Governments might be expected to find financing in their home market easy, but with a dozen governments competing for the attention of euro investors, Euroland's sovereigns are being forced to work hard. And while the argument for syndicated transactions is winning over more issuers, the debate over the best way to use the system is far from over. Neil Day reports on how Euroland's sovereigns are fighting to stay ahead of the pack.
In February 1999, barely a month after the introduction of the euro, EuroWeek examined the unprecedented surge in syndicated government bond issuance that accompanied the arrival of the single currency and asked whether the strategy was "the way forward for smaller EU sovereigns to meet Euroland's challenge". Just over three years later, the market has responded with an emphatic "yes".
Only last month the Republic of Finland offered its support to the argument for syndication with the launch of the largest ever syndicated single tranche fixed rate issue in euros, a Eu6.5bn 11-1/2 year government bond via ABN Amro/Alfred Berg, Barclays Capital, Citigroup/SSB and Nordea. Re-offered at 24bp over the January 2012 Bund, the book was twice oversubscribed at the time of pricing.
As Finland's funding requirements are relatively limited, the republic launched the deal simultaneously with a Eu3.385bn buyback of its April 2006 government bond. The republic also allocated Eu500m of the Eu6.5bn deal to its own repo facility to guarantee liquidity in the secondary market.
Satu Huber, director of finance at the Finnish state treasury in Helsinki, says that such an issue would never have been possible through the auction system prevalent across European government bond markets before the introduction of the euro.
"The transaction was huge and we would not have gone ahead with such a size without the simultaneous buyback," says Huber. "However, it is fair to say that we would also never have dared to attempt to create such a large issue by way of an auction.
"We wanted to know that a deal of this magnitude would be successful, so we needed to know that it was well distributed - both regionally and by investor category. Additionally, because we have limited funding needs, we would not have done that amount without a large degree of oversubscription."
Finland's record-breaking issue, and deals from over half of Euroland's members, might make one ask why there was ever a question whether or not syndicated transactions offer advantages over auctions. But it is worth remembering the predominant attitudes before and at the time of the introduction of the single currency. Although Austria, Belgium and Portugal were quick to launch syndicated deals in the first weeks of 1999, not every sovereign was convinced that the move away from the auction system would last.
The move to syndicates was prompted by the greater competition between governments that the euro would prompt. Rather than holding a monopoly in the national currency, government borrowers would have to compete for investors. For smaller sovereigns, this posed a challenge.
"Up to 50% of our debt has been financed by 5m Finnish people," Finland's Huber explained in February 1999, "whereas in Euroland there are over 200m people. As the currency is now the euro and not the Finnish markka, it also appeals to investors outside Europe, so the potential is huge. But you have to get investors to put your name on the list of who they want to buy. There were over 400 Euroland auctions last year, so to try to get investors involved in your auctions is not easy."
Fair enough. But some market participants believed that the syndication process was a one-off and that after everyone had become comfortable with the euro, auctions would once again become the norm. "The initial wave of syndicated euro-fungible deals and those launched during the first few months of the euro were to prepare for the new single currency era, with the supposition that when the euro arrived government bonds would not need to be syndicated, but would sell themselves," says John Winter, European head of debt capital markets at Barclays Capital in London.
The head of one Euroland debt agency even told EuroWeek that the best way to judge if his syndicated issues had truly been a success would be to see whether two or three years down the line he was still employing the system, or whether institutions had become familiar enough with his market through the syndicated deals for him to return to auctions.
Perhaps today the idea seems naive, but it demonstrates how, when the euro was introduced, nobody knew exactly how the markets would evolve. And what the market has learnt in the past three years is that the competition sparked by the euro has been fiercer than anybody could have predicted.
The marketing ethic
"I would say that if there has been a change in the way that syndicated government bonds have been handled since they were first introduced, it is the degree to which they have been prepared and marketed," says Barclays' Winter. "Nobody takes their investor base for granted anymore.
"When you are selling a product, you need to keep marketing it. Everyone knows Coca-Cola, but it is still advertised all the time. In the same manner, having done a big deal a few years ago usually isn't going to be sufficient today unless accompanied by further marketing."
Sovereigns wishing to tap into the wider investor base that has been available since the introduction of the euro have therefore had to access the market on a regular basis through syndicated issues. But for those that have done so, the strategy has paid off.
"At the beginning, when we started issuing syndicated OLOs in 1999, we felt that it was the best way for us to get better penetration into the international investor base," says Anne Leclercq, head of front office at the Belgian debt agency in Brussels. "A large share of the auctionns is typically taken up by trading accounts. Syndicated transactions also proved to be the best way to get investors' attention.
"But if you look at where we stand today in terms of the holdings of our bonds, the syndicated deals have paid off: in September 2001 some 45% of our paper was held by foreign investors, whereas in December 1998 that was only 20%."
Vasco Pereira, chairman of the board of directors at the Portuguese public debt management agency (IGCP) in Lisbon, is similarly enthusiastic about syndication. "Several factors contributed to our decision to employ syndicates for the launch of OT bonds," says Pereira. "The primary reason was to diversify our investor base, both by region and by investor type, and this has been particularly important after the introduction of the euro in 1999. We continue to employ syndicates to target specific segments of investors and to increase the visibility of the Republic of Portugal in the market."
The Portugese agency favours syndicated issuance, because the auction process gave it less control over the distibution of its bonds. "The success of this strategy is illustrated by the increasing participation of international investors in the OT bond market," says Pereira. "We estimate that 80% of the OTs issued in last years were placed with international investors and that they also account for more than 70% of the turnover in the secondary market."
The goal of a more diverse investor base, both geographically and by investor type, is shared by all Euroland sovereigns, and is met by syndicated deals in two ways. Firstly, through the direct efforts of the banks involved in the transaction at marketing paper.
"When you concentrate your funding requirements into a fairly large syndicated issue rather than a series of auctions, you more easily get the attention of the sales forces of the arranging banks, the analysts, and subsequently, and most importantly, the investors," says Huber in Helsinki. "With the supply of euro denominated investment alternatives being so huge nowadays, a country like Finland needs the active selling efforts of our intermediaries.
"Also, the bankers need to understand our credit and our funding programme in order to provide investors with the necessary information. Nowadays, we therefore do not need banks to underwrite our deals, but to actively market them. The fees we pay in our deals are thus only selling commissions."
The second and less direct way in which syndicated bonds help sovereigns to attract more investors is through their size. Because of the efforts of the banks involved and the time allowed for a book to be built, investors know that a large size is likely to be achieved, and the larger size in turn attracts more accounts. Sovereigns offering high liquidity know that they can generate more demand.
Lucinio Muñoz, deputy director general for public debt at the Spanish treasury in Madrid, says that the kingdom had this in mind when it decided to launch its first syndicated government bond this year, a Eu5bn 15 year transaction via BBVA, BSCH, Crédit Agricole Indosuez, Deutsche Bank and JP Morgan.
"We had two basic targets that we wanted to achieve by using the syndicated structure," says Muñoz. "The first was to offer very high liquidity right from the start and to make sure that the bond would be quoted on the electronic exchanges, both EuroMTS and the local trading platform, SENAF. Our second target was to try to control the placement of our bond, both in terms of regional placement and making sure that we had the right kind of investors involved."
Pereira at the IGCP gives a similar message. "Syndicated issues enable us to place bigger amounts and to offer greater liquidity to the new bonds from the start, at the same time as allowing us to exert better control over pricing," he says. "The average size of our auctions in 2001 was around Eu700m, whereas in syndicated issues we were able to comfortably reach four times that size [around 50% of the targeted final size of the bond], and even at that level have excess demand."
However, Pereira adds that he feels auctions still have value in that they allow the republic to benefit from the liquidity of the original syndicated deals. "Our approach of combining syndicated deals with increases that are executed via auctions later in the year has been, in our view, cost efficient," he says. "On one hand, we have been able to price the syndicated deals through our curve. On the other, in providing size to a bond from its launch we expect to benefit from improved liquidity in the subsequent placement through auctions."
Otherwise, it is hard to find issuers or bankers with positive things to say about auctions. The simplest reason is that the borrower has no idea or control over who is buying its bonds. "With auctions, because most of it is initially taken by banks, we do not know what the real level of demand is," says Huber. "But by launching a syndicated bond, we had the transparency that enabled us to get a clear picture of demand."
The problems of auctions can be exacerbated by the way in which a few banks can see them as a competition to increase market share. "In auctions, banks often bid up the levels to buy market share, which means that investors are less inclined to get involved in the primary phase, as we often see prices revert to realistic levels in the subsequent days and weeks," says Bill Northfield, director, debt capital markets, and co-head of frequent borrowers at Deutsche Bank in London. "Fortunately, this practice has become less common."
But perhaps the strongest reason for a sovereign to employ the syndicate structure rather than auctions, is the cost savings on offer. "The best prepared deals - those incorporating a strategic premarketing period, a transparent price discovery process, and positive momentum - more often than not have produced new issues priced at a premium to the interpolated curve," says Deutsche's Northfield.
A recent example is the Eu5bn 10 year OLO launched by Belgium in January via Deutsche Bank, Fortis and JP Morgan. The transaction attracted Eu9bn of orders at the historically low re-offer spread of 25bp over the Bund, despite coming 1bp-1.5bp through the sovereign's interpolated curve. At the Belgian debt agency, Leclercq says that the latest issue merely confirms what has become the norm over the past three years.
"When you look at the pricing of our issues, it is clear that the strategy of using syndicated issues has been a success," she says. "Apart from the first and second deals that were introducing the concept to investors, we normally price our syndicated issues at least 2bp through our curve, which covers the cost of the concession that we pay to the banks."
However, bankers argue that it is not only the borrowers that gain from using syndicates. "There is a growing recognition that the syndicated method can result in a win/win situation," says Winter at Barclays. He believes issuers and investors can both gain from syndicated deals, since investors are able to participate in more liquid transactions that usually perform, while borrowers can profit from the better pricing they can achieve from offering investors these benefits.
Roger Paice, director, frequent borrower syndicate desk at Citigroup/SSB in London, agrees with Winter's view, but says that not every investor has been won over. "There are a certain number of investors in Europe who have so far refused to buy syndicated government bonds," he says. "I believe that the rationale for their stance is that the borrowers are paying a selling concession to the banks, which in turn is taken to mean that investors will not get the fair price that they would at an auction.
"To these investors I would point out that so far this year syndicated government bonds have not only been priced at a premium to outstanding paper, but have also performed in the secondary market. As this is better than deals normally perform after auctions, investors would therefore be advised to participate in the syndicated deals."
Sovereign seal of approval
While more work may be needed on the investor side, bankers - for whom, after all, syndicated government bond issues are a lucrative and prestigious business - can be pleased with the growing use of syndication by Euroland sovereigns. Part of the reason for the growth in syndicated issuance can be explained by the way that governments are changing their issuance strategies, not least their increased use of the long end of the yield curve.
But although long dated government bond issuance is attracting the interest of borrowers, its relative novelty means that approaching the market carefully and thoroughly is essential. This, according to Muñoz at the Kingdom of Spain, is why the sovereign chose to use a syndicated issue for the first time when it launched its 15 year deal in March - although he makes it clear that the kingdom is not convinced of the need to do away with auctions for all new issues.
"You have to use the different methods according to the different objectives you are trying to meet and the type of product that you are selling," he says. "We might consider using the syndicated method again if we were trying to achieve goals that are difficult to reach through our regular auction procedure. For a specialised maturity like 15 years it made sense to use a syndicate, but for a more standardised maturity, like five or even 10 years, we would have to weigh up the merits of the two processes."
Other sovereigns that appear to share Muñoz's view are Italy and France - two borrowers that issue most of their debt through auctions, but use syndicates for niche products. While France has syndicated new lines in its inflation-linked market of OATis and OATeis, Italy used the syndicate structure in its domestic market for the first time to launch a 15 year BTP.
"We have seen the syndicated issuance methodology become the norm for the non-core Euroland sovereigns," says Deutsche's Northfield. "But perhaps more interestingly, in the last 12 months we have seen some of the larger sovereigns, such as France, Italy and Spain, decide to use the syndication methodology when borrowing in niche areas of their domestic curve or when launching new products."
Another bank sums up the situation: "You've got two camps when it comes to Euroland government bonds," he says, "the core issuers - namely Germany, France and Italy - and then the non-core issuers, ie everyone else.
"The latter group can again be broken down into the larger and smaller issuers. The smaller - such as Finland and Portugal - are launching syndicated deals to highlight their markets - whereas the larger, along with the core issuers - will only do syndicated transactions to highlight their niche products."
It is perhaps not surprising that the sovereign that has used the syndicated structure the most this year was the last to join the euro: the Hellenic Republic. Through three syndicated fixed rate transactions this year Greece has raised Eu12.5bn. Most recently the sovereign others at the long end of the euro curve to launch its first 20 year transaction in April, a Eu3.5bn 2002 issue via Commercial Bank of Greece, Deutsche Bank, Goldman Sachs, Morgan Stanley and National Bank of Greece.
"This is a major stepping stone and major benchmark in the development of the long end of the euro denominated curve," said a syndicate official at Morgan Stanley at the time. "A very high percentage of the transaction was sold to pension funds and insurance companies, both of which are searching for longer dated assets."
Citigroup/SSB's Paice has a theory why Greece and its peers are tapping the long end in increasing numbers: "The long end of the euro market has been a relatively immature part of the market, but there are two dynamics emerging on the investor side that are encouraging borrowers to issue longer dated bonds," he says.
"Firstly, in several countries there is the move to more funded pensions and a corresponding need for longer dated assets to offset these longer dated liabilities. And secondly, looking at where we are in the interest rate cycle, with most people expecting a flattening of the yield curve, it clearly makes sense for a lot of accounts to position themselves at the long end.
"On the borrower side," adds Paice, "longer dated issues make life easier for sovereigns, simply because they don't have to refinance their debt so often, which can put pressure on the pricing they get."
The latest borrower to tap the long end is Belgium, which in mid-May was getting ready to launch a 15 year deal. "We decided to go ahead with the 15 year because investors are showing an increasing interest in that part of the curve and it gives us the opportunity to offer something a bit longer than usual," says Belgium's Leclercq. "It also fitted into our funding plans as we would normally issue five and 10 year benchmarks every year, but as the 2007 maturity is already quite heavy, an additional Eu5bn would have made it overcrowded. There was then room for us to consider an alternative maturity."
Leclercq's third reason for being keen on joining activity in the 15 year area of the curve also suggests that the momentum for long dated issuance may keep on building. "The fact that some of our peers have tapped the 15 year maturity was also important," she says. "We feel that it is helpful for us to keep up with some of the larger players in the second tier of Euroland government issuers. If we want to keep our position in the hierarchy of issuers then it is important to be active in the areas in which our peers are present."
And Portugal could swell 15 year issuance further next year, according to Pereira at the IGCP. "We will be considering launching an OT beyond the 10 year area next year," he says. "As we already have a 2013 benchmark that will be a 10 year in 2003, we might take the opportunity to replace our usual 10 year new benchmark with something longer in the curve."
Not why, but how?
While the competition between Euroland governments for investment since the introduction of the euro may be fiercer than some had expected at its inception, there have been no such surprises on the banking front. That is not to say that peace has broken out in the battle for fees and league tables. Far from it; it is just that everybody knew that competition between banks would get tougher under the euro.
Fortunately, there is more business around for banks to compete for. And while the expected boom in corporate issuance has offered rich pickings for the successful, syndicated government bonds have proven a bonus, too. Who, then, is winning the business? And how?
Perhaps the best place to start is Citigroup/SSB. The overall number one bookrunner in the international bond markets last year has, so far this year, also been the most successful in winning syndicated Euroland government bond mandates. However, Paice at Citigroup/SSB is modest when suggesting reasons why he has been so busy since January.
"We are a primary dealer in every single Euroland government bond market except the Republic of Ireland," he explains, "and being a primary dealer is a prerequisite for being eligible for a lead management role on a syndicated government bond, if not a guarantee. There is also an element of rotation involved in the awarding of mandates, and perhaps we have also been fortunate on that front this year." Hardly a recipe for success in Euroland's government bond markets.
Nevertheless, Paice's focus on Citigroup/SSB's primary dealership's is reflected by officials at state treasuries and debt management agencies. When Italy handed out the mandate for its 15 year BTP to Citigroup/SSB, ING and UniCredit Banca Mobiliare in January, Maria Cannata, director general for public debt at the Italian treasury in Rome, explained that the lead managers had been chosen because they were the top three banks in the BTP market.
Cannata's peers stress that while support for their government bond markets is crucial for a bank to win their business, other qualities also come into play.
"We take into account the activity of our 21 primary dealers in the primary and secondary markets on a daily basis, because when we award a mandate we must consider banks' commitment to our market," says the Kingdom of Spain's Muñoz. "But we also look at the specific merits of every bank in the particular product that we are working on."
Leclercq at the Belgian debt agency says that while support for the sovereign's debt markets is essential, there are other factors that she will look for. "When we are choosing our lead managers, we look not only at their share of the primary and secondary markets, but also at the quality of their advice and the quality of the other activities we work with them on, for example treasury operations such as swaps," says Leclercq.
"We also look at their strengths of each bank in the particular product that we are looking at bringing to the market. This was the case with our recent FRN [Barclays and Citigroup/SSSB] and is also the approach we took when choosing the bookrunners for our 15 year OLO [ABN Amro, Goldman Sachs, ING and Morgan Stanley]."
It is a similar story at the IGCP. "Several factors contribute towards our choice of lead managers," says Pereira in Lisbon. "One key factor is the performance of the banks as primary dealers in the OT market, namely their participation in the primary market, and the turnover of the secondary market, which we can judge from MTS Portugal volumes. We also consider the advice that primary dealers give us, whether they come up with new ideas and innovations that can help us in the definition and implementation of the funding strategies.
"Against this background, we structure the syndicate group taking into consideration other targets we may have as to the diversity of placement and geographical distribution of the bonds - we would avoid, for example, using three banks from the same country. "Performance of the banks in previous deals and their relative position in the euro sovereign debt markets are also taken into account."
But although Muñoz, Leclercq and Pereira make it clear that banks can impress them by their advice, skills and track record outside their domestic government markets, banks complain that borrowers are too strict in applying eligibility criteria based on primary and secondary market turnover when awarding mandates. More often than not, the complaint is not that this turnover should not be rewarded by governments, but that it does not offer a clear picture of who deserves to be rewarded.
"The MTS platforms are being used more and more often by sovereigns to see who is supporting their issues in the secondary market as one of the key variables in determining who wins mandates," explains Deutsche's David Shasha, director, DCM and Northfield's co-head of frequent borrowers at Deutsche in London. "But we have heard rumours of banks trading bonds back and forth between each other at no cost simply to boost their volumes. Naturally we don't support this practice because it distorts market clearing prices and interferes with the very transparency that the MTS platforms are trying to provide."
Citigroup/SSB's Paice agrees that the criteria are open to abuse. "There is never a 100% correlation between EuroMTS volumes and client turnover," he says. "You can trade on EuroMTS all day every day without doing any customer business at all. EuroMTS volumes are therefore not necessarily a guide to how well you know end investors, which is what the borrower wants to be able to measure. But such activity does bring liquidity to the market, and that is also of use. Winning a high share of auctions is not a perfect guide either, because a certain amount of market share activity goes on in the auction process."
However, Paice adds that complaints can only be taken so far. "I would say that there is a limit to how long you can keep on buying market share," he says, "and if you regularly win a high share of auction business then there must be some client business behind that."
Perhaps the real reason why sovereigns highlight market share is that they want to be able to justify their decisions. "The borrowers want to have some objectivity in their selection criteria so that they can explain their choice to the banks," says Winter at Barclays. In the same way that corporates and banks are increasingly linking bond mandates with M&A advisory work and credit lines, he explains, sovereigns are looking for linkage they can point at when awarding mandates.
Going to pot
For those banks that are primary dealers for a sovereign, but miss out on lead management roles in syndicated government bonds, there is always the opportunity to participate in issues in a more junior position. However, the way in which sovereigns structure their syndicates is another area of contention.
Today, few issuers or bankers disagree that the pot system is the best way to syndicate transactions. "Since the euro it has been more and more the practice to launch pot deals because it is such a transparent process," says Finland's Huber, for one. "Deals launched via this method have, in my view, the possibility to perform better because you can more accurately judge where to price transactions when you can see what types of investors are in the book, whether you have buy and hold investors or the more trading oriented accounts."
But just how a pot should be run and a syndicate structured is a different question altogether, and one that is the subject of much discussion. Mostly, these arguments focus on the co-lead pot.
"The whole issue of the pot is quite complex," says Citigroup/SSB's Paice. "It is a model that is based on US market practice, which traditionally sees the whole transaction being included in the pot. This model has now been quite broadly introduced into the European marketplace, particularly for corporate deals, but it has been modified for sovereign/supra/agency deals.
"Some borrowers have felt that under all-pot transactions the co-leads have little incentive to do their best, hence the introduction of the co-lead pot."
While there is general agreement on the rationale for the co-lead pot, it does have its problems. Some bankers argue that co-leads often undercut each other and the leads to offer investors attractive terms to win their orders, which can detract from a deal's performance. "There have been some deals in which the co-leads, in order to impress the borrower, have run around gaining orders on an aggressive basis, undercutting each other and the leads, and this can negatively affect the aftermarket performance of the issue, which is good for neither the borrower nor the investors," says one.
However, sovereigns are unlikely to see this as too much of a problem. "I'm slightly sceptical when bookrunners claim that co-leads are being disruptive by working so hard to get orders," says Barclays' Winter. "It is generally a positive thing for a deal when the co-leads are pushing it so strongly."
|Bookrunners of all international euro denominated bonds for sovereigns - 2002 (May 9, 2002)|
|This||Lead manager||Amount||No of||Share|
|4||Credit Suisse First Boston||2,725.00||7||5.06|
|Total eligible issuance||53,882.00||27||100.00|
|Source: Dealogic Bondware|
One banker says that name give-up should only be used in cases where the co-lead pot is so large that were the leads not to have complete information about its make-up, they would not be able to properly handle the transaction. "The determination of who gets what bonds is usually done at the discretion of the issuer, but sometimes the joint leads are involved and the co-leads are not always happy for the leads to see their investors' names," he says. "We believe that it is only justified for the leads to see the names when the co-lead pot is a significant portion of the deal.
"For example, Belgium has used a co-lead pot that is 21% of the total deal, which on a Eu5bn deal is more than Eu1bn of paper. For the leads to be able to control the transaction they need to know where this paper is going."
Belgium's Leclercq knows that if she wants her co-leads to work hard for her, she has to keep them happy. Hence her efforts to strike a balance in the transaction referred to by the banker. "On our most recent issue we had name give-up to the joint leads, but each co-lead also had a retention of 1%," says Leclercq. "We also gave banks the opportunity to put in X orders if there was a name that they really wanted to protect."
Citigroup/SSB's Paice argues that name give-up offers borrowers the best chance at achieving well handled deals, but has sympathy for the complaints of co-leads who dislike the system. "One of the difficulties of the co-lead pot, and we are all guilty of it to a greater or lesser degree, is that when managing a pot, when anyone brings in a named order there is the temptation to go running to the investor and ask why they didn't place the order through us," he says. "Nonetheless, the best functioning system is when name give-up is used, because of the clarity it brings to the quality of the order book, but for it to make progress the leads need to respect the way that it is meant to work."
Although all Euroland sovereigns concentrate their funding in the euro government bond markets, changing dynamics in the swaps market mean that over the past couple of years they have increasingly had to factor in foreign currency issuance. The collapse in swap spreads in euros during that time means that were Euroland sovereigns to chase the best arbitrage, their foreign currency issuance would have boomed.
However, the strategic and political concerns of Euroland sovereigns have in most cases outweighed the temptations of arbitrage driven issuance. Italy has set up a benchmark dollar issuance programme and borrowers may raise small amounts in arbitrage markets - as Austria did in Norwegian kroner, South African rand and Swiss francs this year - but foreign currency issuance has made up a much smaller proportion of Euroland sovereign borrowing than that of the more aggressive supranationals and agencies, which last year piled into the dollar market.
Obviously sovereigns are committed to their own government bond markets, but the competition within Euroland has made this focus doubly important. For when liquidity is such an important consideration for investors, borrowers must do their utmost to boost the size of their bonds. "All of the smaller Euroland countries are very sensitive on the subject of liquidity and are concentrating all their firepower on a small number of issues," says one banker.
Pereira at the IGCP supports this view. "We have not used the foreign currency markets since 1999 for medium and long term funding," he says. "In a context where our annual borrowing requirements were relatively small, priority was given to the issuance of domestic bonds in order to increase the size of the OT bond market and to create liquid benchmarks in the main segments of the yield curve up to 10 years."
Nevertheless, most sovereigns remain open to some foreign currency issuance, even if its proportion in their funding programme is small. Spain, for example, has allocated Eu1.5bn for foreign currency issuance this year. "The actual weighting of our foreign currency funding has diminished in recent years," says Muñoz.
"For 2002 we have a target of Eu1.5bn in foreign currency financing and our objective for this is either to achieve arbitrage that will allow us to reduce our cost of funding, and/or to use foreign currency issuance to try to target specific kinds of investors that we feel would be tempted to come to our name but would not be attracted to euros."
Muñoz's second reason for foreign currency issuance - reaching investors not regularly active in euro government bonds - played a part in Finland's decision to launch its first dollar transaction for six years in February, a $1.5bn five year global via Citigroup/SSB, Deutsche Bank and Merrill Lynch. Like its peers, Finland has focused on its domestic market since the introduction of the euro, but the republic took advantage of the need to refinance a maturing state housing bond to diversify its funding and hence its investor base.
"The main reason for launching the dollar transaction was to widen our investor base and to draw the attention of investors to the Aaa/AAA Finland of today and to our euro benchmark programme," says Finland's Huber. "The reason we were able to do it was the fact that it was more cost-efficient even after swapping it into euros."
And whereas Finland has to compete with its Euroland peers in euros, the rarity of sovereign product in dollars gave the republic the chance to shine. "If you are a US investor looking at euros, Finland is not necessarily the first borrower that you are going to consider," says Huber. "However, in the dollar market, sovereigns are rare, so we could get investors' attention with our $1.5bn issue and at the same time tell them about our credit and get them to look at our euro benchmark funding.
"We knew that they were more interested in shorter maturities than in the long end of the curve, and that they would prefer to buy a five year dollar than a 11-1/2 year euro," adds Huber.
Euros: the common denominator
Ironically, a foreign currency issue by a sovereign outside the euro zone best illustrates why the single currency will remain the focus of Euroland sovereigns' efforts.
The issue in question was a Eu1.5bn five year deal via Deutsche Bank and Morgan Stanley in April for the Kingdom of Denmark - the first euro denominated government bond from the sovereign.
Like its small Euroland peers, Denmark faces a challenge attracting investors to its market, but with the added hurdle that its regular Danish krone issuance is, for euro zone investors, in a foreign currency.
"In terms of Denmark's objectives and issuance strategy, the sovereign is moving closer to Euroland governments," says one banker. "Denmark doesn't need euros directly - although it does have foreign currency reserves - and the primary reason for issuing in euros was for it to raise its profile.
Since the introduction of the euro, investors have been busy diversifying their credit portfolios and haven't had too much cause to look at the Danish government bond market."
But Denmark's strategy of launching the euro denominated bond paid off. The sovereign was able to increase its deal from Eu1bn to Eu1.5bn and price it at 14bp over the Bobl 139 - 2bp inside Austria's five year benchmark, flat to Finland's five year, and only 2bp over the Netherlands.
And with Sweden and even the UK both candidates for the euro alongside Denmark, and triple-A supranationals and agencies such as the European Investment Bank, Freddie Mac and Kreditanstalt für Wiederaufbau establishing benchmark euro programmes, competition can only get fiercer. Today, few Euroland sovereigns can rest on their laurels. *