Kreditanstalt für Wiederaufbau
Gerhard Lewark, senior vice president and treasurer
What markets offer you the most attractive funding?
The most attractive market for Kreditanstalt für Wiederaufbau (KfW) is surely the euro, since this is the sector in which we established our benchmark programme this year, which has been extremely successful. The acceptance of our bonds and the high liquidity of the KfW benchmark bonds in the secondary market make the euro market promising for the future as well.
If we are looking purely at the sub-Libor results we achieve, the private placement market in Japan deserves particular mention this year. We are achieving substantial volumes and considerable arbitrage with highly structured notes.
What are the major challenges facing frequent borrowers in euros?
It continues to pose a problem for me that the different national trading cultures still hinder liquidity to a certain extent. Our benchmark issues are an attempt to solve this problem, but there are still certain particularities, for instance a Paris listing, that are obstacles.
How does KfW go about differentiating its credit from other issuers in the European agency market?
I don't believe that there is much that needs to be done. KfW's credit standing is simply first-class, and the market values this. For this reason the primary topic for us is not credit differentiation but instead liquidity differentiation.
The closer we get to the federal government in this respect, the more investors will appreciate KfW's securities.
You have said in the past that you aim to provide an alternative to governments. Are you satisfied that you have achieved this yet? If not, what remains to be done?
Yes, I am very pleased that we are trading on a par with government bonds.
Not only that: with our five and 10 year benchmark bonds we have outperformed important competitors. We can also proudly point out that KfW's correlation with swap spreads has decreased, and that the correlation with federal bonds has risen considerably.
This shift towards government bonds is a major success, but my intuition tells me that even more can be accomplished here. This is our task in the near future.
How much of your investor base is made up of traditional government bond buyers?
That is difficult to say. In the primary phase of the benchmark bonds it is sometimes significantly more than 50%, but we also have other deals so that KfW covers the entire spectrum of institutional investors.
What are the obstacles that prevent you pricing alongside Bunds?
KfW is a substitute for Bunds, but it is not the Bund. As a result, KfW securities are not available for highly liquid future contracts. In my opinion, this is the key reason for the current difference in prices.
How important, relatively, are timing and issue size in creating secondary market liquidity?
The extraordinarily high liquidity of our bonds and the tight bid-offer spreads in daily trading are the result of a number of factors. Timing played only a minor role. The preparation of the issue and the considerable attention paid to the bond from the beginning were more important.
An essential factor is volume, with others being satisfactory pricing and the transparency of the process in the primary and secondary markets.
How important was EuroMTS eligibility in designing your benchmark issuance programme?
MTS compatibility was of the utmost importance to us when we took our decision on the benchmark programme. The high liquidity offered by MTS, the transparency of the pricing and the actual obligation to market making are favourable for bonds.
However, these advantages of EuroMTS can only be achieved if the securities can be traded in the system from the very beginning.
This was one of the main reasons why we decided to start with benchmarks of Eu5bn instead of tediously working our way towards Eu5bn via taps.
How does KfW ensure secondary market support from its market makers?
We monitor activities on the secondary market very closely and are in constant contact with the market makers. This dialogue and the prospect of additional mandates support the secondary market.
When pricing your recent Eu5bn 10 year global bond, you agreed on the spread a day ahead of pricing. Why did you shoulder the risk of a movement in swap spreads over the 24 hours before pricing?
Yes, we took the risk very deliberately, and we wanted to demonstrate our position as a government bond surrogate. Transparency and reliability are of decisive influence for all parties involved, and the risk we take on is reflected in the risk assumed by our investors.
And this is precisely the character of the KfW benchmark programme: KfW benchmark bonds are not products with a spread to the Euribor curve, but instead liquidity products in their own class.
What role does the structured market play in your funding programme?
In addition to the benchmark securities we also simply need arbitrage possibilities. And KfW, as one of Europe's largest issuers, cannot disregard this investor group, especially since, with its undoubted credit standing, the bank compensates well for other risks.
To what extent has combining your funding with that of Deutsche Investitions- und Entwicklungsgesellschaft (DtA) and Deutsche Ausgleischsbank (DEG) had an effect on your issuance activities?
Our funding needs have increased by around 15% as a result. This rise was not serious enough to cause our volume of work to increase substantially, however, and it has given us more security in launching our benchmark programme. *