Guarantor: Federal Republic of Germany
Maturity: 14 March 2008
Issue/re-offer price: 99.70
Spread at re-offer: 24bp over the 3% November 2007 UST
Launch date: Tuesday 25 January
Payment date: 1 February
Joint books: Citigroup, HSBC, JP Morgan
We have raised close to Eu10bn so far this year, which is roughly in line with what we have done in previous years. Everyone knows that in January there is a strong demand, so we try to get some prefunding done in the first few weeks of the year. However, we expect the coming month to be quieter. We aim to fund Eu50bn-Eu55bn in 2005.
We saw strong demand in dollars in the first two weeks of the year which continued. Our initial market sounding showed that there was strong demand from Asia. That was the motivation for going ahead.
We started out saying that it would be benchmark size, which could be either $2bn or $3bn according to the demand, but our aim was, if possible, to issue $3bn.
The feedback from investors was that they would rather have a three year. There was some five year supply, and three years was the right decision.
There are two areas we focus on for this short dated dollars ? Asia and the US. The US distribution was challenging because we had a spread well inside the US agencies. However we succeeded in having top accounts in our order book. Asia was even better.
Last year we saw more orders and smaller tickets. The average last year was around 130 orders, and in this deal we had 100, so the average size of tickets is higher.
On Tuesday morning we had a discussion about whether to speed up the execution or to hold on and increase the order book. We decided that a book of $3.4bn is sufficient for a $3bn deal if it is a good quality book.
We wanted to avoid inflating orders. The bonds are holding strong in the secondary market. And flowback is commensurate with what we have seen in previous years. The deal's success confirmed that we were right to go for $3bn.
The pricing in dollars is attractive with respect to the levels that can be achieved.
There has been a lack of three year supply. The European Investment Bank issued a $3bn three year in the first week of the year as did the Federal Home Loan Banks, but there has been nothing since.
Paper maturing in 2008 trades tight against swaps ? the old 2008 deals trade tight and the two new issues tightened in dramatically. The EIB went from 22bp over Treasuries to 17.5bp.
That is really what convinced KfW to come to the market. The five year sector was also being considered, but there had been a lot of supply and the sector was starting to underperform, so the consensus was that we should stay away.
We were able to price at a fairly aggressive level compared to where the borrower has come in the past.
This is an excellent result for KfW, but it still offers good value against tightly trading comparables.
Demand from the US was lower than it usually is for KfW, and that reflects the spread between KfW bonds and bonds issued by US agencies. There is a bit of a yield barrier as well.
We sold 71% of the bonds to central banks. The Middle East and Africa took 9%, and that was largely to central banks as well. Asian demand came not just from central banks but there was appetite from insurance companies and commercial banks as well.
We were mandated on Friday, but did not open the books until 9:30am on Monday because KfW wanted to write to the co-leads. That did not help the momentum in Asia ? it took a while to get going, but when it did, the book grew quickly, driven by central banks.
On Tuesday morning it was obvious we had a book that was largely insensitive to price and we wanted to leave room for performance.
We did not set the size initially, but we reached $3.4bn and priced the deal at 24bp over, which was 19.5bp through Libor. The bonds held there yesterday and are now (Wednesday) at 24bp/23bp. There was a bit of flowback yesterday after the syndicate broke, but that has not continued today.
To give itself more flexibility over timing and size, KfW changed its end of year statement about what its benchmark principles will be in dollars.
Having done this deal at this level is a great result for KfW, and investors appreciate its focus on picking its points of entry into the dollar market.
Getting a $3bn deal done is different to doing smaller deals ? the timing is crucial, especially if one has an eye on further issuance later in the year.
?...you have to give KfW credit for taking the advice that it should do a three rather than a five year. It was something of a victim of the sheer volume of dollar supply in the last few weeks, but it picked the right maturity given the heavy supply.?
?...there was strong central bank demand throughout Asia and the Middle East, centred on the three year sector, and execution in dollars is strong. This was 19.5bp through though, so one would not have thought that US participation was very good. A couple of basis points cheaper would have made it an easier deal.
US agencies are tight in three years, but just a 1bp-2bp difference would have meant much greater US distribution.
We have heard that $300m went back through the broker screens, but we are confident that the deal will perform.?
?...there is nothing wrong with this deal, but the market is full of paper. We placed our allocation, but the spread is too tight for the US market.
Next week though, there will be less issuance, and the week after that is the Chinese new year, so all the excess paper in the dollar market will be absorbed.?