Inflation linking grips MTN mart in hunt for next craze

EuroMTN issuers produced a flurry of inflation-linked hybrid structures this week, combining linkage to inflation with other plays, on interest rates or equities.

  • 24 Mar 2006
Email a colleague
Request a PDF

The deals are driven by MTN investors' wish to gain exposure to European inflation, which they expect to rise. The clutch of deals confirms that inflation structures — the MTN structurer's newest set of gadgets — are now an established part of the toolkit.

They also suggest that inflation may become the craze of 2006 in the notoriously faddish EuroMTN market.

Certainly, investment banks are pushing the product hard in their search for the next big trend, and the market is throwing out new inflation-linked structures at an accelerating pace, including plays on inflation in countries such as Poland.

The most intriguing deal of the week came from the Republic of Italy, which on Monday launched a Eu1bn 12 year bond linked to euro zone inflation through lead manager Goldman Sachs. Unusually for a deal of this size, it was kept private.

"They haven't disclosed this deal yet," said one banker not involved in the deal. "They wanted to keep it secret, but it's known in the market already. It's a seriously large deal."

The deal pays Euribor plus 60bp with an issue price of 99.85, and it is capped at 2.25 times the Harmonised Index of Consumer Pricing excluding Tobacco (HICPX) — an inflation indicator used by the European Central Bank.

Goldman Sachs and the Republic of Italy declined to comment.

Inflation-linked deals have been very much in vogue this year, particularly the lightly structured FRN ones.

The attraction is that investors expect both inflation and interest rates to rise, so are keen to take exposure to both indicators.

"If you look at the forward curves for both inflation and Euribor rates, they are very attractive and could offer some steepness, especially the longer dated trades between 10 and 15 years," said one banker.

"That's something which offers a bit more value than a lot of the constant maturity swap structures that were done last year, where the curve has now completely flattened.

"With these trades an investor is looking for more of a yield pick-up, and also the extra security these deals offer."

First Polish inflation deal
Land Sachsen-Anhalt issued the first ever Polish inflation-linked EuroMTN on Monday.

It was a Eu50m 10 year note, led by Lehman Brothers, and linked to the Polish Consumer Price Index including Tobacco (PCPIT).

The deal pays a coupon of 1.37% plus the PCPIT level on the coupon payment date minus the PCPIT level on day one.

At maturity the deal will be redeemed at par plus the final PCPIT level minus the initial PCPIT level.

EuroWeek understands that this deal was sold to one French institutional investor.

"I can't imagine this deal being repeated very easily because Lehman will have to hedge it against the underlying 10 year Polish inflation bond, and there is only one of those in the market," said one banker.

"Basically, you need to have that particular bond to hedge your risk. For this reason it's a very illiquid trade."

Deutsche Bank also closed a Eu60m 15 year bullet hybrid inflation deal for Land Brandenburg on Friday, which carried a coupon of six month Euribor plus 50bp, capped at two times HICPX.

Play on new euro entrants
Barclays Capital was also active, leading a Eu51m 12 year inflation-linked deal for Dexia Crédit Local yesterday (Thursday).

The innovative deal pays six times the difference between euro zone inflation and French inflation.

Barclays has printed three similarly structured deals, described as the first of their kind, over the past fortnight: one in its own name and a further two for Dexia Crédit Local.

The deals are being bought by investors speculating that as more eastern European states join the euro, the level of euro inflation will rise and thus give an increased spread over French inflation.

At the end of last week, Nomura led its inaugural inflation-linked and equity-linked hybrid deal, for Caisse Nationale des Caisses d'Epargne et de Prevoyance.

It was a Eu7m six year ticket, which pays the best of the EuroStoxx 50 index and eurozone HICPX.

"This is very much the sector that people are looking at, at the moment," said Gayle Turner, head of MTN syndication at Nomura. "We're expecting more flow to be coming over the next few months. It is very much the hot topic."

Spanish structures
SNS Bank issued a Eu5m 10 year Spanish inflation-linked note through Banco Santander on Friday last week.

The deal pays a notional amount times Spanish inflation plus 50bp in years one and two, before stepping up to an amount times inflation plus 115bp between years three and seven. For the last two years of its life, the note pays an amount times inflation plus 125bp, which is floored at inflation.

"Spanish inflation is very popular at the minute," said Jan Boon, an official on SNS's MTN desk in Amsterdam. "We've been getting a lot of interest for a while, but this is the first one we've traded."

Caixa Catalunya settled a similar Eu100m 15 year Spanish inflation-linked trade on Tuesday. It pays a coupon of Spanish inflation plus 20bp for the first four years, before stepping up to pay Spanish inflation plus 150bp between years five and 11, and thereafter a coupon of Spanish inflation plus 175bp.

"There are many investors looking for this structure right now, from insurance companies to big corporates looking to cover either salaries or contracts linked to Spanish inflation," said Carlos Guimera, a member of Caixa Catalunya's structuring department. "We know that 50% of this deal has gone to insurance companies with the other 50% going to corporates." 

Gavin Finch

  • 24 Mar 2006

All International Bonds

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 JPMorgan 101,974.94 404 8.29%
2 Citi 95,105.34 354 7.73%
3 Bank of America Merrill Lynch 82,200.55 309 6.68%
4 Barclays 81,531.75 289 6.63%
5 HSBC 65,681.57 320 5.34%

Bookrunners of All Syndicated Loans EMEA

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Bank of America Merrill Lynch 8,556.66 16 10.43%
2 Deutsche Bank 5,064.63 12 6.17%
3 Commerzbank Group 4,780.90 20 5.83%
4 BNP Paribas 4,451.03 21 5.43%
5 Citi 3,873.29 11 4.72%

Bookrunners of all EMEA ECM Issuance

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Citi 2,316.87 11 11.60%
2 Morgan Stanley 1,958.99 12 9.81%
3 Bank of America Merrill Lynch 1,598.24 7 8.00%
4 JPMorgan 1,371.27 7 6.86%
5 UBS 1,219.50 7 6.10%