Competition for funds spurred by the introduction of the euro last year has prompted European agencies to approach investors more carefully than ever before. Intensive marketing, thorough explanations of government support, and large liquid benchmarks have all been employed in the drive for surrogate status. And when the euro market has proved tough, agencies have moved to position themselves in currencies such as dollars and yen. Interviewed by Neil Day.
* Piet Hein Verloop, managing director, treasury, Bank Nederlandse Gemeenten
* Patrice Ract Madoux, chairman, Cades
* Robert Fassbender, head of capital markets and treasury, Deutsche Ausgleichsbank
* Gerhard Lewark, treasurer, Kreditanstalt für Wiederaufbau
* Stephan Tribull, head of international funding, L-Bank
* Uwe Zimpelmann, member of the board, Landwirtschaftliche Rentenbank
* Johannes Attems, member of the board, Oesterreichische Kontrollbank
Q - What role do European agencies play in the euro fixed income market? To what extent can they be seen as a separate asset class?
A Uwe Zimpelmann, Landwirtschaftliche Rentenbank: Agencies are government credit with a yield pick up. In light of this they are a unique asset class. Apart from being regular issuers of benchmark transactions, Rentenbank and other agencies offer government credit quality for a variety of currencies and structures, which complement the government benchmark bonds.
Johannes Attems, Oesterreichische Kontrollbank: With the introduction of the euro, investors opened up their portfolios to new asset classes extending to a broad spectrum of credits. Meanwhile, they also drew new lines between hitherto similar and common risk categories.
Whereas previously agencies and supranationals were seen as identical credits, agencies now are distinguished by their ability to replicate the respective sovereign credit. Large borrowing programmes and frequency of market presence are further new criteria that are used to differentiate between credits.
It seems to have become the norm to document the close relationship of an agency to a sovereign and its related special financing needs. In light of this, some market participants even consider mortgage banks to be included in the agency category.
Stephan Tribull, L-Bank: European agencies are important for what they do and how they do it. Firstly, they provide a ready source of liquidity, in the form of high quality quasi-sovereign risk. Secondly, they have traditionally set the standards for professionalism and innovation in borrowing - where one has left off another has taken up the cause.
Gerhard Lewark, Kreditanstalt für Wiederaufbau: European agencies play an important role in the euro fixed income market. Agency issues offer investors the opportunity to invest in sovereign or quasi-sovereign risk at a distinctive yield pick up compared to government bonds of the respective host government.
In some cases they come with a zero risk weighting, thus reducing the need for investors to underlay investments with capital. The permanent funding needs of the agencies ensure a steady flow of bond issues at distinctive volumes, which provides liquidity for that particular market segment.
Therefore, agencies may well be regarded as a separate asset class between sovereign and financials.
Robert Fassbender, Deutsche Ausgleichsbank: European agencies which carry an explicit governmental guarantee can be seen as surrogates for government bonds since they offer investment alternatives with a comparable credit risk.
As these agencies become better known for their specialist role in carrying out public tasks - DtA, for example, for its market leadership in small and medium-sized enterprises (SME) financing in Germany - the funding needs of European agencies are likely to grow, which could lead to further expansion of the euro agency market itself.
Although less developed than their US counterparts, European agencies are well on their way to becoming a separate asset class. Currently, the European market still lacks the homogeneity and liquidity of its US counterpart. The development of repo facilities, the use of future contracts, as well as improved marketing concepts would better achieve this goal.
Patrice Ract Madoux, Cades: In the current environment, decreasing government deficits will leave investors hungry for real agencies, triple-A rated and 0% Cooke. Agencies can be seen as a separate asset class because liquidity makes such a difference - but, then again, it is the only one.
Piet Hein Verloop, Bank Nederlandse Gemeenten: European agency paper has indeed become a common core holding amongst institutional investors, offering a product that combines high credit quality at a spread to government bonds.
Q - What are the key features of your government relationship that underline your agency credentials and your credit strength?
A - OKB: As the Austrian export credit agency, OKB derives its triple-A credit quality from an explicit, direct and unconditional guarantee of the Republic of Austria on its borrowings - which have been carried out mainly in the international financial markets. OKB has tapped the international capital markets for over 30 years, as a funding source for the Austrian export financing scheme.
L-Bank: We start with the 100% ownership of the state of Baden-Württemberg and its explicit and direct, unconditional and irrevocable guarantee of all our obligations. If people still have problems, we point to the fact that our supervisory board looks a lot like a cabinet meeting.
The credit strength comes from being responsible for a rather large proportion of Germany's exports, which makes us one of the most prosperous regions of Europe.
KfW: KfW is the largest government agency in Germany. 80% of KfW's capital is owned by the Federal Republic of Germany and 20% by the German Federal States. The prime aim of KfW is the support of the economic development of the Federal Republic of Germany and financial cooperation with developing countries. We perform tasks of direct public interest which cannot be provided at all or not to the same extent by private institutions.
Therefore KfW benefits from the German law principle Anstaltslast - institutional liability. That means that the Federal Republic of Germany must safeguard KfW's economic basis and must enable KfW to perform all its obligations when due.
In addition KfW enjoys the explicit and direct guarantee from the Federal Republic of Germany.
DtA: DtA is a special purpose financial agency with a public mandate to promote and advise SMEs in Germany. DtA is 100% government owned and maintains a first-class credit rating, triple-A, based on the explicit statutory guarantee.
In addition, DtA, a public law institution, benefits from the unique German law principle of Anstaltslast - maintenance obligation. Our bonds are zero-risk weighted under the EU solvency ratio directive. DtA is a tax exempt institution and retains all its earnings, in order to fulfil its tasks.
Cades: As an Etablissement Public Administratif, Cades is formally part of the French state. Its board consists exclusively of state representatives and its non-commercial activity prevents it from any kind of privatisation.
More than a formal state guarantee - which leaves the date of repayment unknown in case of liquidity problem or bankruptcy - Cades benefits from a guarantee of immediate liquidity and so will never be in a position to default. And of course Cades benefits from its triple-A rating, 0% Cooke, and very accurate risk management.
BNG: BNG is a fully government-owned enterprise: 50% is directly owned by the Dutch central government, the remaining 50% is split between over 90% of the Dutch municipalities, 11 of the 12 provinces, and a water control corporation. Changes in the present stakeholder structure are not expected, and the government's strong commitment to its current holding was evidenced by its participation in the most recent issue of shares in 1990 in order to maintain its 50% stake. The government's 50% stake has been held since 1921, and there have been two share transfers among lower tier government entities in BNG's entire history.
Although BNG operates independently and without a formal guarantee by the Dutch state, substantial support is indicated by the continued 50% ownership of the Dutch state. Moreover, the government is directly represented on the supervisory board: officials from both the ministry of finance and the ministry of the interior and kingdom relations are members. At least four members of the board must belong to the executive of a Dutch municipality which is a shareholder of BNG.
Lending is limited by its articles of association to central and local governments, state-owned entities and state-guaranteed institutions within the EU. Lending to borrowers outside BNG's core Dutch public sector business is limited to a maximum of 15% of total assets.
One could say that BNG's shareholders are its core clients.
BNG acts as the principal agency of the highly creditworthy Dutch public sector. This special status has also been recognised by other authorities: the Ministry of Finance of Japan for example, views BNG as a sovereign issuer. This is evidenced by the authorisation to register under the official Japanese Form 2 procedure for yen issues targeted at Japanese investors.
The major rating agencies have also recognised the strength of both BNG's underlying risk profile and the implicit government backing, evidenced by the continuously high ratings BNG enjoys: AAA/Aaa/AAA.
Rentenbank: Rentenbank is Germany's agency for the agricultural sector established by federal law in 1949. Germany has a maintenance obligation - Anstaltslast - for Rentenbank, which requires the Federal Republic to safeguard its economic basis, keep the bank in a position to pursue its operations and enable Rentenbank to perform its obligations when due.
Other features underpinning Rentenbank's status include: Rentenbank is tax-exempt due to its development role; Rentenbank is supervised by a commissioner appointed by the German government; and Rentenbank has strong capital ratios: 10.7% core capital and 17.4% total capital.
Q - What elements of your issuance strategy are aimed at providing investors with surrogate government debt? Are you considering introducing a more fixed issuance programme or calendar?
A - L-Bank: Clearly the pricing, but that is set by investors not us. But if you look at our past activity as L-Bank and our return as L-Bank the State Bank, you can see we often set the parameters of our issues to allow ease of comparison with relevant benchmark government bonds.
KfW: With a funding volume of Eu35.5bn equivalent in 1999, KfW is one of the largest borrowers in Europe. Last year, more than 90% of this volume was raised by issuing securities in euros (59%), US dollars (20%), and in sterling (13%).
On these markets KfW/KfW International Finance Inc is a frequent issuer of large and liquid benchmark bonds and has established yield curves with maturities of up to 30 years. Therefore, and with an outstanding volume of Eu133bn equivalent as of December 31, 1999, KfW's bonds in these currencies are used as government bond substitutes.
KfW considers the market environment carefully before launching a benchmark issue and has, for the time being, no intention to abandon this flexibility by announcing a predetermined issuing calendar.
DtA: Our issuance strategy is focused on providing investors alternatives to government bonds by regularly offering liquid benchmark bonds in global format. The benchmark bonds denominated in euros are linked to Bund maturities, making them more comparable and simplifying hedging among investors.
DtA does not plan to set up a calendar, because our funding requirements are not yet sizeable enough to justify this step. In the meantime we will exploit the advantage of flexibility of timing the launch of issues in accordance with market developments.
Cades: Since the beginning of its existence, Cades has insisted in providing markets with liquid bonds. Market-making agreements are a general rule for us and this policy will be maintained. We can also provide the market with very specific instruments such as inflation-linked bonds.
Cades' programme is not adapted to fixed calendar.
BNG: BNG's issuance strategy can be effectively described as evolution, not revolution. Although receptive to new funding tools and features, BNG's top priority is to safeguard its first class risk profile on the basis of our strong asset base and our public sector ownership, as well as its excellent standing with investors.
BNG has not needed or wanted to launch any unusual capital markets products, such as inflation or credit-linked issues, as either they would create risk gaps or might compromise BNG's good name. This does not mean that BNG will not be investing in its ability to handle structured finance transactions.
The ability to offer investors a custom-made proposition, taking into account essential legal and operational constraints, is also a guiding principle in BNG's product developing. Issuing large benchmarks - such as the two five year deals of $750 million in 1999 and the recent Eu1bn 10 year - is also a key part of BNG's funding strategy.
Furthermore, we want to maintain our excellent position in the euro market and further strengthen our position in the US dollar market.
Being one of the smaller frequent issuers - with only Eu8bn to Eu10bn to fund on an annual basis - BNG is not considering launching a funding programme. We are very cost conscious and need to fund part of our needs on an opportunistic basis.
Rentenbank: From a credit quality perspective, all Rentenbank issues are a surrogate for government debt. Rentenbank intends to issue benchmark transactions on a regular basis, but there will be no issuing calendar. Our total annual borrowing requirements of Eu8bn to Eu10bn can be handled more efficiently with flexible timing.
OKB: OKB's annual funding requirements, of Eu3bn to Eu4bn in the international capital markets, are moderate. OKB does not, therefore, issue on the basis of a regular calendar, but instead takes advantage of opportunities in different market sectors and capitalises on flexibility, especially with regard to timing, currency, and maturity.
To increase flexibility in timing OKB operates a euro-shelf programme, a Japan-shelf programme, a global issuance facility, and commercial paper programmes both in Europe and the US that are designed to launch either strategic or more opportunistic transactions.
OKB's issuing strategy is built on the quality of the name, providing the investor with a transparent credit and performance history so that the risk free pick up vis-à-vis a government bond results in an easy portfolio decision.
Q - How do other issuers use your debt as a pricing reference?
A DtA: The main reference for our benchmark issues is still government bonds, but at the same time every issuer is forced to take the issuance level of its peer group into consideration.
BNG: Other borrowers will use BNG as its peer. Borrowers within the peer group will probably look at BNG in the same way BNG looks at them.
OKB: All borrowers compare their issuance level and performance as a spread to government debt and swaps versus their own peer group.
OKB's spread reflects its quality and scarcity value: OKB trades consistently within a narrow range to comparable agencies, supranationals and some European sovereigns.
L-Bank: Whilst the portents are good we have not issued enough in our new zero-weighted form to establish a pattern. However, there was clearly a time when the old L-Bank rate influenced levels not only in Germany but much further afield.
KfW: We are delighted when they do so.
Q - What steps are you taking to maintain your funding levels in light of the difficult arbitrage environment for top quality borrowers over the past year?
A BNG: Investors prefer to price benchmark deals over the swap curve instead of the yield curve. BNG strives for a balance between benchmark and arbitrage driven deals. Furthermore, private placements are a substantial part of BNG's total funding volume.
Rentenbank: We have set up a continuous dialogue with our investors and syndicate banks through presentations, briefings, e-mailings and via our web-site. We offer a broad range of products and currencies under our Euro-MTN and Euro-CP programmes. In addition, we have shelf-registrations for the Japanese and the Australian domestic markets. These steps will help us to further broaden our institutional investor base.
In 1999 we could roughly maintain our 1998 Euribor-based funding level. The absolute funding level is, however, not our benchmark.
It is more important for us to note that our funding costs develop in line with those of our peer group and that the margin between our funding cost and our lending to banks remains stable or improves.
OKB: Flexibility and timing are key. OKB continues to consult closely with its investment bankers and is increasing its investor relations activities with internet presentations on its web site, www.oekb.co.at, and road shows in Asia and the UK.
Like most other borrowers, a substantial portion of the funding programme is raised via structured private placements in Asia and Japan as well as targeted issues to UK funds, or tailor-made transactions to suit specific investors' interest alongside benchmark issuance.
L-Bank: It is, and has always been, our opinion that it is dangerous to depend on any one market. Our very entry into the Eurobond sector was to hedge against possible difficulties in access to domestic funding. Conversely, our strong domestic position has enabled us to fund at attractive rates throughout the recent period when arbitrage has been poor. As a result, we have not had to put our name under strain internationally and have simply bided our time till a technical window appeared, as with our recent issue.
KfW: Funding levels are always dependent on supply and demand in the issuers' segment of the bond market and the situation in the swap market, as well as on possible structural risks associated with swaps that the participants of the swap markets are ready to take.
The main field to work on is the diversification and deepening of the investor base. Furthermore, the ideal timing for a new bond has become more and more important due to volatility in the swap markets.
DtA: The key to achieving favourable funding levels in a difficult market environment is maintaining flexibility with respect to the timing, the currency and the type of new issues. DtA, therefore, attempts to diversify its issuance by considering new markets/currencies. Since 1999, DtA is shelf-registered with the SEC and has been awarded the status of seasoned issuer, ie. a permanent issuer on the US market.
In addition, the increase and redenomination of our EMTN programme from US dollars into euros shows DtA's commitment to the euro, while enabling us to continue to issue bonds in all major currencies. We also intend to make frequent use of our newly arranged Australian dollar MTN programme, which was set up at the end of 1999.
Cades: Cades is in a very favourable situation as the volume of its debt is fixed, and more than 80% of its initial short term debt has been restructured in medium and long term debt. There will be very little new debt and its rarity value will therefore push the spread down.
Q - Many investors are employing a barbell investment strategy, buying on the one hand single-A and triple-B corporate issues and on the other hand sovereign and quasi-sovereign issues. Have you been able to take advantage of this behaviour?
A Rentenbank: The number of quasi-sovereign triple-A borrowers is limited and decreasing rather than increasing. Against this background, Rentenbank is a natural choice for investors who maintain a diversified asset base including agency credit. Most portfolios are already invested in Rentenbank. We will continue to enhance our name recognition with the measures described above.
OKB: The trend over the past year among investors to seek increased return and thereby to extend the credit spectrum has generally not worked in favour of high rated, quality issuers. Only central banks have not drastically changed their credit policy and still look for quality credits.
OKB's smaller issuing volumes offer the advantage of scarcity value, while the direct and unconditional guarantee of the republic - a clean and transparent credit - places it on par with other high quality, quasi-sovereign issuers.
L-Bank: Yes, and we have done so for a number of years. This is by no means a new investment strategy or a successful one - people just talk about it more. What is true is we tend to benefit from barbells and flight to quality.
KfW: We see continuing good demand for our quasi-sovereign paper - whether or not due to the described barbell investment strategy. The feedback we have got directly from investors during our roadshows is not enough evidence to attribute the success of our paper particularly to that barbell strategy.
DtA: We have not noticed this behaviour as being advantageous or disadvantageous for us. In our opinion there is always a steady demand for benchmark issues and private placements from triple-A borrowers, especially from those with rarity value like DtA.
BNG: Certainly, where there is a flight to quality BNG is able to take advantage. Given BNG's excellent credit quality, there is always a certain number of investors who are buying the triple-As of this world.
Q - What other new trends have you seen in investors' preferences?
A OKB: With regard to benchmark transactions, a clear preference for larger volumes - which give the perception of greater liquidity - has been witnessed. The global format, as opposed to a traditional Eurobond, has also gained in popularity. Both of these trends do not, however, appear to exclude a well priced, smaller sized and regionally targeted transaction, especially if such issues add to portfolio diversification.
The trend towards greater flexibility, both in size and structure, suits MTN programmes. In particular, in Japan issue sizes of just ¥500m or even smaller are no longer uncommon.
L-Bank: The fundamentals have not changed - investors want liquidity and value, especially at times when sovereigns are either unready, unwilling, or unable to supply these. Our credit risk is pretty clear, but we notice an increasing focus amongst investors in event risks that might affect the value of their holdings.
KfW: In the triple-A sector, institutional investors concentrate on big liquid bonds with tight bid-offer spreads, and on those issuers offering such bonds across the yield curve. We have responded by building a yield curve through euro globals, with Japanese yen globals, and have now started to build a US dollar global yield curve too.
DtA: The trend towards the issuance of fully integrated e-bonds reflects a growing demand - especially from retail investors - for transparency and more simplified execution of issues. We have encountered a growing price sensitivity among investors whose monitoring is more focused on the secondary performance of newly issued bonds. Also, the growing issuance of corporate bonds shows an increase in the spread appetite of investors.
BNG: To price new issues over the swap curve, instead of the yield curve.
Rentenbank: There is persistent demand for yield pick-up via structured issues, such as reverse convertibles. Many of these investors do not want to add credit risk to that. Against this background, Rentenbank, as a triple-A rated borrower, is a top choice for such transactions.
Q - How do the funding opportunities available in dollars compare with what is available in euros?
A L-Bank: In cost terms they vary between being marginally less and marginally more attractive. There is not so much in it at present, though I suspect one is more of a hostage to fortune in the dollar market because of the way deals are premarketed.
KfW: 1999 was already called the year of the dollar. In the first quarter of 2000, funding has turned out to be even more favourable in US dollars. Consequently, of our total funding in the international non-euro capital markets, mounting to an equivalent of Eu7.5bn, roughly two thirds have been done in US dollars.
In the euro-domestic market, our home market, we have raised another Eu7.5bn equivalent, so that our total funding until now amounts to Eu15bn.
DtA: Funding opportunities available in dollars are currently less attractive for new issues. The US dollar market is highly volatile largely due to the US Treasury's announced plans to buy back part of its debt in the coming years.
The arbitrage in euros is holding up slightly better than in US dollars, due to increased demand, mainly from Europe. International demand should rise as soon as the expected appreciation of the euro currency against the US dollar makes bonds denominated in euros a more attractive investment for foreign investors.
BNG: It is difficult to say because it depends on investors' appetite.
Rentenbank: Last year Rentenbank launched euro and US dollar denominated benchmark transactions which both resulted in cost-effective funding. This year the volatile swap spreads in the US dollar market offered few windows of opportunity and the euro debt market has not been very receptive to triple-A rated borrowers. However, we expect more favourable conditions for euro-denominated debt in the upcoming months.
Q - If you are active in the dollar market, do you aim to position yourselves relative to the US agencies and will you use them as pricing references?
A KfW: We can offer investors in US dollars the credit quality of the Federal Republic of Germany. The question is then: what spread does this translate into vis-à-vis the US agencies as an unofficial price reference in US dollars?
The ongoing public debate about the future status of US agencies has led to a significant spread tightening of our 5 year US dollar global vis-à-vis the US agencies. Recently we were even trading through agencies. We think this level is more appropriate for our credit quality.
DtA: We aim to position ourselves relative to the US agencies as they are likely to become the future benchmark for the US dollar market. DtA is in a favourable position to align itself with the US agencies.
Compared to the US agencies, whose bonds are not guaranteed by the US government, DtA's explicit federal guarantee makes us the favoured credit.
We are keen on reducing the spread to US agencies by offering more liquidity and enhancing our name recognition in the US through roadshows.
BNG: Given the liquid benchmarks which are being issued by the US agencies, it is only possible to a limited extend to position ourselves relative to the US agencies. Furthermore, we prefer to await the outcome of recent discussions in the US regarding agency status.
Rentenbank: As a German agency Rentenbank also looks at the issuance of US dollar global bonds. It remains to be seen how the current discussions about the implicit government guarantee for US agencies will affect their benchmark status.
However, in terms of issue size and frequency, Rentenbank cannot and will not try to compete with the US agencies. The decision over which pricing benchmark to take will be made case by case depending on, among other factors, the volatility of the relevant benchmark versus swaps.
OKB: The market sets the rules and US agency paper, even if it has suffered from recent turbulence, is the benchmark for our type of credit, even more so since government paper is becoming more scarce and swaps remain the measure for relative value investments.
L-Bank: Of course. But differentials work horizontally - that is to say geographically - as well as vertically, so we would also be looking at how we would be priced in dollars relative to our European peer group.
Q - How do you aim to take advantage of the growing interest in yen?
A DtA: DtA plans to issue its first yen global later on this year, probably in the second half of 2000. We have done a number of private placements in yen in the past and consider the yen market extremely important. We hope to become a frequent issuer. Although we do not anticipate offering Uridashi bonds in 2000, we are monitoring the developments in this sector very closely.
BNG: The growing interest in yen is mainly driven by UK investors. Arbitrage is difficult and the basis swap is volatile.
Rentenbank: Rentenbank profits from high name recognition in Japan. In 1999 yen took a 11.7% share of our total international funding. This was second only to euro-denominated debt. That trend is continuing this year. Although we have no immediate plans, the launch of a yen global bond is another option we may consider.
OKB: We already have. At the beginning of this year, OKB was the first out to test the yen market and issued the year's first ¥100 billion 10 year global benchmark transaction. Again, flexibility and timing were essential for the success of this transaction. Furthermore, targeted yen issues have played, and will continue to play, an important role in our funding programme.
L-Bank: We will monitor the market for suitable opportunities as we do with all other currencies. We undertake regular trips to the Far East and to yen investors in London. Our new status is well known and yen buyers are a valued and loyal part of our global investor base. We are grateful for their continued interest in our name.
KfW: Two global yen bonds have been issued so far, amounting to ¥100bn each, the first one in 1999 in the five year term and the second one earlier this year with a 10 year maturity. Both issues were very well received in the capital market.
On the other hand, by issuing private placements, we have increasingly shown flexibility in accommodating investors' demands with regard to special features, such as calls, different types of structures - FX- or CMS-linked - and relatively small sizes - going down as low as to notional amounts of ¥1bn - which led to a very considerable increase in the flow of deals.
Q - How does the sterling market fit in to your issuance? Do you view it as a strategic market or a purely arbitrage market?
A BNG: As in the US, the UK will show budgetary surpluses for the foreseeable future. As an important quality borrower this situation will of course open opportunities in both markets, especially the longer end of the sterling market, which is dominated by a handful of investors. They invest on a spread to Gilts, while issuers consider the sterling market to a certain extent as an arbitrage market.
Rentenbank: The importance of the sterling market has grown in 1999. Currently sentiment in the UK towards joining the euro is rather negative and as a result sterling is going to remain a European core currency with strategic value. The main problem for us has been the expensive basis swap into euros because we do not take outright positions in foreign currency.
OKB: The sterling market is very attractive for various reasons. Demand for non-domestic paper opened up more opportunities last year, certainly from the investor's perspective and indeed also from both OKB's portfolio perspective - sterling remaining one of the few non-euro currencies - and an arbitrage point of view. In particular, when we launched a long-dated sterling issue at the end of last year all these three criteria were met. The issue was received very positively by investors.
L-Bank: Some of the best performing deals of the old L-Bank were in sterling, where we issued both for strategic reasons and to gain arbitrage. A number of houses give an excellent feed of information and we will continue to work closely with them to identify suitable opportunities. We have done a lot of work with UK investors in London and Scotland over the years and we want to build on the mutual respect in this area.
KfW: The sterling market is of strategic importance for KfW's overall funding. All new issues and increases are considered very carefully due to the importance of the performance of our bonds. We are looking for a long-standing relationship with the big UK investors - eventually they will become big euro-takers. In 1999, KfW International Finance Inc borrowed a volume of more than £3bn in this market. With an outstanding yield curve covering all important maturities between one and 30 years, KfW is an established Gilt substitute.
DtA: DTA's funding programmes in both 1998 and 1999 included the issuance of sterling bonds. Although funding volumes in the sterling market are too small to compare with the euro or US dollar markets, it is still a preferred choice among borrowers who want to explore arbitrage opportunities, as reflected by the numerous smaller issues and increases during recent months. Unfortunately, demand tends towards long maturities in which DtA has limited funding needs.
Q - What attractive funding opportunities do currencies other than the four mentioned above provide?
A Rentenbank: Rentenbank established an A$5bn domestic programme in February of this year. We expect to launch the first bond in the upcoming months. The Swiss franc market should also offer issuing opportunities for Rentenbank throughout the year.
OKB: OKB has long benefited from an especially strong investor base in Switzerland and in Swiss francs. OKB regularly launches Swiss franc benchmarks, with both fixed and floating rate coupons. Other more exotic currencies also offer opportunities from time to time. In all OKB has to date issued bonds denominated in 15 different currencies.
L-Bank: We border on to Switzerland, where much of our paper is placed. We have always issued in Swiss francs and I am sure that we will continue to exploit opportunities in this and other arbitrage markets when suitable opportunities arise and it makes sense overall to do so.
KfW: Apart from the major four, KfW issues in a large variety of currencies. KfW sees demand for issues in eastern European currencies among others, as well as from the domestic Australian market.
This diversification of the investor base allows KfW to access parts of the market where demand and costs for KfW are best met. However, these issues represented less than 5% of KfW's total funding volume in 1999.
DtA: Currently, issuance in eastern European currencies like Polish zlotys provides good arbitrage, although the swap market, which is often illiquid, is a restraint on issuance.
Issuance in Swiss francs, however, which offered very favourable arbitrage opportunities in the past, is currently less attractive for triple-A borrowers, as reflected in the historically low issuance volume in 1999 and the first months of 2000.
BNG: Retail investors are still looking to those currencies where the absolute interest level is high. They are more coupon driven - looking at currencies such as Rand - and issuers can take advantage of that.
Q - How do structured issues fit into your funding policy?
A OKB: Structured issues play an important role in OKB's funding policy allowing penetration of different market segments, e.g. targeted and retail, while achieving attractive funding levels. From a portfolio and credit perspective though, OKB is conscious about the impact on its risk profile.
L-Bank: We moved away from structures in the mid-1990s, but this, like all our policies, we keep constantly under review. Structured issues have a place, but we have greater priorities at the moment.
KfW: Structured issues have a growing share, complementing our funding profile.
These structured issues offer advantages to both the investor and the issuer, providing the investor with tailor-made, yield-enhanced investments and to the issuer, allowing him to obtain very attractive funding levels. Among the structures that we have contracted so far are FX-linked or CMS-linked features and Bermuda calls.
However, the use of structures will have to remain within certain limits, due to operational and administrative restrictions as well as to status and image constraints.
DtA: DtA considers structured issues as complimentary and they allow us to enhance our margin and reduce funding costs. Structured bonds are issued under our EMTN programme and we have no restrictions on type of currency, although proceeds do have to be swapped into euros.
BNG: Part of BNG's strategy is to invest in its ability to handle structured finance transactions. Not all structures will be accepted. For example, credit-linked structures will not be accepted by BNG, given the close relationship with the Dutch government.
Rentenbank: Rentenbank launches structured transactions on a regular basis, particularly under the Euro-MTN programme. We do not keep any outright risk but swap the structures into floating euros.
Q - What effects will the internet and platforms such as EuroMTS have on distribution and trading of your products and on the fixed income markets in general?
A Rentenbank: The internet provides an additional distribution channel and will in the long run give better and faster access to semi-professional and retail investors. E-bonds will also increase the importance of issuers' web sites, because the internet, in addition to the rating agencies, will be the prime source for information about the borrower.
EuroMTS is a further step towards ultimate liquidity and transparency. This is likely to put further pressure on syndicate banks' margins and will accelerate the consolidation process in the underwriting industry.
Investors are likely to profit, but for borrowers and market-makers the matter is less clear cut.
Still, Rentenbank supports the development of a Euro-Agency-MTS platform in principle. Participation will depend on the development and general acceptance of this trading platform and on the minimum size for eligible transactions.
OKB: Clearly the internet and electronic trading platforms will change the way fixed income products are priced, distributed and traded. OKB welcomes these changes as they will bring improved transparency for both investors and issuers.
By being able to witness the bookbuilding process OKB will be better informed when engaging in the pricing process as well as generally be in a position to improve its investor relations activities. Improved transparency in trading will undoubtedly also help OKB's trading levels vis-à-vis the benchmarks.
OKB will, nevertheless, continue to rely on financial intermediaries when bringing issues to the market and above all for managing issues in the secondary market. In general, financial intermediaries can be expected to remain the primary source of information and the gateway to the markets for issuers and investors alike.
KfW: We recognise the increasing importance of the internet platforms for the bond markets. We think they will initially be mainly used for commoditised products like CPs or government bonds mainly. For us, they will be most important for information dissemination and in the future for secondary trading - rather less so for primary market distribution. As soon as Euro-MTS becomes open for agency issuers, we will therefore seek to be traded on this platform. The same applies for platforms in US dollars.
DtA: The electronic market is revolutionising how we do business. The internet and platforms such as EuroMTS offer more market transparency, leading to more improved price discovery, more flexibility, and better control for the issuer. Furthermore, transaction costs are reduced, which could lead to a higher volume of transactions.
Borrowers can broaden their investor base - especially towards retail investors - by using the internet during the bookbuilding process and for associated marketing activities. DtA therefore will issue its forthcoming global bond as a so-called "e-bond" allowing us to exploit all the benefits of this new technology.
BNG: It will give more transparency to issuers and banks.
L-Bank: In the long term the markets are going to be revolutionised, but more in the middle than at either end of the distribution chain - by definition you will always have issuers and investors. For example, this exercise will probably soon be a chat group or on-line conference. Quite how we get there is a more difficult question to answer and probably it's too early to say. Technically, the sky is the limit, but new technologies bring new risks and the potential for big technical crashes. Technology is undoubtedly bringing us closer to investors.
Whatever happens we have to be convinced new systems are in the market's interest and not simply a dotcom fad. The market is a bit 'froth-e' at the moment - we'll be able to tell better when things settle.