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Supras look to MTNs for exotica

31 Jan 2011

Supranational and agency borrowers in core Europe found the MTN market a useful complement to a busy year in the public markets. Issuers were able to issue private placements in exotic currencies and light structures to offer investors extra yield or increased protection. Tessa Wilkie reports.

The MTN market was pitched against the public bond markets in 2010, as supranational and agency issuers benefiting from a flight to quality sparked by the eurozone debt crisis looked to benchmark deals for liquidity.

"The strong activity in the public market overlapped with much of the MTN demand, resulting in many investors taking benchmarks over private placements" says Toby Croasdell, director in MTNs and structured note trading at Barclays Capital in London.

Despite this, supranational and agency issuance volumes of privately placed MTNs rose to $136.4bn in 2010, up from $108.2bn in 2009, according to Dealogic.

Issuers were able to use the MTN market to issue bespoke structures and in currencies that gave more yield. A sell-off in the euro led to attractive yields in more exotic currencies, and supranational and agency issuers took advantage of this.

"Persistent low interest rates in dollars, euros, Swiss francs and yen are likely to continue to encourage diversification from retail and institutional investors alike into other, often exotic currencies," says Isabelle Laurent, deputy treasurer and head of funding at the EBRD in London. 

Issuance of dual-currency and currency-linked deals by supranational and agency borrowers jumped last year, with $11.3bn issued, up from $3.4bn in 2009

The EBRD’s main currency of issuance in the privately placed MTN market last year was the Brazilian real — 38.9% of its issuance in the market was denominated in the currency, compared with 19.9% in its second largest currency of issuance, dollars. In 2009 dollars made up 31.9% of its funding in the market, while Turkish lira was its main currency of issuance, at 33.5%.

Other popular currencies for issuance last year were Nordic ones such as the Norwegian krone and Swedish krona, which offered attractive yields compared with the euro.

"Nordic agencies benefited from a safe-haven view from investors, and most of them comfortably achieved their funding target ahead of time via the private placements market, notably through structured notes placed in Asia and a prime access to the Uridashi market" says Benjamin Lamberg, global head of MTNs and private placements at Crédit Agricole CIB in London.

Supranational and agency funding in the MTN market in Swedish krona and Norwegian krone nearly doubled last year — 2010 volumes were about $8.4bn, according to Dealogic, up sharply from $4.6bn the year before.

As these borrowers are seen as some of the safest in terms of credit quality, investors have been comfortable taking exposure to other forms of risk on their deals, such as structured issuance. For example, there was strong demand last year from Asian investors — mainly Taiwanese life assurers — for long-dated callable zero trades sold by supranationals and agencies.

The trend for structured issuance from SSAs is one that is expected to continue in 2011.

"There should be a small uptick in structured issuance with investors looking for yield enhancement across the curve ," says BarCap’s Croasdell. "Investors continue to look for simple, transparent products to express their view."

For those issuers on the periphery of the eurozone conditions were very different, as worsening investor sentiment at times made issuance in the public markets difficult. However, these borrowers were able to use the MTN market’s flexibility to issue in conservative structures.

"Iberian issuers in particular have issued large volumes of puttable FRNs to investors who wanted to lock in wide spreads but who only have short money market lines," says Paul Jones, executive director in MTN trading at UBS in London. "The domestic bid for these issuers has tended to be the most consistent source of funding with asset managers attracted by the wide spreads from their own country risk."

Instituto de Crédito Oficial was one peripheral borrower able to tap the MTN market at tough times. For example, it sold a Eu50m 18 month puttable floating rate note via JPMorgan on November 21, and a Eu75m fixed rate note via Banco Santander due January 2013 in December.

"The public markets were difficult at points in the year, although, as usual, we funded more than 60% of our debt issuance in those markets," says Rodrigo Robledo, head of capital markets at Ico in Madrid. "We’ve issued [MTNs] in several structures — puttables, CMS-linked deals, range accruals, as well as doing vanilla deals. We expect 2011 to be similar."

Although 2010 was a volatile year in the capital markets, supranational and agency issuers gained from the resulting investor flight to quality — something which should continue in 2011 and is being encouraged by regulators.

"We expect to have a similar sized borrowing programme for 2011, and expect that patterns of demand will be very similar to last year," says Laurent at the EBRD.  "The EBRD will continue to benefit from its safe-haven status, which is underpinned by its strong shareholder support, its well diversified portfolio, and its conservative risk management. I think this will be reinforced by Basel III rules that are likely to see supranational bonds sought after by banks for their liquid asset buffers."
31 Jan 2011