Planning the unplannable for supranationals and agencies
The SSA sector faces a bumpier ride than ever in 2012. Despite having survived and occasionally flourished last year, public sector borrowers were knocked sideways when Standard & Poor’s put large swathes of them on CreditWatch at the end of 2011. Ralph Sinclair investigates what the fallout is likely to be as high grade issuers tackle the sovereign crisis, volatile markets and the aftermath of Eksportfinans’s closure.
For the first time in 20 years, Bart van Dooren is a worried man. Bank Nederlandse Gemeentens head of funding and investor relations is facing up to a year in capital markets where some very big questions about the future of sovereign, supranational and agency borrowers seem to have no answers. It is the first time in many borrowers memories that they have not been able to plan for the years funding task.
Van Dooren echoes the sentiments of many borrowers when he says: "We are concerned because we have no clue what will happen."
The view is common among BNGs peer group. "It is hard to have concrete plans for 2012 but our best guess is that demand for liquid benchmarks will continue," says one funding official at a supranational institution. "That means concentration in the liquid currencies will continue."
It seems supranational and agency borrowers can make no plans other than to attempt what they managed last year to be as responsive to markets as possible and hope for the best.
At least some of the markets key borrowers have been able to announce borrowing targets. Germanys KfW is targeting a repeat of 2011s 80bn funding target while the EIB has cut its borrowing needs by 15bn this year to 60bn. The European Financial Stability Fund is looking to raise 24bn.
The strategy for doing so remains less certain although it seems likely benchmark funding will continue to dominate over arbitrage funding such as niche currencies and private placement markets.
Investors flocked to the higher liquidity of benchmark trades in core currencies last year as they looked for a combination of safety and a yield spread over government bonds and, in some cases, something relatively less volatile and risky.
Borrowers, such as the EIB, expect to see the benchmark concentration continue. "It is hard to have concrete plans for 2011 but our best guess is that demand for liquid benchmarks will continue," says Eila Kreivi, director and head of EIBs capital markets department.
Although for some credits there may be an inability to change issuance strategy, for others there is no desire to do so. The EFSF is one such borrower that plans to build its public market presence despite augmenting its benchmark issuance recently with money market funding.
"We will continue our strategy in the first part of the year as we are still building up our benchmark curve," says the EFSFs CFO and deputy CEO, Christophe Frankel.
As for maintaining wider market access, that is a particularly strong desire among a group of borrowers that appeared to enjoy a solid year in the markets.
That group consists of Washington-based supranationals and German borrowers and they believe they have a plan to cope with another difficult year that will involve funding in a variety of markets.
"Weve always pursued a strategy that aims to offer a diversified mix of debt products to investors so that investors worldwide can buy our products in multiple currencies and structures," says Heike Reichelt, the World Banks head of investor relations and new products. "For us, that means we can reach different types of investors and diversify our investor base. This strategy helps us fulfil the fiduciary responsibility we have to our shareholders, which is to raise funding for the institution at the best terms available on a sustainable basis. The events in Europe havent affected our approach. We still pursue this strategy."
"For next year, our traditional strategy seems waterproof so there is no reason to change it," says KfWs head of capital markets, Horst Seissinger. "We will continue to price to market conditions, engage in a fair dialogue with dealers and investors and be a frequent and reliable borrower."
Diving through windows
In approaching markets when it comes to deals, a range of tactics is expected to be deployed. Whereas 2011 came to be defined by smash and grab raids on markets featuring intra-day launch and execution, Seissinger expects market volatility will require a more considered approach this year.
"I suspect we will need more pre-sounding time for deals at least during the first part of 2012," he says. "Last year you took the opportunities that came up. This year a more intensive dialogue is needed with banks and investors so the lead time for deals will be longer."
"Our approach to issuing for public transactions is a demand-driven approach to selecting the terms like maturity and the timing, using consensus pricing to ensure transactions maximise success for all parties," says the World Banks Reichelt. "We believe it is very important for all parties to be happy with a transaction. Since this has been working well in both stable and volatile markets and seems to be appreciated by both our investors and our dealer partners, we dont expect to change our approach.
There will also be more of a drive to fund as early in the year as possible. "In times like these you want to front-load your funding if anything," says EIBs Kreivi. "We expect to have to remain as responsive to deal windows in 2012 as 2011."
Other borrowers agree that responsiveness to the underlying market will be critical to the timing of deals this year. In fact, BNGs van Dooren goes so far as to suggest that this can govern SSA issuance strategy.
"It is difficult to know what to issue beyond issuing when rates rise above certain investor thresholds for example, 4% for German investors buying in loan formats, or 1% in three year US dollars," he says.
Growing the investor base is another target borrowers wish to achieve this year. Some SSA borrowers may have suffered from falling demand in the asset class driven by fears of an association with the European debt crisis or an association in investors minds with Ekpsortfinans whose owners decided it should be wound up after the government withdrew its monopoly on Norwegian export financing but there are reasons to be optimistic about maintaining a growing divergence of investors.
First, more and more investors are flocking to SSA bonds that are seen as safe-haven assets. This is something a number of borrowers saw in their deals last year. "Growing an investor base is difficult but we may be helped by the fact investors are increasingly looking for high quality assets," says KfWs Seissinger.
Some of this new interest has come from the US and a number of borrowers will continue their relatively new efforts to appeal to institutional buyers there. "The four 144A deals we priced last year saw US participation of between 44% and 50% which helped us to diversify," says BNGs van Dooren.
The World Bank is one borrower in particular that is striving to increase US participation as it looks to take up where borrowers like Fannie Mae and Freddie Mac are leaving off. "We have been increasing our efforts to reach investors in the US that are looking for alternative investment opportunities to US GSEs," says the World Banks Reichelt. "Many US investors such as treasuries of cities, counties and states find themselves looking for high quality alternatives. Supranationals are a good fit in terms of credit quality, but investors are not familiar with the asset class and until this year the products we issued didnt match what they were looking for.
"We started communicating more with these and other US investor groups to help them learn more about our credit and purpose. We also launched a callable bond programme giving investors products they are familiar with, with non-call periods of three or six months instead of one year. This programme has been very successful with about $3.5bn issued so far. The order books for our global bonds issued in the second half of the year showed that we were making progress in reaching US investors."
In fact, investor work in general is right at the top of many borrowers agendas given what they see as misconceptions about the sector and the need to reassure bondholders and potential bondholders about the risks associated with the European sovereign crisis.
The borrower that has probably done more investor relations in the last 18 months or any 18 month period for that matter is the EFSF. Despite its relentless approach to being out on the road meeting people, Christophe Frankel is reluctant to pack away the suitcase and passport just yet.
"Our investor relations strategy has been quite successful so we will continue with it. We met a wide range of investors," he says. "There is still a lot of uncertainty out there and we need to explain the consequences of decisions taken by the European Council to investors."
KfW is another borrower that has found its investor relations work has gone beyond merely pitching about the institution. "KfW became something of a Eurozone ambassador last year," says Seissinger. "People we met wanted to discuss with us the Eurozone rather than KfW."
That is emblematic of how much investor interest there is in the sector. Borrowers are not only looking to expand investor relations efforts with investors but with the industry intermediaries as well the banks.
"We want to work to ensure our intermediaries have and are passing on enough information about us," says Kreivi at the EIB. "This is a shared challenge in such volatile
Fixed income salesforces, wags remark, will often not sell anything unless they can do it by forwarding a Bloomberg message and tales are rife of salesmen ringing investors only to find the investor has forgotten who they are or, in one memorable case, that the salesman had left it so long between calls that the client had died.
But it is vital that in times of such increased scrutiny that the sell-side knows what it is selling. The Eksportfinans episode has highlighted the need for knowledge of individual credits in particular. Municipality Finance is one borrower that some investors have raised questions about in the aftermath of Ekpsortfinans and the borrower says it has made sure it has done everything it can to point out the difference between it and Eksportfinans.
"Japanese investors are educated to see the difference between MuniFin and Eksportfinans," says Joakim Holmström, head of funding at the Finish borrower. "We have communicated with our dealers to highlight this you have to ensure the sell-side knows what it is selling."
Much of that increased investor relations work of meeting old and new investors will revolve around reassuring investors about the one thing guaranteed to drive SSA issuance strategies, however the European debt crisis.
Investors, especially outside of Europe, crave information. "When investors need feedback, we give it," says the EIBs Kreivi. "There will be no fundamental change to that in 2012. Also, we have operated proactively to reassure investors when markets have become more nervous.
"Well keep seeing investors and will deal with rumours directly."