KfW

  • 21 Jan 2005
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Guarantor: Federal Republic of Germany
Rating: Aaa/AAA/AAA
Amount: Eu4bn global
Maturity: 4 July 2015
Issue/re-offer price: 99.081
Coupon: 3.5%
Spread at re-offer: 10bp over the 3.75% January 2015 Bund
Launch date: Tuesday 18 January
Payment date: 26 January
Joint books: Deutsche Bank, Morgan Stanley, UBS

Borrower's comment:

We are pleased that this maturity worked ? 10 years has traditionally been a more difficult maturity, but this time it was exactly right. Right for the market and right for us. We had a lot of discussion with the market and found there was a bid for duration.

We decided to change our issuance plans and go for a 10 year as the first benchmark of the year. The market is in great shape overall, but we felt that the execution demonstrated that the longer part is well bid.

The 10 year maturity is an important part of our benchmark programme. We have always done 10 years, and though we had not planned to do one we felt that we would. We have outstanding 10 year issues and from time to time we issue in the very long end, though more often in a structured format.

We can use a 10 year funding more easily for asset and liability management purposes than we can longer dated debt. We do not exclude longer maturities, but there was other issuance in longer maturities last week and the 10 year sector of the curve had not yet been covered. We felt that we could fulfil investor demand.

The target size for our benchmarks is Eu3bn-Eu5bn. The book was strong and we felt at the end of the day that the right size, on the back of the strong book was Eu4bn.

That left a decent short in the market and the potential for performance. Our experience demonstrates that that was the right strategy. The bonds are now (Wednesday) trading at 9.25bp-9.75bp over Bunds. It is important to KfW that we deliver

performance and we did.

We could have held out for more orders but there was such a good dynamic in the bond that we decided to close it today (Wednesday) and to go for Eu4bn.

Our experience has been that there is no major difference between Eu4bn and Eu5bn KfW deals in terms of trading liquidity.

We have a requirement of Eu50bn-Eu55bn for 2005, and so far this month we have raised roughly Eu7bn-Eu8bn. The markets are in good shape, and not just for KfW.

Bookrunners' comments:

Deutsche ? The most impressive thing was the Asian distribution, which took the largest share ever in such a KfW benchmark. It shows that Asian investors are keen to buy 10 year bonds, though their normal preference has been for five years.

Overall demand was so impressive that the order book filled up very fast and we were able to increase to Eu4bn while achieving an order book that at Eu6.3bn was more than 50% oversubscribed.

This was one of the most successful 10 years yet. It is now (Thursday) trading at 9.5bp over Bunds. We are seeing continuing demand in the secondary market.

There have been two changes. First a lot of the Asian investors, not just central banks but Asian investors in general, are becoming increasingly interested in euros and are using the euro to hedge their large overweight positions in dollars.

Central banks are shifting more strongly out of dollars and into euros to reduce their losses from a weakening dollar.

The second is that in these low yielding markets, a lot of Asian accounts are increasingly interested in longer maturities and some of the accounts told us that they had switched benchmarks and were now interested in longer maturities.

Morgan Stanley ? We originally went out on Monday with Eu3bn at 10bp over. The book grew extremely quickly and at the end of two days we had Eu6.3bn. The orders were consistent at 10bp over and by Wednesday morning we were able to price.

It worked out at 1.5bp through mid-swaps.

We were pleased with the

percentage that went to Asia, which was good for a 10 year. It's not a part of the curve where Asian buyers have traditionally been active. There has been no other 10 year government supply in the market this year.

The bonds broke at 9.25bp-9.75bp and closed today (Thursday) at 9bp-9.5bp. We have bought a few bonds back, but the deal is very well supported and there are shorts out there.

There has been an extension to 10 years and there is also a percentage of money being allocated into euros. Even though it is a relatively small percentage of Asian central bank holdings it is a huge amount of money.

UBS ? KfW announced last year that it would do benchmarks of Eu3bn and larger. January is traditionally a 10 year month, investors are cash rich and none of the similar issuers has done a 10 year yet. We could comfortably have done more than Eu4bn. The book was over Eu5.5bn.

Europe bought 70% and Asia 29% while 1% went elsewhere.

Central banks bought 32%, banks 39% and funds 23%. The other 2% went to insurance companies.

To have 29% of a Eu4bn deal sold into Asia is a very high proportion. The big central banks are not normally long dated players. They are happy to buy euros, and are buying dollars as well, but it is unusual for a 10 year to have that kind of distribution in Asia.

We also had a high cash component. There was no switching out of KfW, it was all cash and govies. People like this instrument, it is close to Libor and long, so there were switches out of the shorter govies. There were 200 orders in total.

It was a good book. The biggest ticket was Eu300m.

We started with price guidance of 10bp-11bp and refined that to the 10bp area. The reason we priced at 10bp was that KfW wants some performance in the deal. That is why we did not go for 9bp for Eu4bn, or for a larger size at 10bp. We could have done Eu6bn.

The bonds are (Wednesday) trading at 9.75bp-9.5bp. They were bid 1bp up in the grey market before pricing and tightened right in off the break.

The outstanding 2014 was at 2bp through mid-swaps, so at 1bp through, this does not offer much of a premium.

KfW has such liquid curve outstanding that one can price it off its own bonds. We priced this essentially flat to the offer side of the 2014.

The markets are buoyant. There is always money to put to work in January and accounts were under-invested, so some of this is money left over from last year.

It takes confidence to start your programme for the year with a 10 year euro trade. The trade went well, but 10 years is always a risky maturity.

Market appraisal:

?...this was a great trade for them, it was increased to Eu4bn with a strong order book. This was the right trade to do. It might have taken a few people by surprise ? doing a 10 year for their first benchmark of the year ? but it shows that they were paying attention to what the market was saying and doing.

We have seen a lot of extension in euros and there was no competing supply.

One could argue that at longer maturities there is more execution risk, but last week ? when Belgium priced a lacklustre five year and Spain priced a blowout 30 year ? it showed that the further along the curve you go, the more demand there is.?

?...KfW was clearly very successful. It captured the Asian bid nicely. The curve flattened during the process, so the final Libor level made the deal more attractive to investors than it had been on the first day.?

?...the KfW 10 year was a great deal. I would have loved to have done it.?

?...the pricing was right. It is difficult to go from 10bp to 9bp as investors view that as more than simply one basis point ? there is also a psychological barrier.
There is enormous demand for paper in the market and this deal benefited from that overriding fact. They were therefore able to upsize the deal.
The book did build faster than had they done a Eu5bn issue, as they did in the past, as investors have more confidence and therefore place their orders quicker. But in this kind of market it wouldn't have made too much difference if they'd have come with a Eu3bn, Eu4bn or Eu5bn deal.?

  • 21 Jan 2005

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