Bart van Dooren, acting head capital markets
Are you on target to achieve what you hoped for this year?
In terms of volume, our funding target at the start of the year was between Eu7bn and Eu10bn, and this range has remained stable. So far, we have raised approximately Eu5.6bn via 35 transactions across nine currencies. We expect to raise a further Eu2bn by the end of the year, so we are on schedule to complete our funding programme.
Last year, our turnover in the capital markets was slightly higher, at around Eu7.8bn. However, due to the healthy state of the global economy this year we had less need to access the markets. This is why our annual funding will be closer to the lower end of the target range.
What have been your main challenges this year in trying to meet your funding targets?
Our borrowing is divided up into strategic and opportunistic transactions. The low margins that are a feature of strategic borrowing make it essential for us to try to raise as much cheap funding as possible via opportunistic deals.
However, it is becoming increasingly difficult to maintain our funding levels in the face of external developments. Telecoms companies need to finance their UMTS licences, this will bring about a widening in swap spreads, and we will have to wait and see to what extent this affects our funding.
What lessons are there to be learned from the difficult market environment for triple-A credits this year?
Timing is absolutely key, even more so now than in the past. We are fortunate that our modest funding requirements allow us to stay on the sidelines for much of the year. If a lead manager tells us that it has found investors who are specifically looking for BNG paper, and if the funding levels seem realistic, then we will launch a transaction. But we are not under pressure to borrow at times when the markets may be hostile for us.
It is also important for borrowers not to try to squeeze out a couple of extra basis points on the re-offer spread. The market is no longer borrower driven, as it was a couple of years ago, and nowadays investors are in the driving seat. Borrowers cannot afford to price a deal on the tight side and to wait for spreads to come in, as this will not happen in the short term. I do not think that this situation will change before the end of the year.
In our position, as an agency borrower, it is definitely a plus if we can stay sidelined at times. There are several telecoms borrowers lining up transactions over the next couple of months and we would prefer to avoid heavy competition from such a tide of issuance.
Has it become uneconomical to offer benchmark-style transactions in euros at the levels where investors are willing to buy the paper?
There is a certain obligation on behalf of triple-A rated borrowers to launch benchmark offerings and we have already established ourselves with a couple of Eu1bn deals in the seven and 10 year tenors. The feedback we received indicated that investors greatly appreciated the realistic spreads and this was key to the success of the deals.
It is extremely important for the market that these deals are successful. To this end, both borrowers and investors must be fair in their expectations.
What do you think of Freddie Mac's euro strategy?
It has got off to an excellent start. Freddie Mac is the first US borrower to issue a benchmark bond in euros and the development may eventually lead to a pick-up in demand among US investors for such deals. The euro/dollar exchange rate may also evoke interest from some accounts in the Asia Pacific.
The appeal of the programme lies in Freddie Mac's use of a calendar. Investors will feel that they can rely on a sizeable, liquid bond each quarter. However, we do not have a crystal ball and only time will tell if the programme is a success. Not so long ago, the EIB's EARNs programme also got an initial warm reception from the market.
Which markets have you found the most attractive?
Our funding has been achieved mainly through the same currencies, although the US dollar has not been as attractive as it was last year. Of the Eu5.6bn raised so far, almost 28% has been in sterling. We have also conducted several MTN private placements in yen. Our involvement has been as stable as ever in the Swiss franc market, where we are active on a quarterly basis, either through new deals or reopenings of older transactions.
Are there any other currencies or instruments that you are looking at for the coming year?
Last year, we launched a Kangaroo programme, which was targeted at the Australian domestic investor base. Unfortunately, the economics have not been conducive and we have not been able to launch a debut transaction. It remains high on our list of priorities and we are hoping to pull the trigger on that by the year end.
As far as structured products are concerned, we are a little reluctant. We swap the proceeds of all of our issues back into euros and must account for everything with the central bank. Given the complex nature of many structured products, we prefer not to get involved in the market.
The higher risk inherent in structured issuance is also a factor. We are not keen to open up ourselves and the government, which owns 50% of BNG, to such risk. We would not like to have to justify ourselves to the finance minister if anything went wrong.
How attractive is BNG paper as an alternative to Dutch and German government debt?
BNG paper is an attractive substitute for Dutch sovereign paper. The government guarantees 85% of our assets, yet investors can still get a healthy spread pick-up over government debt. BNG 10 year paper trades at around 42bp over Dutch government paper and at around 60bp over Bunds. This level has been fairly stable for a few years. In 1993, for example, the spread of 20bp over Dutch government paper was seen as well priced and the subsequent increase is more a result of widening swap spreads since then.
How attractive is BNG paper compared to its peer group?
The value of BNG and other agencies is closely tied in to the liquidity offered by these borrowers. Both KfW and EIB have funding needs of Eu40bn each year. We cannot match these volumes, so by way of compensation we offer investors a small premium. For a 10 year benchmark deal in euros, for instance, we would expect to pay around 10bp more than KfW and 8bp to 9bp more than EIB in spread terms.
Funding levels are also affected by the risk weighting of the borrower. As banks, both BNG and EIB carry a 20% risk weighting, while KfW benefits from a zero percent weighting.
What are the main selling points for triple-A rated paper this year? Is liquidity still vital?
Yes. Liquidity has undoubtedly been the major selling point for triple-A rated borrowers. We have also noticed an interest among institutional investors in global bonds in particular. On several occasions, the lead managers of our transactions have alerted us to strong appetite for global bonds from central banks and Asia Pacific accounts and this trend should continue into next year. However, we are not yet registered with the SEC.
To what extent have European agencies become a distinct asset class?
Not at all. None of the European agencies has a calendar for issuance, which means that in terms of reliability they are not yet on a par with the US agencies. Even KfW's funding remains Libor based. The situation for borrowers in the US, such as Fannie Mae, is entirely different. It would be more accurate to say that there is now a distinct class of investors looking specifically for European agency paper.
How do currencies other than the euro and dollar, such as sterling, fit into your funding strategy?
Apart from the euro and dollar, we will continue to focus on sterling, yen and Swiss francs. We have no plans to get involved with other niche currencies, such as zloty and rand. These currencies tend to be limited to small deals and our institutional investors would prefer it if we were not launching transactions every day. This does not mean that we would not consider launching a retail deal in a niche currency if there were signs of real interest.
How has the dollar compared to the euro this year? Would you price BNG dollar paper to an extent relative to US agency spreads?
Our dollar borrowing is less than it was last year, but our funding levels tend to fluctuate year on year and we may borrow more heavily in the currency next year. Unfortunately, we have been unable to follow our benchmark euro denominated offering with one in dollars, but if we had we would not have priced it over US agency paper.
On the international stage, US Treasury bonds are still the benchmark and it makes no sense for us to set our funding levels relative to the US agencies. For one thing, this would indicate wrongly that European agencies were to an extent dependent on US agencies.
To what extent do you think the internet and electronic platforms, such as EuroMTS, will affect your approach to the financial markets in the future?
Both our benchmark transactions featured bookbuilding via the internet and this was a real eye-opener for us, as a borrower. Lead managers can sometimes give a slightly coloured version of events and we got a chance to monitor investor activity directly. We were able to get valuable insights into who was buying our paper and in what quantities. It was also interesting to see the amount of new money coming into the deal, as opposed to switching. Using the internet also offers investors, particularly in the retail sector, additional value.
At the moment, it will be difficult for us to meet the criteria for the EuroMTS platform as our deals simply are not large enough. For EuroMTS it is crucial that the issues trading on it are extremely liquid. We must wait and see whether not being on EuroMTS will adversely affect our secondary spreads.
What will be your main goals next year?
We have no plans to change our strategy in the future. While we may not be able to offer the same degree of liquidity as KfW or EIB, we can still spread our name among institutional investors across the world. We aim to show that we are a strong and reliable borrower, as well as a triple-A credit. *