KfW
Guarantor: Federal Republic of Germany
Rating: Aaa/AAA/AAA
Amount: Eu5bn
Maturity: 15 July 2009
Issue/re-offer price: 99.838
Coupon: 3.5%
Spread at re-offer: 12.6bp over the April 2009 Bobl 144
Launch date: Tuesday 13 June
Payment date: 21 June
Joint books ABN Amro, Dresdner Kleinwort Wasserstein, HSBC
Borrower's comment:
We brought a 15 year issue at the beginning of the year and, after the ECB raised rates last week, decided that a three year was the best option in the current market environment. Accounts are looking for safe investments at the moment. We felt it was the right time to bring a conservative three year bond.
We announced a benchmark transaction, which for KfW means a minimum size of Eu3bn, on Monday morning at around 9am London time and closed books early Tuesday afternoon with orders of Eu7.6bn.
We decided to issue Eu5bn on Tuesday morning to avoid any serious allocation problems with investors.
The initial price guidance was mid-swaps less 10bp to 11bp and, given the size of the book, we were able to price at the tight end at less 11bp. Historically this is a tight level for KfW but, compared with secondary spreads, which are around less 12.5bp or 13bp, a 1.5bp give-up to secondary markets is reasonable for a Eu5bn transaction.
Highlights of the distribution were the fact that Scandinavia took 25% of the issue, which is a big percentage for the region, and that France took 15%, which is normally a difficult market to reach.
Germany accounted for a further 16%, the UK 15%, other Europe 16%, Asia 11% and US/other 2%. By investor type, central banks, many of them in Europe, took 24%, banks 40%, funds 32% and insurance companies 4%.
The bond is stable in the secondary market, having tightened in a little, and we have not seen any flowback, so overall, the result has been pleasing.
KfW has already issued Eu35bn in the capital markets in 2006, which is a large portion of the total funding of Eu50bn to Eu55bn planned for the year as a whole.
Bookrunners' comment:
This perfectly timed issue achieved 1.5 times oversubscription on an enlarged size at the tightest ever spread through swaps for a KfW benchmark, the borrower's second of 2006 after a highly successful 15 year in January.
Bids for high quality fixed income assets following the volatility in global equity, commodity and emerging markets, combined with some near term interest rate clarity from the ECB on June 9 gave KfW an ideal platform for a shorter dated benchmark.
Books opened in the European morning on Monday and momentum built steadily from the beginning on the mid-swaps less 10bp to 11bp spread guidance. By noon, the leads had Eu2.5bn of orders with the total book reaching Eu5.4bn on day one.
Spread guidance was refined to the tight end of the marketing range shortly after the London open on Tuesday. At the time, the KfW April 2009s were at less 14bp and the EIB April 2009s at less 17.5bp.
Participation from key Asian accounts and sustained pan-European demand highlighted the remainder of the session. Oversubscription drove an increase in deal size to Eu5bn from Eu3bn and book closing was brought forward to maximise allocation ratios to the large proportion of real money investors involved.
The final total book was Eu7.6bn.
The issue was priced in the European morning on Wednesday at mid-swaps less 11bp, equating to 12.6bp over the April 2009 Bobl.
Distribution was particularly broad with over 150 accounts participating, confirming widespread investor appreciation of both KfW's responsiveness to the market and commitment to its balanced benchmark strategy.
Some 40% of the bonds were taken by banks, which were by and large all bona fide ALMs or treasuries, 32% by funds, most of which were asset managers, 24% by central banks and 4% by insurers and pension funds.
Market appraisal:
"...a very successful trade. We have seen little three year supply in the SSA sector and this was an ideal defensive instrument in the face of so much market turmoil.
We had no problem selling our bonds and are not surprised to see the issue trading marginally tighter in the secondary market."
"...KfW's timing was spot on to bring a three year transaction. It benefited from a strong flight to quality bid and we were not surprised to see it emerge as a Eu5bn deal.
The issue was priced at mid-swaps less 11bp, which was 2bp back from secondaries, which was also spot on.
There is huge demand for triple-A product at the moment and a correctly priced and correctly timed issue was bound to succeed.
We had a retention order of Eu60m and sold it easily, mostly to central banks."
"...a three year KfW is one of the safest trades you can imagine and it was perfectly pitched to appeal to the wall of flight to quality money we are seeing. I was surprised by the low Asian distribution of only 11% but we quickly sold our bonds. I thought the pricing was fair to a little cheap."
"...everything is trading extremely expensively at the short end of the curve and anything in three years at less 10bp to 11bp or even 12bp is fair value so this came on the cheap side.
There was a big buyer out of London, probably one of the bank treasuries or asset managers, which gave the issue a solid backbone.
The deal underlines the fact that the euro market is still relatively cheap to dollars and also that the universe of buyers is so much bigger than in dollars. In euros you have about 250 accounts to go to, while in dollars you have maybe 10 big investors and 20 smaller ones.
It was a good result for KfW to print Eu5bn and shows that there is a lot of cash available for top quality issuance at the right price."
"...this was helped by the fact that the market has been so volatile and the front end of the euro curve has performed well since the ECB raised rates.
Eu5bn is a huge deal and mid-swaps less 11bp isn't cheap — KfW is the first issuer to price through less 10bp for a long time — so they achieved an excellent execution.
