUROWEEK: What about the outliers that perhaps we haven’t thought to worry about yet?

Taor, RBC: There are parts of the market in denial about where regulation is taking us. We have the Volker rule, Dodd-Frank, Basel III, central clearing, FATCA — there are so many issues that are not being fully and openly addressed, and that’s partly because we’ve had a very good last two months.

Goebel, Rentenbank: We see what the impact of the unintended consequences of banking regulation already mean for us, a triple-A rated, well-capitalised, very stable organisation, I wonder what it means for those who we’re doing business with, so the fall-out from regulation is my biggest concern.

Bill Northfield: Two things, if anything, we learned from last year, were how brittle confidence can be, and how important that can be to drive momentum. So I’d be concerned primarily about implementation risk to the macro economy from both the fiscal austerity packages and the coming fiscal compact, and how that’s manoeuvred within the governance issues facing Europe. I am equally concerned about the regulatory environment, which we can’t avoid. That’s a big issue, and that’s global. While the details remain open to discussion, we don’t know where that’s headed.

Seager, BofAML: It feels pretty clear in the last two months there has been a bear squeeze in terms of levels, whether that’s equities or in fixed income markets. That’s predicated on LTRO money and confidence growing, and to a large extent investors coming into the year underweight the market and overweight cash. Those underweights are being addressed, the LTRO money will start to ease out, that bear squeeze rally will start to have the juice squeezed out of it. Those are the things that make investors think carefully about whether they want to get involved in primary deals.

Hansen, Kommunekredit: My main concern is the challenge facing the banks. Of course there are a lot of concerns about regulation. But also on the credit side, there’s a lot of pressure on banks, first of all for regulatory purposes, but also on the business sides of the banks, especially the retail banks. It is key to our business that we can do business with the banks. So that’s crucial to us.

Poerschke, DZ Bank: The regulation issue is a big one for regional banks. Especially in Germany, which is a market with a huge number of independent banks that all have to cope on their own, and that are not as big and professional as most of us. But to say something positive, the German economy is faring a lot better than many people expected. There is a silver lining on the horizon for the real economy, and I believe this will help the Eurozone to get through the crisis better than expected.

At the same time, SSAs are coping well and there’s a good chance that this will go on for a while.

Littel, BNG: Financial markets have always been based on trust and confidence. We’ve lost that a bit. The biggest challenge for us all is to regain that confidence and that trust from the regulators. There is a reason why we are regulated so heavily nowadays. It’s up to market participants to prove we can do it differently.

01 Apr 2012