If, as many Spanish bankers believe, the Matador foreign bond
market will become extinct as the euro comes into being, it will do
so at its moment of greatest vitality.
The need to provide domestic investors with higher returns at a
time of record low interest rates has brought much needed diversity
into the sector, with emerging market credits and structured
products leading a powerful growth in new issue volume.
But it looks likely that the Matador market will disappear with the
peseta. And the imminence of that threat is posing strategic
challenges not just for the Spanish banks that have dominated the
market - but for those foreign houses that have also been
instrumental in its recent growth, and also for Spain's investment
So what happens next? How are the Spanish banks, and those foreign
banks active in Spanish bond markets, planning to use the
experience and relationships which they have gained during the life
of the Matador market to best effect? And how are Spanish investors
responding to the need for greater diversity and better
In the Spanish bullring it is usually the Matador that does the
killing, the word being derived from matar (meaning, to
kill). In the new realities of Emu, most bankers in Madrid believe,
Spain's Matador foreign bond market itself is already terminally
Given that the instrument owed its strength exclusively to the higher returns available in the peseta market - and given that the peseta itself faces extinction in just over six months - it is difficult to see where demand for Matador issues can be generated after January 1, 1999.
But there is a good deal of disagreement and apparent confusion among Spanish bankers about the outlook for the market. And the Matador market may not give up the ghost without a fight.
Some bankers say that the Matador market may be given a stay of execution if, as they expect, the Treasury relaxes regulations that have closed the market to all but sovereign and supranational borrowers as well as public institutions.
This will open the way for corporate borrowers to tap the market. In particular, they hope, it will pave the way for companies from Latin America (many of which have already been enthusiastic borrowers in Portugal's rival Navigator market) to offer their bonds to Spanish investors.
"In the same way that Spanish companies have been investing heavily in Latin American industrial companies, Spanish investors will start having to look much more carefully at portfolio investment in emerging market names," says one optimistic Madrid banker. The Matador market he believes, be it peseta or euro-denominated, would be the ideal vehicle through which to access this exposure.
Others view this as a forlorn hope. "We don't foresee any change to the regulations before the end of this year allowing new borrowers to tap the market," says an official at BBV Capital Markets. "The Treasury will maintain these peculiar limitations, meaning that the peseta market remains the last of the Euromarkets to be deregulated."
But he believes the regulatory question to be a side issue. "Once the peseta disappears, so too will the Matador market," he argues, "simply because all borrowers will issue in euros. "And it is nonsense to think that borrowers would want to seek approval from the Spanish Treasury to issue in euros. The only exception to this might be if an international borrower wanted to do a retail-targeted transaction to be placed exclusively in Spain.
"In that case the borrower would have to file a prospectus with the CNVM [the Spanish stockmarket regulator]. But so far the only issuer to have done this is the EIB, and looking ahead we see very little potential demand for this sort of transaction."
But if the Spanish Matador market is in its death throes, it seems to be going out more with a bang than with a whimper. Total new issue volume in the market, fuelled mainly by an increase in structured deals, rose to more than Pta1tr in 1997.
"Over the last two years the Matador market has outgrown most other Euromarkets in terms of volume and in terms of product diversification," says Carlos Stilianopoulos, vice president of capital markets at Santander Investments in Madrid, which is comfortably the market leader.
"Last year about 50% of issuance was in the form of structured deals, with the Matador market broadly divided into two sectors: the plain vanilla sector, which appeals to foreign investors, and the market for structured products which are bought by domestic players."
It is not difficult to see why there has been such a scramble among local banks to promote structured products in the Matador market - or to see why there has been such strong demand for them among local yield-starved investors.
Low interest rates have halved the returns available to investors in the plain vanilla sector of the market, sending retail and institutional money to seek out the high returns on offer in Spain's booming equity market, or to look for higher yielding debt products.
The main focus for originators providing extra yield in the Matador market in 1997 (chiefly in the second half of the year) and in the early months of 1998 was through the launch of callable issues, range FRNs, reverse floaters and equity linked structures.
The next logical step, say Spanish bankers, would be for appetite for increased yield to lead investors to move down the credit curve, something they have historically been reluctant to do.
"Now that interest rates have stabilised, investors will look more at credit risk," says Pedro Aragones, a member of the capital markets department at Banco Central Hispano (BCH) in Madrid.
"That is where we see the scope for an expansion in activity, although in 1997 we did see a number of new names in the market. For example, we led a deal last year for Quebec which offered investors a pick up in yield terms."
That was a 10 year Pta10bn transaction priced at 17bp over Bonos, which followed an earlier Pta10bn three year transaction, also led by BCH and Citibank, for the Korean Development Bank (KDB) - the first non-Japanese Asian deal in the Matador market, which offered a 30bps pick up over Bonos. Other emerging credits in the Matador market in recent months have included Mexico and Argentina.
By the end of the first quarter of 1998, some Pta200bn had been issued in the Matador market, which suggests a decrease compared with 1997's record breaking volumes.
But again there have been signs of new issuers appraising the market, relieving it of its overwhelming dependence in previous years of issuers such as the EIB, the World Bank, DSL and Rentenbank - many of whose outstanding deals trade well below swaps in the secondary market.
A welcome diversification came at the start of May, when Santander Investments launched a three year Pta15bn issue for the Republic of Croatia.
Priced at the bottom of its indicated range of between 225bp and 240bp over Bonos, and offering a coupon of 6%, this was the first emerging eastern European credit to have tapped the Matador market since December 1993, when the National Bank of Hungary had launched a Matador issue.
"Given their own domestic restrictions the Croatians can't swap any of their bonds into other currencies, so the basic rationale is to raise funds in several of the currencies that will convert into euros in 1999," explains Stilianopoulos.
"They looked at Italy and Spain and after the roadshow concluded that there would be more demand for a peseta issue. Demand for the issues was good and it demonstrates that there is still room in the Matador market for more emerging market credits."
Aside from the Croatia offering, this year's activity in the Matador sector has revolved largely around the staple fare of supranational names and public sector European banks.
Structured deals have continued to dominate the market, with a recent example being a seven tranche transaction led by Santander for the IFC, linked to a basket of Latin American equities.
If over the longer term the Matador market is to be a casualty of Emu, it is not clear what will replace structured Matador issues to offer domestic investors yield pick-up in an environment characterised by low interest rates.
The Spanish domestic bond market is limited in the extreme. "You can count the issuers in the domestic market on one hand," says a local banker. "We have a few of the local autonomous regions, ICO, which is the main local borrower, and a couple of corporates dominated by Telefónica and the utilities.
"But spreads are very tight, especially in the primary market, simply because there are so few issues and competition is so fierce." By way of illustration, when Telefónica recently launched a Pta70bn domestic bond, it came at 50bp below government paper but was still comfortably placed.
Another Madrid banker adds that smaller and medium sized companies can scarcely be blamed for having restricted their fund raising activities predominantly to the bank loan market.
"One of the reasons why the domestic bond market is so limited," he says, "is that the Treasury has tended to crowd out other borrowers. Presumably that will change as Spain's government borrowing requirement falls, although it has not yet led to many more issues in the domestic market."
Other potential sources of local capital market diversification are also unlikely to bear much fruit over the short term. Smaller companies in Spain fund themselves almost exclusively through syndicated or bilateral bank loans. The country is also one of the few left in continental Europe that has not yet produced any high yielding corporate paper.
This scarcity of product in the domestic market is posing local investors with a conundrum - as German Castejon, director general at Deutsche Bank in Madrid outlines.
"Domestic institutional investors, be they insurance companies, pension funds or mutual funds, are facing three new challenges at the same time," he says.
"First, they are operating within a financial environment that has changed substantially. It has changed from being an environment of high money market and fixed income returns and a cheap stockmarket to one with very low risk free returns and a very well priced equity market.
"Secondly," he adds, "the funds under their management have multiplied several fold over the last two years. And third, their customers are an increasingly demanding and sophisticated group of investors."
Castejon believes that, in the light of this triple challenge, Spanish domestic investors have responded well, establishing new teams to track opportunities in the derivatives market, for example, and launching a range of structured products for retail investors such as equity linked structures.
In part, say bankers in Madrid, change is being forced on domestic institutional investors. "Spanish investors still tend to be conservative," says Ignacio Mataix, head of corporate finance at ABN Amro in Madrid.
"But a big change is coming about because the level of competition here is so fierce. All the big international banks are marketing their funds very aggressively, and Spanish fund managers know that they will have to adapt very quickly to cope with the local and international competition."
Stilianopoulos at Santander Investments acknowledges the problem that local investors face due to the relative underdevelopment of Spain's capital market. "We are holding conferences for our investors on a frequent basis," he says, "and trying to educate the investor base about the opportunities available in emerging markets, for example, or in credit derivatives. But it's not a simple process, because the domestic investor is still quite cautious."
That caution, say local bankers, is starting to diminish, with Spanish investors increasingly looking at the potential of investment beyond the euro-zone. "We're starting to see more institutional investment in dollar products," says one local investment banker. "But the process is very slow and the proportion of overseas assets in Spanish portfolios remains very small."
Nevertheless, it is clearly expanding. At ABN Amro, Mataix describes his bank's sales of non-Spanish securities to Spanish investors as "a fantastic growth area".
An obvious by-product of the diminishing importance of the Matador market is that the capital market activities of many of the domestic banks are under threat, causing the leader's sector to evaluate their future strategies within the context of Emu.
"We're trying to get involved in as many euro issues as possible," says Stilianopoulos at Santander Investments, "and trying to expand our presence in international markets, largely by emphasising our distribution capabilities in Spain."
Santander is better equipped than most to fulfil this role, having co-led the last two euro-denominated issues for the Kingdom of Spain and thereby demonstrating a capacity - and a surprisingly strong one, according to international bankers - to distribute paper outside Spain.
"All the plain vanilla paper we have placed in the Matador market has been placed outside Spain," says Stilianopoulos, "which has given us a very strong client base in several European markets. Additionally we placed over 70% of our allocation of this year's Spain euro issue outside Spain, so our name recognition overseas is becoming much stronger."
Aside from focusing more intently on cultivating client bases in Europe, the leading Spanish banks have also built up franchises in Latin America which are second to none. However, it is unclear how much they will be able to leverage this presence into European capital market activity.
Theoretically, their extensive branch networks in Latin America and the contacts they have developed with corporate borrowers in the region suggests that the Spanish giants would be some of the best positioned to originate and place Latin American issues aimed at Europe.
In practice there is little evidence of this materialising. Recent euro issues from Brazilian borrowers such as the development bank BNDES and the privately owned Bradesco were led by Société Générale and WestMerchant Bank respectively, while the Republic of Argentina's recent Strips issue was led by ABN Amro.
Santander rejects the notion that it has been effectively blindsided by its Latin American push.
"It is true that our main investment has been in Latin America," says Stilianopoulos, "but it is also true that we have a very big presence in Portugal. We have a presence in Italy through our holding in San Paolo di Torino, and we have a very large presence in the US. And now of course we have Peregrine in Asia."
Of the other Spanish banks, BBV - Spain's second largest in terms of assets and branches - seems the best equipped to compete within the new European parameters.
"We realise that we're going to lose the market niche which we've enjoyed with the peseta business," says an official at the bank's capital market headquarters in Madrid. "So we fully recognise that we need to diversify in areas such as derivatives, to broaden our relationship with European issuers and to improve our penetration among international investors."
He adds: "The advantage that we have, and that we will take with us into Emu, is our knowledge of the domestic Spanish investor. So instead of placing pesetas among domestic investors we will be placing euros or dollars or Japanese yen. But it is very obvious that we won't be able to compete for, say, an EIB jumbo in euros."
While there seems to be little question over the long term viability and competitiveness of Santander and BBV, it seems improbable that Spain will be able to justify maintaining seven or eight institutions with aspirations in the area of full service investment banking in the context of Emu.
For this reason the local press is persistently speculating about an imminent wave of consolidation in the industry.
Local bankers describe the subject of consolidation as an extremely touchy one - especially in the light of Spain's high unemployment rate. But privately they concede that the future of many investment banking departments as independent bodies is uncertain at best.
"I think that the capital market influence of BCH and Argentaria will be progressively reduced," says one banker. "Because they are mainly only local players. And all the others will remain exclusively local, although I expect they will play a role in private banking." EW
|Bookrunners of Matador Bonds|
(January 1, 1997 to May 28, 1998)
|Rank||Manager||Amt Pta bn||Iss||No|
|2||Banco Central Hispano||485.34||48||15.60|
|4||Banco Bilbao Vizcaya||388.17||38||12.48|
|5||Caja de Madrid||260.75||23||8.38|
|6||Deutsche Morgan Grenfell||246.69||57||7.93|
|8||Union Bank of Switzerland||96.25||19||3.09|
|12||La Caixa de Barcelona||30.50||11||0.98|
|13||SBC Warburg Dillon Read||27.50||5||0.88|
|17||Bankers Trust Alex Brown||14.25||6||0.46|
|19||Bank of Tokyo-Mitsubishi||10.00||1||0.32|
|Capital Data Bondware|
|Issuers of Matador bonds|
(January 1, 1997 to May 28, 1998)
|Rank||Issuer||Amt Pta bn||Iss||No|
|5||De Nationale Investeringsbank||122.00||11||3.92|
|6||Kingdom of Sweden||118.00||14||3.79|
|12||Council of Europe||82.00||6||2.64|
|18||Finnish Export Credit||60.00||6||1.93|
|22||Republic of Argentina||30.00||2||0.96|
|26||Kingdom of Denmark||15.00||1||0.48|
|26||Republic of Croatia||15.00||1||0.48|
|28||Republic of Portugal||12.00||6||0.39|
|Capital Data Bondware|