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Small issuers make a big impression

04 Sep 2003

Nordic sovereigns have taken advantage of their rarity value and fiscal strengths this year to attract strong demand from investors. At the same time, growing funding needs have prompted the region's agencies and supranational to adopt a more international stance. Neil Day reports.

It's not quite a story of David and Goliath, but this year the top Nordic borrowers have shown some of their larger European peers how to triumph in the international bond markets. Despite having a combined population of less than one-third of Germany's, the region's sovereigns, supranational and agencies have made a big impression on investors. And none more so than the Republic of Finland.

Having already taken the record for the largest syndicated government bond issue in 2002, Finland excelled itself in February with an even bigger transaction, raising Eu6.5bn in a three year deal via ABN Amro, Deutsche Bank, Merrill Lynch and Nordea. This eclipsed the sovereign's Eu6.5bn deal in April 2002, as the Finnish state treasury had then retained Eu500m for its own repo facility.

The issue was just the latest example of a smaller euro zone sovereign concentrating its funding needs into as liquid a benchmark as possible to compete on a level playing field with the core European markets of France and Germany. And not for the first time, Finland made use of a buyback to boost its firepower. The republic bought back Eu2.1bn of its old high coupon 9.5% March 2004 line.

However, Satu Huber, director of finance at the Finnish state treasury, says that market participants should not expect such large transactions in the future. "When we have issued these Eu6bn-plus deals we have said that they are unusually large for a small country like ours," says Huber. "It's not something that one would normally expect and Eu5bn will be the regular size."

The reasons for the step back to a more modest, albeit still liquid size, are twofold. Firstly, Finland's funding requirement is modest; next year the republic will have a net funding requirement of around Eu10bn. And secondly, through its combination of buybacks and new issues since the launch of the euro, the sovereign has taken out most of its pre-euro, high coupon lines.

Hence when Finland returned to the market in May to launch a five year benchmark via Barclays Capital, BNP Paribas, Citigroup and OKO Bank, the size was fixed at Eu5bn. But while the size might have proven less impressive than the republic's three year exercise, the pricing was more striking.

Benefiting from its fiscal prudence while Germany and other euro zone sovereigns were breaching the stability and growth pact, Finland was able to price its issue roughly flat to Germany. The re-offer was also inside original price talk and equated to a 2.5bp benchmark premium for the republic.

Looking back on the deal, Huber recalls that some accounts required convincing of the pricing. "Our biggest challenge this year was the five year deal because we were trading so close to Germany," she says. "I met with many central banks who had bought our paper in the past, but who asked why they should buy Finland when there was no pick-up over Germany."

Huber's answer was to present them with a graph of European Commission forecasts which presented Finland in an appealing light versus Germany and other euro zone sovereigns. "That really helped us to show Finland's relative value compared to other countries," says Huber.

Denmark enters the fray
Finland's five year issue came in a busy month of five year supply, as the Kingdom of Belgium was readying a new deal at the same time. The Kingdom of Denmark had also just paid a visit to the five year sector, albeit on a smaller scale.

Denmark's deal, launched in the first week of May, was a blow-out success. Lead managers ABN Amro, Deutsche Bank and JP Morgan had initially gone out with guidance of 20bp over the Bobl 141, but were able to price the issue at 18bp over and increase the deal from Eu1.5bn to Eu2.3bn. This gave Denmark pricing just 2bp over the German curve and 3bp inside its own curve.

The transaction benefited from Denmark's rarity value as well as the strength of demand for five year paper that was again demonstrated on Finland's issue. And having attracted demand of Eu8bn, Ove Sten Jensen, head of government debt management at Denmark's Nationalbank, told EuroWeek at the time that he was particularly pleased with the distribution.

"We are very happy with the very solid order book and the broad group of investors that we have reached," he said. "The book contained the sort of names that one would hope to see involved in such a deal."

Denmark's issue formed part of its foreign currency borrowing needs and Jensen said that the sovereign will continue to launch one euro benchmark a year. Such a policy allows the central bank to meet its needs and at the same time help the sovereign to broaden its euro investor base.

"We are very public in our strategy," he said, "which is to issue one euro deal in benchmark size annually in the five year maturity. This is a long term policy and a strategy that we are very happy with."

The largest of the Nordic countries, the Kingdom of Sweden, has kept a relatively low profile this year, its largest issue being a $500m December 2008 retail-targeted Eurodollar transaction via Citigroup and RBC. However, the benefits of its modest and opportunistic approach to the market were highlighted by the re-offer level that it achieved - around 27bp through Libor.

"Sweden is a magic name," said a syndicate manager at Citigroup at the time. "It has a limited funding requirement, so it comes to the market quite rarely. But when it does, the transactions attract interest from all quarters."

Kingdom lifts SEK
With Sweden's international borrowing so modest, those investors wishing to gain exposure to the country have to look elsewhere. One of the alternatives is Swedish Export Credit (SEK), which this year has overcome problems to emerge stronger than ever.

Early in the year, SEK's borrowing was suffering from its association with the beleaguered ABB, which held a 35.5% stake in the institution. "Some investors far away from Sweden, in Japan for example, were a bit reluctant to invest in SEK paper," says Johanna Clason, SEK's treasurer. "They were concerned about ABB and hence the uncertainty surrounding our ownership."

However, the borrower's problems were short lived, as the Kingdom of Sweden took over ABB's stake, taking its ownership of SEK up to 100% on June 30. As a result, Standard & Poor's removed SEK's AA+ rating from negative outlook and Moody's upgraded the institution from Aa2 to Aa1.

Clason therefore had a busy June. "The actual ownership change took place at the end of June, but everybody knew about it beforehand so that month we did more funding than in any other month of the year, and July continued to be busy," she says. "We had been raising decent volumes all year, but since the change of ownership our funding levels have consequently improved."

SEK's funding programme was helped by marketing efforts including a presentation to investors and banks in the Swedish embassy in Tokyo, and a busy round of meetings at the Euromoney Borrowers and Investors Forum in London in June.

Clason also found time to launch a $200m non-cumulative direct perpetual capital contribution securities issue with the help of bookrunners Lehman Brothers and Nomura in mid-June. As part of the kingdom's agreement to take over ABB's stake, SEK paid a special dividend of Skr1.24bn to ABB, and the issue was largely designed to fund that.

The modest size of the transaction and strength of demand from Asia for such capital securities allowed the leads to first offer coupon guidance inside 6% and then tighten the level from guidance of 5.75% to 5.4%. And given the way in which the change in interest rate expectations over the summer has hit the Asian retail market, Clason is relieved that the transaction was executed so successfully. "We were extremely lucky with the timing of that transaction," she says.

Eksportfinans benchmarks fly
Like Kommuninvest, Eksportfinans, Norway's export credit agency, has also faced growing funding needs. In 2001 the agency raised $1.8bn equivalent and in 2002 $2.8bn. This year Eksportfinans has already raised $3.6bn and it expects to have borrowed over $4bn by year end.

Søren Elbech, head of funding and investor relations for Eksportfinans, says that it is these growing requirements that have prompted the borrower to adopt a more strategic approach to the bond markets.

"In recent years our borrowing has doubled," he says, "due to both developments in the Norwegian krone/dollar cross-rate and because of increased funding requirements resulting from growth in our balance sheet. In order for us to raise that much more capital, we have refined our funding strategy, which includes both strategic benchmark type issuance as well as MTN-style structured funding."

In October 2002 Eksportfinans launched the first transaction to mark this change in strategy, a $750m five year global bond via Citigroup, Nomura and UBS. The agency had, in May 2001, already approached the global market with its debut issue, but last October's deal was the first of what will be a more regular presence for Eksportfinans in the dollar market - plans for a $1bn global bond in the first quarter of 2004 are already under way.

And had it not been for a shift in investor demand, Eksportfinans might already have launched a third dollar global. When the agency announced in January that it was planning to issue a benchmark transaction, it had originally been expecting to tap the dollar market. However, Elbech says that during discussions with investors, particularly Asian central banks, it became clear that a euro deal would be more welcome.

So after a delay caused by the Iraq crisis, Eksportfinans in April launched its largest ever bond, a Eu1bn five year deal via Credit Suisse First Boston and Nomura priced at 19.5bp over the Bobl and 2bp over mid-swaps. Demand for the agency's paper enabled the issue to be increased from the initially planned Eu750m.

Given that Eksportfinans had through the two transactions raised as much as it had previously raised in a year, Elbech was delighted with the reception. He says that the success of the deal shows that investors have understood the borrower's commitment to the market. "It is paramount to us that investors and dealers alike are convinced that our benchmark strategy is a long term one and that we will also be a frequent, high quality issuer going forward," he says.

He is also pleased with how Eksportfinans has been able to keep its funding levels down, despite the greater requirements. "The challenge for us was to raise much more funding without our funding costs deteriorating and we have achieved that," says Elbech.

NIB thinks global and local
At the Nordic Investment Bank (NIB), keeping funding costs down has determined that the supranational has been present in the dollar, rather than the euro market. Its head of funding, Kari Kukka, says that the funding advantages of the dollar market make it an obvious choice.

"The euro market would be interesting and the natural currency for us to issue in, but we are still a relatively small borrower, raising just $3.5bn equivalent this year, and if I only have to issue one benchmark a year in euros or dollars, dollars is more competitive."

At the beginning of December 2002, the supranational launched its debut global dollar bond - at $1bn, its largest ever deal - and in April this year NIB followed it up with a second transaction.

However, Kukka is keen to stress that it was not only the attractive funding costs that drove the two transactions. "First of all, there is, of course, the good funding," he says. "But there is also the diversity of investors that we achieved and the way in which we could improve our name recognition among this investor base."

On the back of strong demand for short dated paper and its rarity, NIB launched a three year global via Citigroup and Goldman Sachs in December, and then returned with a five year in April via BNP Paribas, HSBC and Morgan Stanley. Its first transaction was priced at 1bp-1.5bp back from the EIB and its second on top of its peer. While some market participants had at first been sceptical about such pricing, any fears were soon overcome.

"Everyone was suspicious at the outset, thinking that the deal was too tight historically for NIB and against its supranational peers, but the doubters were proved wrong," said one syndicate member.

04 Sep 2003