In common with their peers, Germany's triple-A agencies, KfW and Rentenbank, here found that demand for large liquid benchmarks have weakened this year. Investor attitudes have shifted as interest rates have risen and the importance of size has faded. In order to meet their funding requirements KfW and Rentenbank have introduced more flexibility to their benchmark funding and expanded issuance in arbitrage currencies.
?We were successful in selling all our benchmark bonds this year, each one of which has been oversubscribed,? says Horst Seissinger, head of capital markets at KfW's Frankfurt headquarters. ?And in such a volatile environment that represents a good performance from our point of view.?
That process has involved KfW tweaking its euro and dollar benchmark new issuance programmes, dropping the minimum size of its 10 year euro benchmarks, for example, from Eu5bn to Eu3bn, while maintaining the minimum of Eu5bn for the three and five year benchmarks. ?The most important part of our strategic funding is our euro and dollar benchmarks, and when we started the benchmark programmes liquidity was clearly the buzzword among our investors,? says Seissinger. ?Today, our impression is that investors are focusing much more on the performance of new issues immediately after pricing, as long term liquidity is now taken for granted.?
The change in philosophy ensured that when KfW launched its 10 year benchmark in April via ABN Amro, Citigroup and DrKW, the Eu3bn transaction re-offered at 15bp over the 2104 Bund generated demand of Eu4.6bn.
That was a far cry from the sort of oversubscription levels KfW saw when it kicked off its euro benchmark programme three years ago, but was ample demonstration that the borrower had very accurately gauged shifting investor preference in an uncertain interest rate environment.
?We recognised that in the current market where rising interest rates are expected, the biggest tickets aren't as big as they used to be,? says Seissinger. ?Tickets that in the past may have been as big as Eu250m are now more likely to be Eu50m or Eu100m, and of course that reduction has an important impact on overall demand.?
At the shorter end of its euro curve, KfW has clearly maintained the levels of oversubscription that it needs to ensure performance. Its most recent Eu5bn three year euro benchmark in September, for example, which was led by BNP Paribas, Goldman Sachs and Nomura and was credited with re-opening the sector after the summer break, generated Eu7bn of demand.
While euros and dollars have continued to be the anchor of KfW's borrowing in 2004, accounting for more than 40% and over 30% respectively, the sterling market has also been a fertile source of funding this year.
Exploring new avenues
By mid-October, sterling had accounted for more than 10% of its total borrowings for the year, driven in part by the longer maturities available in sterling and by the publication in July of the FSA's 04/16 policy statement exempting high grade issuers such as KfW and the European Investment Bank from the so-called ?credit risk test?.
Although the non-core currencies inevitably play a less strategic role for KfW, given its annual funding requirement of between Eu50bn and Eu55bn, the Aussie and Canadian dollar markets have continued to grow in importance, as they have for a number of other triple-A issuers in 2004.
For Landwirtschaftsliche Rentenbank, the Kangaroo market has featured in a strategy of funding diversification that has been especially striking this year, although it has also successfully built on its benchmark issuance in core currencies. Its Eu1bn five year transaction in September via ABN Amro, CSFB and Nomura was re-offered at mid-swaps minus 2bp, which was the tightest pricing Rentenbank had ever achieved in euros but still drew a number of investors to the Rentenbank name for the first time.
With Rentenbank completing its second dollar benchmark the following month, with a $1.5bn five year deal via Deutsche, Nomura and UBS which was increased from $1bn, its treasurer, Horst Reinhardt, says he is satisfied with the funding levels the bank has achieved in its benchmark issuance this year.
Nevertheless, Reinhardt concedes that 2004 has been a challenging year. ?The uncertainty of interest rates has mainly had an impact on demand for plain vanilla private placements with longer maturities and shortened the duration of our funding a little,? he says. ?But we are well funded.?
Exploring alternative avenues of financing has been an important strategy for Rentenbank this year. ?2004 has been a year of innovation for us and we are extremely pleased with the results,? Reinhardt says. ?While we found that our euro benchmark programme has required particularly accurate timing to be successful, other markets have offered us new opportunities. For example, we have been one of the most prominent borrowers in the Kangaroo market. We have also launched our first Canadian dollar global benchmark as well as our first US dollar callable global benchmark. We have also made a successful return to the short end of the sterling market.?
Like KfW, Rentenbank detects a change in investor preference away from the super-liquid transactions that characterised the market last year. ?Liquidity remains an important issue for investors but some of the hype that prevailed in 2002 has disappeared,? says Reinhardt. ?In particular, in the first half of 2004, investors were very cautious and less inclined to commit cash to the market, which favoured transactions with a controlled size rather than the super-jumbos of Eu1bn or $1bn.?