Flexibility the key for stressed sovereigns

With sovereigns facing a rising funding mountain, any extra tools that can assist the ascent should be welcome — and privately placed MTNs and short term debt are seen by many as useful additions to traditional debt options. However, MTNs and short term debt such as CP come with their own hazards. Craig McGlashan reports.

  • 13 Dec 2011
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Investors and issuers benefit from the use of privately placed MTNs, with the former gaining flexibility around maturity, structure and currency to plug any holes in their portfolio, while the latter are able to access new investors and lower their funding costs.

In addition, sovereigns can issue "more quickly and effectively" through established MTN programmes, according to Piotr Lesinski, a partner at law firm Allen & Overy, who advised the Republic of Poland on the launch of its MTN programme.

"Poland planned to issue on an ad hoc basis so the programme was very convenient," he says. Poland uses MTNs — privately placed and public — more often than other forms of debt in the international market and will continue to do so.

Poland is not alone in its desire to gain as much cheap funding as possible through the placement of MTNs. In the last two years, increasing numbers of sovereigns have used MTNs to supplement increasing funding needs.

 "Ultimately they can achieve more attractive funding by issuing many small trades through the MTN market," says Jamie Stirling, co-head of the frequent borrower group at RBS. "The access and speed to market possible through MTNs has also been very useful to satisfy specific investor demands."

However, MTNs suffer from a lack of secondary market liquidity. Privately placed MTN issuance has fallen as liquidity has dried up in the difficult market conditions of 2011.

"Domestic investors who are less concerned over liquidity and headline noise may be willing to buy MTNs issued by their respective sovereign issuers," says Stirling. "However, the current market environment means that there is less non-domestic demand given the obvious reluctance to buy non-benchmark, less liquid ‘foreign’ paper which carries greater headline risk."

This environment can lead to extremely short windows in which conditions are favourable to issue. Having an MTN programme in place can allow issuers to respond more quickly.

"At the moment the market doesn’t stay open for long — you have pockets of opportunities when you can issue and if you have MTN documentation you can do it very quickly within a few days," says Allen & Overy’s Lesinski. "If you have to draft new documentation it takes weeks, if not months."

Finland diversifies

Increasing flexibility is another option for sovereigns that want to issue MTNs during turbulent times. Finland has diversified its currency range to help increase MTN issuance in the past few years, for example.

The country has issued 10 MTNs in 2011 — eight of which were private placements — totalling $3bn, £1.1bn and Skr3bn ($437.1m), amounting to 20% of total long term funding. It has also issued in Norwegian kroner in the past.

"We have not faced difficulties to access the capital market although timing is even more important," says Mika Tasa, senior manager, funding and liquidity management at the state treasury of Finland.

"Windows can be very narrow and sentiment can turn to the worse very quickly. Basis swap levels are a key element when looking at the economics of a potential deal. We don’t take currency risk when we issue currencies other than euros."

Despite MTNs making up 20% of total long term funding, Tasa says the instrument is seen as a "supplemental funding tool", rather than a primary device. "We like to provide opportunities to new investors to get familiar with our product and encourage them to invest in euro benchmarks as well," he adds.

However, Finland has two advantages when it comes to meeting investors’ requirements, according to Kentaro Kiso, managing director of global MTN syndicate and public sector global finance at Barclays Capital.

"Finland is a relatively infrequent issuer; they print euro benchmarks twice a year and have plenty of time to look into all these alternative funding requests," he says. "They also have the benefit of getting genuine reverse enquiries given their rare triple-A status. Peripheral countries have to go out and market and talk to investors. They need to spend more time on the road."

Romania is the latest sovereign to join the MTN table, selling its first bonds under its €7bn programme in June 2011. Both Barclays’ Kiso and RBS’s Stirling believe that the move is sensible in terms of boosting the country’s pool of available investors.

MTNs should be seen as a necessary part of a country’s funding evolution, which begins with a few years of benchmark issuance, following which investors can see the curve to work out where any MTN — which could have an uncommon maturity of 4.2 years, for instance — should be priced.

Short and sweet

The desire for liquidity, brought on by the seismic shocks in global markets, has led many issuers to consider short term debt, according to Barclays’ Kiso, which may lead to a "crowding out" or "cannibalisation" among some of the smaller scale sovereigns, also versus their own state agencies and banks.

Sovereigns must compete with banks, supranationals, agencies and even corporates for investor attention in short end MTNs and CP. In particular, large amounts of bank senior or government guaranteed paper will be maturing from November onwards and issuers will be unable to roll everything on into senior debt, meaning short term markets become key, says Kiso. On the top of FMS Wertmanagement this year, EFSF will be another giant borrower in treasury bills and CP from early next year. 

"There is a lot of stress in the system so people flock in with short end puttables and callables for instance," he says. "Triple-A issuers can access this market but it’s not open for everybody."

Sovereigns wishing to issue CP face another disadvantage when compared to banks or corporates, according to Deborah Cunningham, CIO of taxable money markets at Federated Investors, a US-based asset manager.

"We have not used sovereigns on an overnight basis or on a term basis probably for the better part of the last 10 years simply because they are too expensive," she says. "We review them, we approve them, and then we leave it up to our traders to decide if there is relative value in purchasing them. The traders are able to find better value in financial institutions or corporations. They get a better spread in the paper that doesn’t necessarily have the state guarantee but has the implicit backing."

While the SSA sector generally has failed to whet the appetite of US investors, 2011 saw a shift in European CP, as SSA issuance overtook bank debt as the main source of supply for the first time.

One thing remains common, however, according to Peter Eisenhardt, head of short term fixed income origination, EMEA, at Bank of America Merrill Lynch. "Investors still want to buy single-A credits or better," he says. "It’s hard for the emerging market or CEE region unless there are investors from those countries that want to buy."

The Netherlands is one triple-A rated sovereign that has had success in CP, although much of this was unintended. The Dutch State Treasury Agency (DSTA) introduced a CP programme in 2007 to complement its treasury bill funding in an effort to boost flexibility, allowing it to fill any fluctuations in funding needs through CP, which allows for flexible maturities.

"With CP you can set prices so you attract very short term funding for a week, a few weeks or somewhat longer term funding depending on your needs," says Peter Nijsse, head of cash management, issuance and trading at DSTA. "At the same time we hoped to attract some additional investors who had specific needs, either for maturities or because they had investment rules that meant they could not buy treasury bills."

Initially, DSTA had expected to issue a "few billion euros" of CP, but when the 2008 financial crisis hit, the Dutch government found itself with extra funding needs for the recapitalisation of the banking industry and the purchase of the Dutch activities of Fortis when that bank collapsed.

"We financed in the very short term with extra treasury bills — so treasury bill issuance grew enormously — but also in CP," explains Nijsse. "In November 2008, we had between €30bn and €40bn outstanding. When the crisis hit, many investors — including corporate treasuries and others — looked for triple-A or highly rated names to deposit their money and some did that in commercial paper form. It was a good way to attract these flows."

Since then, the amount of Dutch CP outstanding has fluctuated according to need, leading to a "very event-driven" approach to short term funding, says Nijsse. However, favourable euro/dollar basis swap rates have meant that DSTA has been able to take advantage of dollar demand from investors. DSTA has also added Norwegian kroner to its programme in 2011, joining US dollars, UK sterling, euros and Swiss francs as its available currencies.

A complementary tool

Until markets settle and confidence returns to investors it is unlikely that MTNs and CP will be used as the primary tool for sovereigns to scale the growing mountain of funding requirements. However, by remaining flexible and vigilant for opportunities, the instruments can be seen as an ice axe — not as essential as a harness, but certainly useful in frozen conditions.
  • 13 Dec 2011

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Rank Lead Manager Amount $m No of issues Share %
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1 Citi 8,563.70 22 14.58%
2 HSBC 7,832.21 25 13.34%
3 Deutsche Bank 6,701.74 14 11.41%
4 JPMorgan 4,850.50 14 8.26%
5 Bank of America Merrill Lynch 2,611.95 12 4.45%

Bookrunners of LatAm Emerging Market DCM

Rank Lead Manager Amount $m No of issues Share %
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1 Citi 4,285.53 5 18.71%
2 Deutsche Bank 3,977.43 2 17.36%
3 HSBC 3,768.59 4 16.45%
4 JPMorgan 2,812.07 8 12.28%
5 Bank of America Merrill Lynch 1,683.06 6 7.35%

Bookrunners of CEEMEA International Bonds

Rank Lead Manager Amount $m No of issues Share %
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1 Citi 3,236.25 7 10.30%
2 HSBC 2,253.75 3 7.17%
3 Deutsche Bank 1,703.96 4 5.42%
4 Standard Chartered Bank 1,518.77 3 4.83%
5 JPMorgan 1,341.27 2 4.27%

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Rank Lead Manager Amount $m No of issues Share %
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Bookrunners of Central and Eastern Europe: Loans

Rank Lead Manager Amount $m No of issues Share %
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1 ING 3,668.64 29 9.07%
2 UniCredit 3,440.98 25 8.50%
3 Sumitomo Mitsui Financial Group 3,156.55 13 7.80%
4 Credit Suisse 2,801.35 8 6.92%
5 SG Corporate & Investment Banking 2,478.18 21 6.12%

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Rank Lead Manager Amount $m No of issues Share %
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1 AXIS Bank 77.43 3 24.06%
2 Standard Chartered Bank 45.42 1 14.11%
2 Mitsubishi UFJ Financial Group 45.42 1 14.11%
2 CITIC Securities 45.42 1 14.11%
5 Trust Investment Advisors 31.87 2 9.90%