Increasingly volatile conditions are making it tougher for sovereign, supranational and agency issuers to tap the capital markets. But, as Hélène Durand reports, nimble issuers can still get their deals away.
In mid-May it all changed. Up till then the world economic outlook had looked rosy. Inflation was subdued, equity markets stable, interest rates steady.
But overnight over-high US core inflation numbers spooked the world's capital markets. The picture for the dollar changed: interest rates were no longer set to peak but to rise further.
One immediate effect for those seeking to tap the capital markets: trickier issuing conditions — particularly for those trying to access the market on a regular basis.
"In times of real nervousness, investors want the safety of both high credit quality and liquidity and therefore typically buy government bonds, often causing swaps and related products to widen," says Chris Lees, head of frequent borrower syndicate at Citigroup in London.
"The importance of various data [releases] is, in some cases, very acute. Borrowers have to be nimble to take advantage of the market."
This has particularly been the case in the dollar market, where windows of execution have narrowed as banks and issuers try to capture the best yields for investors.
Issuers now even more than before have to navigate between data such as non-farm payrolls, Fed meetings and minutes, CPI numbers and general equity volatility.
Banks sometimes do not have the luxury of a long week to build order books and in most cases will pre-sound investors to be sure that they have some soft orders on board.
"This year, even more than in the past, timing in the dollar market has become more comparatively important," says Cesare Roselli, co-head of sovereign/supra/agency origination at Morgan Stanley.
"Issuers have had to be a lot more careful when choosing their issuance windows. The most recent example was the last non-farm payroll number which was below expectations and we saw the market rally on this tangible data point. Issuers have to tread very carefully."
This has not meant that deals cannot be done, however, and many transactions have been successfully executed with healthy levels of oversubscription.
As Citigroup's Lees notes, "volatility has actually offered some opportunities as exemplified recently after the May CPI data. The market sold off and we were able to bring a transaction for Sweden before the market rallied again and we captured attractive yield levels for investors."
The $1bn three year transaction was announced a few hours after the US CPI numbers in May and immediately attracted interest from European and US offshore accounts. In less than 24 hours, the deal was oversubscribed, with Asia buying over half of the bonds. This allowed the leads, Barclays Capital, Citigroup and Credit Suisse, to price the transaction swiftly.
Another recent example was the $3bn five year global for the European Investment Bank priced that same week via Citigroup, JP Morgan and UBS. The transaction attracted a $3.9bn order book — a great achievement compared with deals launched in 2005 where large issues struggled to reach full subscription.
However, one concession issuers have had to make has been on pricing to keep investors on-side. One such example was the transaction executed for the Kingdom of Sweden. The issue was priced at 22.25bp through mid-swaps. Last year, Sweden was able to print a three year in March at 30bp through.
"Issuers have to be sensible about levels," says Citigroup's Lees. "To get the best out of the dollar market, some borrowers have been more pragmatic about the after swap costs they have sought to achieve this year."
The EIB five year transaction came at a concession to last year's levels at 18.25bp through, compared with the less 20bp print last September.
Easier time for euros
Unlike the dollar market, the ride has been easier for issuers in the euro market. "The market has seen less wild swings in euros," says Morgan Stanley's Roselli. "While the market looks at data releases, it looks more towards the ECB or country holidays. There is a feeling that we are less hostage to data but comparatively more sensitive to other factors, such as competing supply."
This was palpably the case in the covered bond market and the flow of issuance in pure SSA product has generally been more orderly.
As well as bigger windows of opportunities, the widening of swaps spreads in euro deals has created interesting arbitrage for issuers.
Instituto de Crédito Oficial printed a Eu1.25bn three year at Euribor less 11bp, a deal in a similar maturity at the time would have been expected around less 14bp.
As this publication was being published, KfW was marketing a three year euro benchmark at mid-swaps less 10bp-11bp via ABN Amro, Dresdner Kleinwort Wasserstein and HSBC. A deal in the same maturity was printed last October at 8bp through mid-swaps while a new dollar transaction would be expected around less 18bp — although taking into account the basis swaps, the level would get closer to the one achieved in euros.
Another advantage of the euro market is that it offers an investor base familiar with the credits on offer as well as depth throughout the maturity curve. The recent Eu5bn 11 year transaction for the Republic of Finland exemplified investors' appetite for triple-A credits.
As much as Eu9bn of orders were gathered after just half a day of marketing, Eu7bn of these were good at re-offer. The deal was priced at 21.8bp through mid-swaps, through Germany which was trading at 21.3bp through.
Overall, even if the going gets tougher, the view is that issuers are well advanced in their funding programmes and in a position to be responsive to market conditions rather than force a transaction.