Sterling a star as swap spreads widen

  • 30 Nov 2007
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Sterling has had a great year, as far as highly rated issuers are. As the dollar wobbles on its perch, global demand for sterling has concerned, demonstrated by KfW’s funding distribution and the EIB’s series of issues and taps. Elsewhere, the Maple market continues to thrive, while New Zealand’s Kauri market has bloomed into life following changes to the repo rules.

When market conditions are tough, issuers need to keep their options open. That not only means reserving the right to time and size their euro and dollar benchmarks quickly, but to move quickly to launch meaningful transactions in other markets.

To this end, sovereign, supranational and agency issuers have been given a big helping hand by the sterling market, where, for once, lightening has struck twice in the same place.

"Every year, sterling has its windows," says one frequent issuer syndicate manager in London. "There are periods when swap spreads widen and the likes of EIB and KfW start issuing left, right and centre to get a large chunk of their funding for the year done.

"This year there have been two windows as opposed to the usual one. As a result, there have been a lot more issues."

Indeed, Horst Seissinger, KFW's head of capital market says sterling has been the star currency of the year.

"We are very pleased with the sterling market this year," he says. "For now, we have funded more than 15% of our total volume in sterling and this is definitely a clear sign that there is much more global demand for the currency than in the past.

"We have been able to open two new lines, a three year and a five year, which, after taps, have reached £1.5bn and £2bn."

The European Investment Bank has also been able to sell three new sterling benchmark lines, maturing in 2011, 2019 and 2044, as well as taking its 2016 issue in September up to its target £1bn size through six taps.

"The EIB usually sells its sterling bonds at maybe 20bp-25bp [over Gilts] re-offered, but because of the swap spread widening that number increased to 45bp-50bp over in a matter of weeks," says Richard Teichmeister, head of sterling funding at the EIB in Luxembourg. "And we are still getting a decent sub-Libor level."

SSAs have also found a broader audience for their issuance, as the sterling investor base has continued to grow beyond the UK’s borders.

"While maturities such as the 2044 we issued are clearly based on demand from the UK, in shorter maturities the investor base is much more international," says Thomas Schroeder, deputy head of sterling funding at the EIB. "As central banks are diversifying into currencies away from the dollar, sterling has benefited. That diversification trend is most clear in the short or medium maturities, three to five years."

At the same time, demand at the short end has been further boosted by evolving demand in the UK.

"UK funds have shown increasing appetite for shorter maturities," says Shiv Madan, syndicate manager at Dresdner Kleinwort in London. "In the past, you would typically associate UK funds with longer duration interest, typically 15 years and onwards.

"But now pension funds, insurance companies and the like have been asking for maturities as short as three to five years.

"By marrying the UK with the broader international bid for short sterling, issuers can get some really nice deals done out to 10 years and also tap the market more often."

The sterling market has shown its resilience by remaining open even into the last week of November, while other markets were seizing up. Oesterreichische Kontrollbank (OKB), for example, sold a £200m three year issue in late November.

Maples pick up the slack

Meanwhile the Canadian dollar market, in the shape of Maples, has continued to flourish.

Issuers such as KfW have kept busy, although others have been deterred from launching new issues by the underperformance of international SSA paper versus the Province of Ontario, the domestic benchmark. Some SSA issuers have not wanted to set an unfavourable pricing precedent in Canadian dollars, even if the spread to Libor has remained attractive.

Seissinger, however, says KfW has continued to issue to make good on its commitment to investors.

"Ontario is an important benchmark in the Maple market, but our aim is to establish a yield curve and offer liquid bonds in this market, and that’s something we have provided to the market," he says. "KfW is by far the largest issuer in the SSA Maple sector, and it is a clear decision of KfW to be in this market as often as possible.

"Of course we have to bear in mind that we should not harm future opportunities. But as long as the funding targets we can achieve in the Maple market are in line with our general funding targets, we do not hesitate, even if the spread to Ontario is wider."

New issuers are also still beating a path to the Maple market’s door. "In the fall OKB went on a roadshow to Canada," says Monika Seitelberger, director of international finance at OKB in Vienna. "The Maple market did not offer any opportunities so far but we hope very much to do our inaugural Canadian dollar issue some time next year."

The Maple market has taken up some of the slack from a Kangaroo market that has not been as buoyant in recent years. The Australian market has also had to watch the neighbouring Kauri market take off in New Zealand.

In July, the Reserve Bank of New Zealand announced that it was extending the types of securities it would accept in its overnight reverse repo facility. Previously only New Zealand government bonds had been accepted, but the change allowed issues from certain supranationals, foreign sovereigns, agencies and semi-government bodies to be accepted on a case-by-case basis. Issuers such as the EIB and World Bank have been quick to take advantage of the new opportunity.

  • 30 Nov 2007

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