If the past 12 months have taught issuers and investors in the supranational and agency sector one thing, it is that the unimaginable is possible. In response, investors are putting borrowers under high levels of scrutiny, changing the investor relations game.
Bond buyers have faced what would once have been considered nigh on impossible situations holding European Investment Bank paper and watching the spreads on it violently blow out, as happened last autumn.
Investors holding triple-A rated Eksportfinans paper an agency in safe-haven Norway watched it junked almost overnight, and with no warning.
In these volatile conditions investors have been so keen to meet issuers that they have been travelling themselves on reverse roadshows to speak to borrowing teams.
"A big Latin American central bank went to meet European issuers recently," says Bart van Dooren, head of capital markets and investor relations at Bank Nederlandse Gemeenten. "We also had a group of Taiwanese lifers in our office. It was very efficient."
Issuers have stepped up their investor relations, but not enough, some investors feel. While some issuers have organised investor meetings through their banks, Mark Benstead, head of UK credit at Axa Investment Managers, believes it would be better for their relations with investors to meet in person privately.
"You dont need the banks," says Benstead. "We would be happy to deal direct with the borrowers. Its not always an easy meeting to have if your credit is not performing but it would be good to be able to speak with them one on one. All you get if you meet borrowers with a bank are generalities. We can be much more open with a borrower when the banks arent present, too."
Some investors think that they could have more attention than they are given, particularly those in markets such as sterling, which has been a rich source of liquidity for many agencies this year. Indeed, the first Nordic issuer to print a public deal since Eksportfinans was junked chose the sterling market Kommunalbanken printed a £200m December 2014 trade with great success in January.
"We dont often see agencies wanting to put themselves in front of us," says Benstead. "Do we want to see them? Yes, once a year or so, so we can remind ourselves of the credit, so they can tell us what they think of the situations facing them."
Investors also call for more transparency, particularly with regards to borrowers funding plans and targets. If issuers arent clear about their targets and how they plan to achieve them, investors struggle to decide what to buy, particularly at the beginning of the year.
Axa IM was one investor that held off from rushing into the fray at the beginning of the year. The flush of European Central Bank liquidity in the form of the first three year long term refinancing operation produced a spate of short dated deals. But Axa did not bite because of the opacity surrounding future issues. There was plenty of short dated paper available and spreads were heading lower and lower.
"If we buy and then an issuer comes out with a long-dated deal a couple of weeks later, its not very good relative value," says Jerome Broustra, head of global rates at Axa IM.
Another problem is when issuers state one funding target, but end up filling another.
"Its quite discouraging for investors when issuers announce at the beginning of the year that they are going to reduce their debt funding and then at year end when you add up all their issuance it is higher than the year before," Broustra adds. "That isnt good for investors. We need to trust issuers. Programmes are really positive if you look at the marketing, but there can be significant differences that cause problems for investors."
Of course, this is easier said than done. Capital markets have operated more on a window of opportunity basis than being permanently open for business in the past two years, and issuers have often been wise to gobble up funding as and when they can.
Borrowers do try to keep investors informed and updated about any changes to their funding programme, and perhaps in these times it is the best they can do.
Issuers need to be aware of the secondary performance of their deals. This may sound obvious, but in tough funding conditions its hard to calculate the right premium, and the temptation is there to give away too much to ensure a deal flies.
"Borrowers should not be prepared to take very significant discounts," says Guy Dunham, head of global fixed income at HSBC Global Asset Management. "While an investor might think it attractive to get something at a 20bp-30bp premium now, that is unsettling for them when they think that the issuer may have four or five benchmarks to come. If the issuer offers discounts on those new bonds, it could affect the performance of its existing trades."
Details to the fore
One of the big challenges issuers have faced is the enormous amount of detail that investors require.
"Investor demands have changed a lot since post-Lehman but especially since Eksportfinans," says van Dooren. "Investors are not just relying on rating reports from agencies. They certainly do their homework. We have much more pro-active analysts they send emails, asking questions. The proactive way investors are approaching issues is helpful. Its a very interesting trend."
Investors are all too aware now that triple-A status does not make an issuer risk free. They look at the support a borrower can count on from shareholders such as the state and local government.
"They want to see documents which show what support you can count on when something goes wrong," says van Dooren.
The question of the relation of agencies to their underlying sovereigns is of particular pertinence since the Norwegian government withdrew its support for Eksportfinans in November last year, causing the issuer to be junked suddenly. This was extremely painful for investors. A downgrade of a couple of notches can perhaps be absorbed, but many could not hold sub-investment grade paper. On top of this, the government was not very forthcoming in explaining its decision, or the support it would give Eksport afterwards, causing more panic among investors.
"We need to know whether there is potential pressure on ratings," says Broustra at Axa. "We need more information on the correlation between an agency and the underlying sovereign, we need to make sure there isnt potential for major downgrades. We were not involved at all with Eksportfinans, but in general we need to understand why there is correlation or why there isnt."
Regulation has hit issuers too. They are faced with questions about Basle III and how that will affect them. Of course, the Eurozone sovereign debt crisis has also taken its toll.
"If theyre not asking about the credit itself then they ask about Europe, Greece, Portugal, our exposures, the economic prospects in Europe," says van Dooren.
This has become particularly relevant for the European Bank for Reconstruction and Development, which has found some investors are too preoccupied with the first word in its title.
"Theres a lot more work because theres an E in our name and investors assume that we are owned solely by European shareholders," says Isabelle Laurent, deputy treasurer and head of funding at the EBRD in London. "But the US is our largest shareholder, and Japans shareholding is equal to that of Germany, France, Italy and the UK. We also have many other non-European shareholders. Also, investors assume our lending goes into Europes periphery, which is not the case. None of these things were quite such a part of investors focus before the sovereign crisis."
Short and sweet
The challenge in this demand for detail for investors is in communicating it. Issuers and investors dont have the time to wade through reams of paperwork. The key for successful issuers is to tell their credit story simply and powerfully.
"Issuers are diving a lot more into their credit story and are now focusing on the specific top five points that distinguish them from their peers," says Ulrik Ross, global head of public sector global markets at HSBC in London. "Theyre becoming a lot more direct in explaining their credit. Some issuers are really taking the time to meet investors and others are looking more to improve their communications through websites and emails."
One issuer to do this is Spains Instituto de Crédito Oficial (Ico). "The questions investors are asking have increased in the past two years," says Rodrigo Robledo, head of capital markets at the Madrid-based agency. "In response we issue quarterly newsletters to the investor base and we include information on the Spanish economy, on our funding plans, and on a corporate level information like financial highlights."
Ico also summarises its key information into two pages, he says, to give a brief introduction to its activity and funding. "We have also set up a Bloomberg page for investors ICO <GO> with the main information and yield curves both in euros and dollars. This is in addition to increasing the number of roadshows that we do. We try to pay an annual visit to investors in Spain, France, Germany, Japan and the rest of Asia."
Icos efforts appear to be paying off. Its successful issuance strategy was highlighted earlier this year when compatriot Fade pulled a benchmark because it had not got the spread it wanted. Ico on the other hand, has issued benchmarks, taps and private placements at tighter and tighter levels. It had raised over 8bn by the beginning of March. Although other factors have also helped the issuer achieve this impressive total, savvy investor relations can only help.
To bank or not to bank?
While some investors argue that banks are not necessary for parts of the investor relations effort, issuers beg to differ. In troubled times, borrowers have looked to banks to help them identify which investors to meet.
"We dont meet investors independently we always use investment banks," says Joakim Holmström, head of funding at Municipality Finance in Helsinki. "We use banks and carefully analyse which to use for each area."
Banks can source out which investors have the credit cleared and which wont, and they can, on occasion, use their relationships to pull in investors.
"We need banks to intermediate transactions with investors, which guides our marketing effort," says Laurent at the EBRD. "Were not in a position to know what trades are appropriate for whom, who will be authorised to deal that is the banks job. Its much better for us to do things through the banks and we can have a dialogue directly with investors afterwards. If an investor calls and wants to do a deal we ask them to select an appropriately authorised and regulated bank."
Banks also spend time explaining to investors how borrowers differ from each other and how they have been affected by market issues.
"Banks have a lot more explaining to do to investors," says Ross at HSBC. "To segregate credits and explain why credits are trading at different levels. Market perception is not necessarily reality. We need to educate investors and reverse the perception game, to get them to buy on facts. There is a lot of value in the market right now for investors buying on facts."
For Ico, banks have helped it to reach new buyers, and this is something that the borrower is still working on.
"Banks are a mainstay they have the direct relationships with investors, so we try to support, insofar as possible, salespeople," says Robledo at Ico. "Its very important to work with the right bank, that gives you a better approach to the investors. We are working on our relationships not only with big banks but also with regional banks as they have access to tier two and tier three accounts, which in turn helps us diversify our investor base."
Banks also provide feedback from investors after a deal is done. This is one way in which they can improve their service to issuers.
"There is always room for improvement" says Robledo. "We would like more detailed information on investor feedback. In this sense, we require a liquidity report from banks where we are told about the liquidity of a deal. Moreover, if we want feedback on investor appetite, what their mood is, etc, we need to work very closely with banks."
Engaging the sales team
It is not just a case of issuers hiring the banks and sitting back while they do all of the work issuers increasingly need to look at how they market themselves within a bank. Part of this is pitching to the sales force.
"You normally talk as an issuer to the syndicate and origination, but also sales, knowing they dont have much time," says van Dooren. "You need to give them a couple of bullet points to highlight about your credit the presentation should be 10-15 minutes long."
But it doesnt just stop at the sales force. Issuers speak to wider and wider parts of the organisations.
"We explain our credit to the sales forces, and sometimes even to the traders to explain, for example, if Eurozone sovereign spreads are moving out, why our paper (which doesnt trade much) shouldnt necessarily be marked wider," says Laurent at the EBRD.
"One aspect some issuers neglect is strategists writing about their credit," says Raymond Seager, managing director and co-head of EMEA public sector debt capital markets at Bank of America Merrill Lynch in London. "Most houses dont do credit research in this sector, so strategists are a great avenue to communicate with investors about relative value."
Technology is increasingly important too. As events are fast moving, a meeting once a year to update investors on the credit often isnt enough for buyers, who want to be updated quickly on any developments.
"We are doing a lot more work remotely," adds Seager. "The financial crisis has removed that formal layer of face to face meetings, to an extent, although it is still important. But investors want updates on a credit more frequently than once a year, they also want updates quickly after events happen. Were doing a lot more through telephone calls and remotely than was the case before. It can be just 15 minutes, but they are much more frequent than before."
Another area where investors can improve their communications is through their websites, which again allow investors to get up-to-the-minute updates.
"We are working on improving our website," says Holmström at MuniFin, adding that the issuers borrowing team, which travels to meet investors regularly, is doing so even more than before. "We dont have a fully developed investor relations part. We have details of our debt programme but now we are developing a proper investor relations portal. That should be finished this year at the latest. We have looked at what other issuers have and decided that we should improve our investor relations portal on the website."Never before have issuers in the supranational and agency sector been under so much scrutiny. Issuers and banks are, by and large, responding well to investor needs. But while technology expands and the need for up-to-the-minute information abounds, issuers should be careful to invest time in the personal relationships that the market is founded upon.