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MTNs provide exit for agile sovereigns

31 Jan 2011

Despite a turbulent year for European sovereign issuers, some borrowers managed to issue stand-out deals last year, proving that the MTN market is a propitious place to turn to when conditions dictate a more innovative approach to funding. Tessa Wilkie reports.

The MTN market, with its focus on bespoke structures and flexibility, had for a large part of the year remained a funding channel in the capital markets open to Europe’s so-called peripheral issuers — sovereigns wounded by the debt crisis.

Portugal sold a Eu50m five year note through Banco BPI in November and a Eu50m 10 year puttable note, also through Banco BPI, later that month. The deals were the borrower’s first visit to the MTN market since March, when it sold a $1.25bn public deal due in 2015.

Spain tapped the market in size, using puttable structures to offer more safety to investors. It sold two puttable floating rate deals of Eu500m each last year, one in July and one in October. Both were sold through Société Générale and are due in 2012.

"The Kingdom of Spain and Ico were swift in seizing a nice market opportunity by issuing two year, non-put three month products," says Benjamin Lamberg, global head of MTNs and private placements at Crédit Agricole CIB in London. "This has resulted in cheaper funding for them while at the same time tapping a new investor base."

Given the shakiness in the market, and lack of visibility over the future, many issuers adopted conservative funding strategies. "At the beginning of 2010 everyone was talking about the risk of a sovereign debt crisis, so we speeded up our funding and had almost finished our programme by the end of August," says Anne Leclercq, director, treasury and capital markets for the Kingdom of Belgium.

"We used the still available OLO issuance points to prefund 2011, after having completed our OLO programme, prefunding amounts to Eu5.5bn. Belgium wants to raise Eu4bn in the MTN market, and about Eu36bn in OLO funding."

The Kingdom of Belgium completed some stand-out trades last year, selling a Eu700m 30 year non-put 20 note in March through Société Générale and its longest ever bond in the MTN market in October, selling a Eu220m 42 year note via HSBC.

"To be successful in the MTN market, you need to be able to catch a window when it occurs: when there is client demand and when the arbitrage is possible," says Leclercq. "In 2010 — which was very bumpy — it was even more important to be in constant contact with your dealers, to catch opportunities. We prepared ourselves and received the necessary approvals, to make sure that we had enough flexibility to catch the window whenever there was an opportunity, and then to answer to investor demands."

Another long dated trade from a sovereign last year was a Eu250m 50 year trade by the Republic of Italy, sold through Bank of America Merrill Lynch in June.

Sovereign superiority

Some believe that sovereigns were able to benefit more strongly from a flight to quality than supranationals, being individual credits rather than entities tied to the future of the whole of Europe.

"European sovereigns are unique," says Toby Croasdell, director in MTNs and structured note trading at Barclays Capital in London. "More generic names suffered slightly at points when people were worried about the eurozone as a whole."

But while some sovereign issuers might have benefited from a flight to quality, excessive fear in the market kept many away. That said, some of the best times in the market came in September and October — after a calm summer — and in March and April, before the crisis over Greece intensified.

"The calmness in the market helped and on top of that there was a nice arbitrage in the dollar market," says Leclercq. "It was driven by the kind of investors who were similar to those who buy that maturity in the euro products — central banks for example.

"But it is also true that the EMTN product helps to widen and deepen the investor base. There is some cross-fertilisation: we’re seeing more EMTN investors buying the standard OLO product. In dollars we see demand from central banks, particularly from Asian ones. Euro transactions on the longer end issued last year were bought by the usual investors — insurance companies and pension funds."

Another dynamic was funding in different currencies. Those issuers who could sell deals in dollars, sterling, or Swedish krona, for example, were able to take advantage when the foreign exchange basis swap rates looked advantageous.

The size of sovereign issuance in the MTN market rose between 2009 and 2010 — from $5.6bn to $7.5bn — and this growth looks likely to continue into 2011.

"There are many reasons for sovereigns to access the MTN market and it appears more and more are utilising this funding tool," says Croasdell at Barclays Capital. "It offers diversification both in terms of investors, tenors and markets. Also in more turbulent markets it offers a lower execution risk. MTNs (together with Schuldschein) can offer a good supplement to the benchmark funding programme of most global sovereigns."
31 Jan 2011