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German Public Sector Bonds Roundtable

22 Nov 2010

It has been a good year for Germany’s best-regarded borrowers. Only last month, KfW’s $4bn five year global benchmark raised $1bn more than originally planned at a pricing level (1bp through swaps) 1bp below guidance.

With other borrowers such as the Finanzagentur and Rentenbank also benefiting very strongly from their safe haven status on the coat-tails of the stronger than expected economic recovery in Germany, the EuroWeek German SSA roundtable looks at what these borrowers have achieved in 2010.

It also discusses the challenges and opportunities that lie ahead for this very elite group of borrowers.

Participants in the roundtable, which took place at the end of October, were:

Ralph Berlowitz, European head of rates syndicate, Deutsche BankAlex Caridia, head of SSA origination, Europe, RBC Capital MarketsFrank Czichowski, treasurer, KfWCarl Heinz Daube, managing director, German Financing Agency (Finanzagentur)Stefan Goebel, co-head of treasury, RentenbankBill Northfield, head of SSA origination, Deutsche BankOliver Radeke, head of German FIG and SSA origination, Deutsche BankPeter Schaffrik, head of European rates strategy, RBC Capital MarketsNoel Williams, director, syndicate, RBC Capital MarketsModerator: Phil Moore, contributing editor, EuroWeek

EUROWEEK: Let’s start by asking each of the borrowers for a brief overview of how their funding programmes have developed in 2010. Carl Heinz, why don’t we begin with the Finanzagentur, which has announced that it is reducing its anticipated issuance in the fourth quarter of this year?Carl Heinz Daube, Finanzagentur: The size of our funding programme this year was Eu350bn but it has been adjusted three times. The main adjustment was for funding in the fourth quarter which we have reduced by Eu12bn. The reasons were firstly that the German government is enjoying very favourable funding conditions and secondly that the overall economic environment and income generated by the government has been better than expected at the beginning of the year. In other words, tax receipts have been higher and unemployment expenditure lower than expected. Just to give an example, our unemployment figures that were announced recently are the lowest since the early 1990s.

We’ve done a number of non-deal roadshows. We’ve been to Asia twice and have focused some meetings in the Middle East, but our roadshowing has been less intensive than it was last year.

In terms of currencies, we maintain our opportunistic approach to funding, so we have only issued in euros this year.

From the maturity perspective, we always aim to spread our issuance over all different maturities to make sure that all investor preferences are covered.

Looking at the secondary market, the banks provide us with turnover statistics and in the first half of this year liquidity was up compared with the same period in 2010. The biggest share of trading in absolute terms was in Europe outside the euro area, followed by the euro area. In percentage terms the biggest increase was in the Middle East. Overall, however, we continue to see strong interest from central banks throughout the world.

 Frank Czichowski, KfW: For KfW’s funding programme, over the last couple of years we have had a relatively stable requirement of Eu75.3bn in 2008 and Eu74.7bn in 2009 and this year we are targeting a volume of around Eu75bn. To date we’ve issued a little over Eu70bn, so we are well on track.

Clearly the execution of our funding programme in 2010 has been very positive, with all KfW’s benchmark transactions very well-received. Spreads have come down consistently throughout the year, which has led to a very positive performance of our bonds and continued strong demand among investors worldwide.

We continue to market our bonds to investors throughout the world. The very good performance of the German economy, which Carl-Heinz has already alluded to, meant that we have not needed to do much marketing of KfW or of Germany from a credit perspective.

A lot of questions that we were asked in the first half of the year were focused on what was happening in the eurozone, so we had to act as an ambassador for Europe sometimes even more than we did for KfW.

The composition of our funding programme has shown remarkable stability over the years. KfW’s basic philosophy is to be represented in all important markets worldwide from a currency and a product point of view to diversify our investor base.

That has led to a distribution of our funding in terms of currencies in 2010 that is similar to previous years. In general KfW has had a distribution of around 40%-45% issued in euros, 30%-35% in US dollars, about 10% in sterling, 5% in Japanese yen and the balance in a range of other currencies.

This year there has been a higher share of US dollars, which will approach 40% of our overall funding programme in 2010. The share of sterling has been going down for a number of reasons, while the share of other currencies such as the Australian dollar is much larger than in the past.

The average maturity of our debt in 2010 is about 5.4 years, which contrasts with about 4.7 in 2009. This is a positive development for us because we’re looking for duration. The steepness of the yield curve in most of 2010 has helped us to get the duration we wanted in the market.

A clear difference between 2009-2010 is that in 2009 there was a very big risk aversion which did not just apply to certain credits but also to certain maturities, which for some periods made it difficult to get longer tenors in the market. That has been less of a problem in 2010 and we have been very pleased with the distribution of our maturity profile across a number of different currencies this year.

 Stefan Goebel, Rentenbank: Our funding strategy is based on a combination of US dollar and euro benchmark transactions as well as liquid issues in Australian dollars and a number of other currencies.

The size of our funding programme has remained relatively stable over recent years. We generally aim to issue between Eu10bn-Eu11bn annually in maturities of longer than two years and our requirement is likely to be similar in the years to come.

The stability of our funding needs has been very helpful in positioning Rentenbank in the market because investors know that we have a limited requirement and access to plenty of alternatives to cover our needs.

We do three to four benchmarks a year targeted at a very wide and diverse investor base, and we always try to ensure that those investors are offered a fair spread. In essence, investors understand that they should buy our bonds in the primary market because there are very few opportunities for them to buy in the secondary market at an attractive spread.

In the last couple of years we have been a regular issuer in euros, US dollars and Australian dollars, which have accounted for about 90% of our issuance in 2010.

All three currencies are of strategic importance for us. In US dollars and euros we have issued and will continue to issue one or two benchmark transactions a year. In Australian dollars we pursue a different strategy, building a liquid curve through a combination of new issues and regular taps until the bond reaches at least A$1bn.

In terms of maturities, we focus on three to seven years and avoid 10 years because of the steepness of the funding-spread curve and because of our relatively limited funding needs at the longer end. An option is 10 year benchmarks and we have issued these in US dollars, euros and Australian dollars in more favourable market conditions. But right now we favour shorter maturities.

In terms of investor relations, we have a large and diversified investor base and we can cover our relatively limited funding needs with our existing investor base. But we recognise that it is important to maintain a dialogue with that investor base and to grasp opportunities to expand it, especially if central banks — as we have seen recently in Latin America — continue to broaden their lists of eligible investments into the European SSA space. That has been a very supportive development for our US dollar programme.

I would echo the view that there have been very few concerns among investors about Germany. We had a few questions asking if we would be likely to get involved in any bailout programmes, but concerns about the sovereign rating have been almost non-existent.

 EUROWEEK: Is the size of your funding programme influenced by the macroeconomic backdrop and by the strong performance of the German economy?Goebel, Rentenbank: We’re a large financer of renewable energy projects for German agriculture. We have had a special situation in the area of photovoltaic energy, where a number of borrowers have taken advantage of tax incentives which are now coming to an end. So I would assume we will see less investment by farmers in that area in the years ahead.

Fewer and fewer people work in the German agricultural sector but its contribution to GDP remains reasonably stable, so it’s becoming more capital intensive, which will make long term utilisation of our loan programmes stable.

 Czichowsksi, KfW: Looking at the macroeconomic impact on our funding programme, clearly KfW finances the German economy and as such there is a certain correlation between economic activity in the Federal Republic of Germany and KfW’s funding programmes. However, this is not a perfect correlation because there are plenty of other factors influencing our funding needs. Since we primarily finance the investment activity of German corporations, private clients and municipalities, their demand determines the size of our funding. But as we channel the majority of our lending through the banks it is also linked to their activities.

In 2009 while we saw a sharp decline in economic activity in Germany, our financing activity went up because a larger share of investment was financed through KfW. Equally in 2010 we’ve seen a pickup in German economic activity which has also been reflected in both our lending and our funding.

 Ralph Berlowitz, Deutsche: The three borrowers around the table are very predictable and transparent in terms of their funding programmes, with the Finanzagentur’s funding needs more closely linked to economic developments than KfW’s or Rentenbank’s.

All three borrowers have been benefiting from the strong economic and credit story of Germany which is regarded as the top credit in core Europe and therefore the funding opportunities for them in all markets have been tremendous.

I don’t expect any big changes in these borrowers’ strategies. The market will continue to be influenced by uncertainty about European sovereign debt and peripheral markets which will clearly lead to strong demand for high quality products. So in the immediate future these fantastic funding conditions for German borrowers should continue to exist.

 Bill Northfield, Deutsche: I would agree that the transparency and predictability these three borrowers offer is something the markets have come to rely on. In times of stress and dislocation among other credits, the success of transactions for these three, be it in auctions or syndications, has demonstrated that at a global level investors believe in the German credit story. The benchmarks offered by these issuers have often acted as touchstones to reassure investors that there are still comparatively stable triple-A credits where funds can be parked relatively risk-free. Oliver Radeke, Deutsche: Another important element which the issuers touched on is their commitment to investor relations and to being transparent about their funding plans and needs. This has created opportunities for them to play in a wide range of different currencies, which has been especially notable this year in the US dollar market, where the use of basis swaps has provided a favourable cost advantage versus euros. Czichowski, KfW: As much as we enjoy the very good image that Germany has at the moment, for many years the borrowers around the table have enjoyed consistent success in their funding, even at times when German growth has been much weaker. It is important to underline that we remain committed to transparency not just when the economic climate is very positive for us, but we also recognise the importance of ensuring that we have access to funding when growth and unemployment numbers are not as positive as today.

So our aim is to be regarded as a responsible and trustworthy issuer in all possible market circumstances.

 EUROWEEK: Could we look at the dollar market in a bit more detail? One of the most striking features this year has been the success that some SSA borrowers have enjoyed in the dollar market, none more so than KfW. As RBC was joint bookrunner on KfW’s $4bn five year global last month, Noel would you like to comment on this market? Noel Williams, RBC: There have probably been two factors. First, the funding levels in dollars have been attractive because of the cross-currency basis this year. That wasn’t the case in 2009, as this was offset by the wider movement in Libor valuations.

So the pricing arbitrage opportunities have obviously been attractive to issuers. But equally important is the demand side, and this year there has been strong demand for US dollars. In 2009 US domestic investors mainly drove the market but this year demand has been especially strong from central banks, which have taken over as the main investors in this market as Libor valuations have tightened.

Central banks have seen strong growth in reserves this year, and this key demand, especially at the shorter end of the market, is what has been driving issuance.

In the second half of the year the weaker dollar has also driven some currency-driven demand, especially out of Asia. This has allowed some borrowers to push out to longer maturities in the dollar market, moving the focus from three to five year issuance.

 EUROWEEK: KfW has also issued two 10 year US dollar benchmarks this year, hasn’t it? Does this mean you’ve been tapping the broadest range of investors, from central banks at the shorter end of the curve to domestic US institutions further out? Czichowski, KfW: This is clearly not a one-year effort. We’ve been issuing 10 year benchmarks in US dollars every year since 2002.

We always look at opportunities to raise long-term funding, which don’t come around every day in the US dollar market.

Last year, the demand was very much driven by the high spread that we were able to pay vis-à-vis the US agencies.

The main difference this year is that central banks, which have traditionally focused on the three to five year spectrum, have started to go out to 10 years. This is probably due to the low-yield environment and their pursuit of more attractive coupons.

Our approach in the US dollar market has been very strategic. Our objective is always to issue across the whole curve not just in the euro market but also in dollars, which over the last two years we have succeeded in doing.

 EUROWEEK: Stefan, Rentenbank’s issuance in dollars seems to have soared to more than 50% of your total benchmark funding this year. How has your strategy in the dollar market evolved over the last year? Goebel, Rentenbank: It was an exceptionally quiet year for Rentenbank in the dollar market in 2009, because spreads were widening — I think unduly. Also, for a couple of months last year a number of the traditional central bank investors stayed on the sidelines or were even selling dollar assets which definitely weighed on the market and made it more difficult to access.

In 2009 we were also looking for slightly longer average duration, of six to seven years, than what market was willing or able to offer. Especially in the early months of 2009, dollar transactions were largely in two to three year maturities.

As Frank pointed out, demand patterns have been very different in 2010, which allowed us to do a very successful seven year US dollar global transaction. This was the first time we had issued in seven years in global format. Previously we had only accessed seven year US dollars through our MTN programme.

The other factor, already mentioned, is that the basis swap has been favourable. Not just the cross-currency basis, but if you compare US dollars and euro funding you also have to factor the three to six month basis into the equation, and for most of this year the combined effect has been roughly 50bp in five years. Hence we have been able to offer much more attractive spreads versus dollar Libor in comparison to Euribor and still achieve an all-in Euribor funding cost inside of what we would have been able to achieve through direct issuance in euros.

This year’s high share of dollars in our funding programme is not unusual. Generally, we would aim to raise between 45%-55% of our funding in US dollars, and this year we are roughly back to normal in terms of the share of dollars in our funding mix.

EUROWEEK: Carl Heinz, I guess you’ve been monitoring opportunities in the dollar market very carefully. Given that the arbitrage has been so attractive in dollars, has the Finanzagentur considered returning to this market?Daube, Finanzagentur: As you know, we have a purely opportunistic approach to funding in dollars. That means we need to be sure there is a sufficiently attractive arbitrage opportunity in the market.

It also means we have to take into account the basis swap level, because we need to fully hedge the structure as we are not allowed to take any FX risk. If both these criteria are fulfilled, we also need to raise a reasonable amount, because for us as a benchmark issuer, the market may start asking questions if we were to announce an issue of, say, just $2bn or $3bn.

If you look at the benchmark we did in September 2009, that had an overall issuance volume of $4bn, and we saved the German taxpayer something like Eu20m-Eu25m over the life of the bond. This is the minimum that we should be looking to save on behalf of the German taxpayer before we can recommend to our shareholder that we should be looking at the US dollar market.

This means that in these volatile markets we would need a big buffer in terms of the arbitrage opportunity and the basis swap, because if the market knew that Germany was planning to issue a US dollar benchmark, I could imagine that the basis swap would start to move.

 Peter Schaffrik, RBC: Moving the focus away from what has been happening in 2010 towards what may happen in the future, some of the features to have triggered changes in the market over the last year are probably more permanent. This will certainly be the case if we are looking at an environment which will continue to feature very low interest rates or yields core Europe. This will trigger more moves further up the yield curve by investors looking to get better yields on board.

The second factor is that the high volatility in spreads in non-core Europe is unlikely to go away in the next year either. As well as combining these two factors, we should throw into the equation that we are probably seeing a permanent shift in investor behaviour away from pan-Europe and towards core Europe only. I would venture to say this will lead to substantial opportunities for sovereign Germany and other top quality German names, both to move further up the yield curve, and to broaden their investor bases still further.

 Czichowski, KfW: That is a very good point. I would add that we’ve been commenting on the increase in central bank reserves which is a trend that is likely to accelerate. This will lead to a rising demand for top quality credits such as German SSAs.

Additionally, over the next few years we will see a lot of government-guaranteed bank paper maturing, which is rightly treated by most investors as quasi-sovereign paper. Most of the reinvestment arising from those redemptions will flow into government and agency debt. This is another reason why the overall environment seems to be increasingly conducive to SSA issuance.

 EUROWEEK: Does this mean that you will continue increasing the average length of your debt? Czichowski, KfW: In principle we will probably have the opportunity to do so. But all our issuance is asset-liability management driven, so there is a limit to what we want to achieve in terms of extending average duration. Most of the financing we do generates average liabilities of between 4.5-5.5 years, which is in line with the maturities we have achieved in our funding programme. So it is unlikely that we will extend the average maturity of our funding much beyond 5.5 years.

Equally, our appetite for liabilities which are longer than 10 years is limited, especially in large volumes. So our appetite for big 30 year benchmark transactions or even 100 year transactions of the sort that have been issued recently is in the former case limited and in the latter case, non-existent.

 EUROWEEK: What about the Finanzagentur? Will you look to reduce issuance of bills and to term out the maturity profile of your debt? Daube, Finanzagentur: Our overall issuance volume in 2011 may be slightly reduced but it will nevertheless stay above Eu300bn. Although we know what our redemptions will be in 2011, we don’t yet know for sure what the net borrowing demand of our government will be next year. The budget is due to be finalised this month and after that we will be in a better position to determine the details of our issuance calendar for next year.

We intend to keep the same percentage weightings of all maturities of capital market instruments as we have had in previous years. That means we will ensure that there is sufficient supply of two, five, 10 and 30 year issuance.

We may try to reduce our Bubils issuance slightly, because as you may remember, before the crisis we had roughly one third of our funding in short term money market instruments and two thirds in capital markets. In 2009, that rose to 50% and this year it has come back to 40%-60%, so we’re moving back towards reducing the share of Bubils. This is because in the long run we believe it is better not to depend so much on the short end of the curve, even though at the moment there is huge demand from central banks for Bubils.

I should add that we will also stick to our policy of issuing inflation-linked bonds in response to market conditions and investor demand. If there is an attractive arbitrage opportunity we might even recommit to issuing a 30-year linker.

 EUROWEEK: What is the outlook for euro issuance?  Alex Caridia, RBC: Although KfW has successfully issued 10 year dollars, the vast majority of issuance from SSA borrowers in dollars has been focused in three to five years. It’s important to note the role that the euro market plays in extending issuers’ duration.

In 2011, we would expect dollar issuance to remain focused on the short to medium part of the curve.

In terms of other currencies that German borrowers will look at, as has been mentioned before, the Australian dollar market has been a bigger source of funding for Rentenbank and KfW this year. They have each taken about twice as much out of the kangaroo market this year as last year. Demand in that market has been driven by an attractive yield pick-up versus some of the core currencies and an increase in central bank reserves in Australian dollars reflecting strong economic fundamentals. We think this trend will continue in 2011.

 EUROWEEK: Rentenbank had made productive use of the Australian dollar market for years. Stefan, can you comment on how your strategy in this market has developed? Goebel, Rentenbank: It is true that we have been a regular issuer in the Australian dollar MTN market since 2002. Today, we’re the third largest issuer among triple-A agencies in terms of new issue volume as well as outstanding volumes.

We would probably find it difficult to issue A$750m or $1bn in a one-off deal which has become a bit of a trade-mark for borrowers with larger programmes such as KfW, the EIB and some of the US-based supranationals. We prefer to go down the route of issuing smaller transactions and tapping them to increase their size to a minimum of A$1bn in response to investor demand. In this way we have been able to create liquid lines at a number of points on the curve.

The Australian dollar market has developed in an exceptional way in recent years. When European borrowers started to set up Australian dollar MTN programmes in the late 1990s or early 2000s it was largely in the expectation that supply of Australian government debt would diminish, and that domestic investors would need to invest in alternative long-term fixed income products.

At that point there was never the perception that Australian dollars would develop into a truly global currency or that central banks would give Aussie dollars a more prominent place in their reserves.

If you look at the typical distribution of an Australian dollar transaction nowadays there is still a strong take-up from domestic investors, but there is also placement among central banks and asset managers across the world. There is also a decent retail bid for Aussie dollars which drives the longer term performance.

Hence it is a market that will continue to make a stable contribution to our funding programme, which is why after US dollars and euros it is our third most important strategic currency.

 EUROWEEK: Frank, would you like to comment on KfW’s strategy in the Australian dollar market? Or indeed on your strategy in any other currency, such as sterling, where KfW has been very active? Czichowski, KfW: KfW has this year been the biggest offshore issuer in Aussie dollars with an issuance volume which is the equivalent of about Eu5bn in 33 different transactions. Like Stefan, we expect this to be a stable market for us. There is an increasing offshore interest in Australian dollars, which is a market in which we enjoy very balanced distribution. Around 55% of our Aussie dollar securities tend to be sold offshore and about 45% sold onshore which we believe to be a very healthy mix.

Our use of sterling has declined recently, mainly due to the large issuance by other parties in the market, which has reduced the opportunities to secure attractive pricing, with the basis no longer as appealing as it is in some other currencies.

One area where we have made big inroads this year is the Swedish kronor market. We’ve done about 15 transactions in that market, which continues to be of high interest to us. There is also still strong investor demand for Norwegian kroner, which continues to be an important market for KfW.

Overall, KfW’s funding programme is well diversified and we have issued in about 20 currencies this year, but these are the ones I would pick out as the highlights.

 Caridia, RBC: I would echo the points that Stefan and Frank made. Borrowers will be agnostic as to the currencies they decide to issue in, gravitating towards those that offer the best demand profile and the optimum execution and cost of funds.

The Australian dollar market has been very strong this year and we are also seeing demand picking up in the sterling market for triple-A spread product. If we see a widening in sterling swap spreads next year we would expect reasonable opportunities for borrowers in that market.

The sterling market for SSAs came under some pressure over the last year, with some central bank demand gravitating away from the market. But the overall perception of the UK is changing and the last few transactions we’ve done have been supported by a pick-up in central bank demand for sterling, so I would expect further issuance in the market.

 Schaffrik, RBC: One of the features we should all expect in the years to come is that not just the German issuers, but borrowers from throughout Europe, are going to try to broaden their product usage in general. We’ve already seen that trend in sovereigns, where there has been more widespread use of inflation-linked bonds and more interest in using floating rate notes.While German issuers are coming from a position of relative strength and therefore have different motives to other European borrowers, the trend towards using a range of instruments is certainly more visible across Europe.EUROWEEK: Would other bankers around the table agree that there is likely to be more innovation from borrowers?Berlowitz, Deutsche: Our capital market team is always looking to explore new opportunities in new and existing markets, such as the Renminbi market in China and others in the Middle East and Latin America are opening up which is creating new opportunities for borrowers. To support their development you need high quality issuers and German SSA borrowers certainly qualify as being among the world’s premier issuers.

Will these markets supply big funding opportunities in terms of volumes? No. But they will offer borrowers the opportunity to add to the diversification of their funding profile. At the same time we believe there will be more demand for non-core currencies such as those that Frank mentioned. All these markets are growing rapidly and it is clear that investors around the world are concerned about trends in the world’s big markets, given debt levels and recourse to QE. We believe that all this will drive more capital flows into so-called non-core markets.

 Williams, RBC: Of course it is also possible to innovate within core currencies. For example, KfW issued an Eonia-linked FRN this year, and we led a Sonia-linked £300m for EIB in March. It is important to keep looking for alternatives away from the core benchmarks, and to be adaptable when those new opportunities arise. Czichowski, KfW: I agree. We’re seeing economic growth in a number of emerging regions, in particular Asia and Latin America. This is a very positive development which will lead to more capital flows and to the growth of capital markets. A big advantage that global borrowers with a well-established funding platform like KfW have is that investors throughout the world are already familiar with their credit through their core currency issuance. So when new currencies or structures emerge for these investors to consider, it is very likely that we will be a beneficiary.

Over the last couple of years we have seen a continued internationalization of capital markets. At the start of the crisis it looked as though this internationalization would be set back, but with the benefit of hindsight it has been no more than a bump on the road. It now looks as though we will have an even stronger trend towards internationalization with more players participating in the market and more currencies becoming available.

 EUROWEEK: I’m interested to hear you say that. A banker in Frankfurt told me the other day that what he would call the ‘pure’ German institutional investors — not the multinationals like DWS and Allianz — are focusing more than ever on domestic exposure. Is this creating an embarras de richesse in domestic demand, which you are neither able nor willing to satisfy? Goebel, Rentenbank: We did see strong demand from the domestic investor base in 2009 and we were able to supply that investor base with the product it needed. The difference in 2010 is that yields have come down further and our duration requirements are not the same as in 2009.

Hence the broadest demand from the domestic investor base which we have been able to capitalise on has mainly been in euro-denominated floating rate notes. So there has been a completely different distribution pattern into the domestic investor base in 2010 as compared with 2009.

 Czichowski, KfW: Our experience has been a little different to Stefan’s. After the crisis in 2009 we saw a big pick-up in the domestic distribution of our euro paper from 15% in 2008 to 34% in 2009, which we thought was a response to the crisis and that we would see a broader international distribution of our euro paper after the crisis subsided. But in 2010 we have seen an increase in the domestic distribution of our euro paper. In spite of lower yields, about 40% of our fixed rate euro benchmark issuance has been sold into Germany. So from our perspective I can confirm the impression of the banker you spoke to.  Daube, Finanzagentur: It is sometimes difficult to identify whether there have been changes in the distribution of demand. We will have about 66 auctions this year and we won’t necessarily know where the banks in the bund auctions group are selling the paper.

But we do know that in the secondary market there has been strong demand from Europe and the euro area. So I wouldn’t be surprised if there has been an increase in demand from the pure domestic investors, particularly from the insurance company sector.

 Northfield, Deutsche: Insurance companies have certainly been active at the longer end of the curve in their search for yield. With absolute rates trending lower, that has been a theme for most of this year. This comes back to a comment that Frank made earlier about the constraints that borrowers may have on the ALM side. Whereas the dollar market may be expanding out into century bonds, because of the inversion of the euro swap curve, the euro sector may not see a similar expansion out into the ultra-long maturities.  Radeke, Deutsche: As we have seen from the covered bond market, as the situation in southern Europe stabilises we will see appetite for peripheral risk re-surfacing. But for the time being they are favouring government guaranteed bonds available from those countries as well as covered bonds which are trading very cheap against core Europe. So we’re seeing a bar-bell strategy where on the one hand investors are putting their very safe investments into government and agency bonds from prime issuers in Germany and multinationals only, and into spread products from peripheral markets on the other. This trend will benefit the top-quality German issuers. EUROWEEK: Is execution risk less of a concern than it may have been 12 to 18 months ago?  Williams, RBC: Execution risk has always been important for triple-A borrowers and SSAs. The market has moved more towards a 24-hour period for launching and pricing, compared with a few years ago where it would have been two or three days for benchmark bonds. Obviously that move has been caused by the increased volatility in swap spreads, but the market has become comfortable with that time frame, and it is now more the exception rather than the rule when a deal pushes on for more than 24 hours. So I don’t see execution risk as a huge issue.  Czichowski, KfW: Before the crisis new benchmark issues were often announced before the weekend and then executed the following week. But during the crisis volatility was so high that announcement and execution periods became shorter. I would agree that the market quickly got used to that. Williams, RBC: One way that execution risk has been minimised in the dollar market is that SSAs have moved from giving guidance versus Treasuries to guidance versus mid-swaps to safeguard against movements in swap spreads. Again, the market has become comfortable with this change.  Berlowitz, Deutsche: Execution risk for a borrower like KfW is much lower now than in 2009, but it remains a risk for any peripheral issuer. For those borrowers, sentiment can change very easily within a day, sometimes dictating whether or not deals can be done at all, but that no longer applies in the case of KfW or Rentenbank.   EUROWEEK: What are the roundtable participants’ hopes and fears for 2011? Northfield, Deutsche: I expect continued differentiation amongst investors who have spent a lot of time this year getting up to speed on some non-core names which some may now regard as credit rather than rates investments. That should certainly favour the triple-A issuers that are participating in this roundtable, because the markets don’t appear to believe we’re out of the woods yet in terms of the challenges facing some eurozone issuers.

The next three to six months will be very interesting. That said, with systems such as the EFSF and the EFSM now in place, there is a stable framework for providing any assistance that may be needed. So from my perspective the top-rated names in the SSA community should continue to have open and ready access to funding throughout the year via a range of new products, new currencies and new maturities.

With investors understanding that Germany is at the heart of Europe’s economic engine, we are optimistic going into 2011 on the prospects for the German SSA borrowers.

 Berlowitz, Deutsche: I agree. I also believe that looking forward into 2011 there are some very stable and well-known factors such as the size of the funding programmes at borrowers such as KfW and Rentenbank.

There are also some unknown factors which could influence spread levels in Europe. One of these is whether there will be any issuance from the EFSF. Will any country need to go to the fund and ask for aid? If so it would obviously increase the supply of triple-A agency issuance.

Additional agency supply from Germany is expected to come from the two newly created institutions, FMSW and EAA. Their funding volume is a bit of an unknown at this stage.

 Radeke, Deutsche: It is absolutely true that the new Abwicklungsanstalten, which are the new institutions which have been created to manage the non-core businesses of WestLB and Hypo Real Estate, will have to issue medium to long-term bonds in large size.

We know from EEA, which is the institution managing the WestLB non-core portfolio, that they are already in close co-operation with the other issuers in the State of North-Rhine Westphalia, ie the Land itself and NRW.BANK, in regard to market access and distribution of potential issues. And FMSW, which is the institution managing the HRE portfolio, too will have a big funding need, which is also expected to come to the market in a series of issues starting next year.

In total the potential funding volumes of these two institutions could be larger than the amount issued by Rentenbank and NRW.BANK. But this supply will be easily absorbed, once investors have understood how the risk shield and the guarantee schemes of these institutions will function. So in normal market conditions I don’t expect this new supply to have an impact on spreads.

 Schaffrik, RBC: One of the key elements, not just for next year, but for the next few years, is going to be which kind of permanent crisis-management mechanism is going to be decided upon at a political level. It will be interesting to see what impact that will have on the structure of investor demand and on the economic foundations of the eurozone.

We could imagine a scenario where things don’t go as well as they appear to be doing at the moment, which will make it more difficult to place some of the lesser credits. That would have big repercussions on economic activity.

 Caridia, RBC: We would expect the funding programmes of German SSA borrowers to be stable going into next year. That is in contrast to some of the other regions in Europe, where we expect to see some of the French and Scandinavian borrowers to increase their funding volumes going into 2011.  EUROWEEK: Bill said he was very confident about the outlook for 2011. Does RBC share this confidence? Schaffrik, RBC: We are certainly confident that the more stable environment we have seen recently is not going to become shakier next year. However, one of key point to get across is that for the next couple of years among European sovereigns the environment will be changing constantly.

There is absolutely no doubt that that is going to be challenging. It will be an environment which even some of the sovereigns that used to have ready access to the market find more challenging.

 Williams, RBC: Looking forward to 2011, one thing that gives me reason to feel confident is that we will have just come through three very different years, but in each the market has shown itself to be very resilient and able to adapt to whatever circumstances arise.

Bankers are talking about potential haircuts on bonds for peripheral borrowers, so there is still clearly a lot to think about. But I’m confident that markets will be able to rise to the challenge.

 Czichowski, KfW: Overall the crisis has shown that the capital market is fairly resilient. It was a surprise to me that within a couple of days of the beginning of such a deep crisis people started trading again.

It is clear that investors in government product have staffed up their credit analysis capacities and are looking at some sovereign and agency issuers more from a credit point of view than before. That will benefit issuers like us.

The European debt problem clearly isn’t yet over but there have been some very positive signs. First of all, the loan to Greece and the creation of the EFSF shows that the eurozone countries are on top of the situation, which is reassuring. Additionally, most or even all of the eurozone members have embarked on consolidation and austerity measures to implement more sustainable budgets, which I would also take as a very positive sign.

Of course there are challenges ahead but I’m very optimistic on the outlook because there is a high level of awareness about these challenges and a strong political willingness to address these issues.

 Caridia, RBC: We share Frank’s confidence in the outlook and we definitely see good opportunities in the European government bond market. We recently joined Germany’s Bund Bidding Auction Group and we’ve also started making markets in French government bonds as an SVT. We are looking to build on our successes and are focused on establishing a trading capability across multiple European markets.
22 Nov 2010