If 1999 was the year of the euro, then 2000 was even more so. The currency's dominance of the market, especially the private sector (non-syndicated trades of less than $250 million, excluding SPVs, self-led deals and issues with a term of less than 365 days), was underlined in 2000 with total private issuance exceeding $80 billion. This was an increase of almost 45% on 1999. Structures are still declining in popularity leaving some dealers wondering about the long-term future of the structured market. Credits continue to become the fashionable alternative. But Anthony Everill, head of Euro-MTNs at Merrill Lynch, picked up on a few other features that described how 2000 went. He says: "The themes last year were the dominance of equity-linked and credit-linked products, the continuing growth of Asia and the structured market becoming longer and more complex." But it has been a bumpy ride along the way, especially for the equity-linked trade. Nasdaq's worst year since it was established in 1971 meant investors had a big rethink on equity-linked trades after the first quarter. And although the market was far from crippled the volatility meant it was approached with an all-or-nothing attitude. Private issuance in the structure fell by almost 50% over the fourth quarter to just over $1 billion. But strong interest at the start of 2000 meant issuance for the year was only just down on 1999, at $7.27 billion, according to MTNWare (see quarterly reports, p8). Private credit-linked deals, although never trading at the volumes seen in the equity-linked sector, had a considerably better second half than first half. But it was the only structure that did. Interest-rate linked deals had a particularly hard time, with issuance in the second quarter also falling by almost 50% by the end of the fourth. Peter Jackson, head of Euro-MTNs at Salomon Smith Barney (Salomon), explains: "Last year Europe was very successful due to the popularity of long-dated structured bonds with investors taking a view on interest rates. Most of these were bullish, but it turned out that almost every view taken in 1999 was not the view to take." But he points out that bullish views on equity-linked deals were also inaccurate, and that the resulting losses this year when the trades mature will shift the emphasis back to interest rate-linked trades. Japan was responsible for keeping the structured market out of the endangered species list. A buoyant Tokyo market meant power reverse duals were sought right the way into December, according to many dealers. Jackson, at Salomon, says: "Many Japanese investors have liabilities with a need for more than a 2% or 3% interest rate. It's not a very sophisticated credit market so they look for products like the power reverse dual." And reverse convertibles were also popular, described by one dealer as: "A massive structure in the past 18 months." Many expect the product to become even more active this year. Svensk Exportkredit (SEK) was particularly busy with structures. About 75% of its paper had some form of structure attached, and it was especially keen on the reverse convertible. Johanna Clason, head of trading and capital markets at SEK, says: "We did more reverse convertible trades than in 1999 primarily because retail investors in Japan found this structure very attractive. But it was a difficult market last year with credit spreads widening and a pretty low interest-rate environment." In Europe, though, the dwindling appetite for the structured product is causing some concern. Fergus Kiely, head of Euro-MTNs at HSBC, says: "Structures used to be used for arbitrage and were a good fee-earning opportunity for dealers. But investors are now so knowledgeable about the market they can price the deals themselves and the dealer's profit is less in his own hands." And he thinks the success of the reverse convertible and power reverse dual is not something to get overly excited about. He says: "There's nothing radical about the return of some of these structures. It's like rediscovering an old suit, dusting it off and realizing it actually looks quite good on you." Japan hit a peak in the second quarter when the money markets suddenly became the investment of choice for retail investors. This allowed the investment funds to choose foreign corporate paper such as the telecoms over the stock markets. But having spent all their money before the half-year the next six months were comparatively dry. Nabil Aboulzelof, head of Euro-MTNs at Barclays Capital, says: "Spanish insurance companies and French money market funds were big buyers at the start of the year, but then short-dated Japanese investors got involved with telecom funding. It didn't last though, as they soon used up all their funds." And it wasn't just telecoms that benefited. Although about $30 billion of the telecom requirements were met by the Japanese, the auto sector was also involved and Unilever did a well-publicized ¥145 billion ($1.28 billion) trade to fund its acquisition of Bestfoods. And Clason, at SEK, emphasizes the role Japan played in its funding. She says: "Our issuance this year has been mainly opportunistic. We have done some trading in Europe especially Scandinavia, but most has been concentrated in Japan." One event that did not have as big an impact as it could have was the rate hike in August. Jackson, at Salomon, which did over 65% of its private business in yen last year according to MTNWare, says: "The rate hike made it easier to place paper for a while, but Japan is not really out of its recession and the market rates have come back down again. It means the structured market will remain intact." But Everill, at Merrill Lynch, which did just under 28% of its private business in yen, says: "The rate hike in Japan had the most significant effect at the short end. It substantially reduced the demand from the money funds and effectively killed any arbitrage opportunities." The euro saw increasing volumes throughout the year. Issuance in the first quarter was close to being doubled in the fourth quarter. And the openness of the market that comes with a new currency means investment houses are keen to be noticed. Jackson, at Salomon, says: "The big thing for the past year has been who is going to win the euro? There is a lot of consolidation going on as everyone tries to make sure they're not forgotten, and I'm sure of the 20 or so competitive banks in Europe, eventually only six or seven will be used consistently." The sterling sector was a disappointment for many. The second quarter was the sector's worst in terms of issuance volume for well over a year, and has perturbed some dealers. Everill, at Merrill Lynch, says: "Sterling has been a frustrating market this year. The demand at the long end has led to some good issuance opportunities, but elsewhere along the curve the basis swap has made life very difficult." One big talking point throughout the year was the third-generation telecom license bids. Their effect was to drag investor attention towards the issuing strategies of the likes of British Telecommunications, Deutsche Telekom, France Telecom and Vodafone. But Everill, at Merrill Lynch, thinks another sector had an even greater influence. He says: "Telecoms have been banner headlines for the whole year. It's not like they snuck up on us. But the auto sector has had a more pronounced effect. The spread widening in that sector has impacted the whole market." The problems encountered by Ford, with its tyre recall, and big losses on the parts of DaimlerChrysler and General Motors last year meant spreads that started at around Libor+15 bps soon reached as high as Libor+75 bps. And with European investors wary of structures the trend continues to move towards a US-style credit market. Plain vanilla issuance in the private market shot from $95.74 billion in 1999 to $141.48 billion last year - an increase of almost 48%. But although dealers report an increase in interest for lower-rated credits, MTNWare shows that the percentage of trades done by single-A and triple-B issuers actually fell very slightly from 1999 to 2000. Jackson, at Salomon, puts this down to a volatile final three months. He says: "The credit market has been very weak in the last quarter. There has been lots of highly publicized liquidity pressure on companies and with high borrowing costs finding funds is a challenge. We expect credits to weaken still. Xerox, for example, is making big losses and its paper is trading at half its face value. These shock waves reverberate around the market." But some risky credits were issuing more paper in the last few months of 2000 than they ever had previously. Credit Suisse First Boston, HSBC and Merrill Lynch all managed to do trades for Imperial Tobacco after September last year. In a credit-averse environment these would have been quite difficult to place considering the litigation going on in the tobacco industry. And 66% of the rated programmes that signed last year were rated single-A or triple-B by Moody's. This is perhaps a better indication of the state of the market. 2000 saw 122 non-SPV signings, and 28% of these had the confidence to come to the market without a Moody's, Standard & Poor's or a Fitch rating on their programme. Of the 156 non-SPV signings in 1999 19.8% had no ratings, so it appears that ratings are actually becoming less important from an issuer's perspective. Last year the number of signings compared to the previous year dropped. It is only the second time this has happened, the first drop coming in 1998. It may signal the approach of a plateau that originators would do well to avoid. Landesbank Sachsen Girozentrale (Sachsen) signed in 1998, but only issued four notes during 2000. Peter Maurer, MTN funding at Sachsen, says: "Last year was more expensive than previous years and this was one of the reasons for the few number of trades from our programme. With other landesbanks issuing a lot with expensive coupons it was difficult to find the right level." This general widening of spreads was experienced across the spectrum though, and once the higher-rated credits also altered their levels investors were able to get what they wanted with less risk. This was no more evident than in the guaranteed investment contract (gic) sector, which was able to flourish in 2000. Of the 14 gics in the market seven signed in 1999 and were able to take advantage of the credit-conscious investor in 2000. Gics were responsible for almost $8 billion-worth of private trades during 2000, and all offer the investor a credit of at least double-A. Everill, at Merrill Lynch, says: "Gics offer cheap investments with a high-grade credit. They are very flexible and are a sure-fire way of getting issuance done." They have been a rare constant however in what was a stormy year for most. Some feel that a shake-up of the whole process of originating and issuing trades is what the MTN market needs. And it is rumoured that the International Primary Market Association (IPMA) will be doing just that before long. Although Clifford Dammers, secretary general at IPMA, is unwilling to comment about details, he says by the end of this month an announcement about the market revamp will be made. Kiely, at HSBC, supports the move. He says: "This market is sorely lacking in experience, and so something like IPMA and what it plans for the MTN market is definitely a well-needed development." Most dealers and issuers agree that 2000 was a difficult year. Aboulzelof, at Barclays Capital, says: "Last year was sketchy. There were pockets of demand isolated from each other, and it was just been a case of finding and making use of those pockets." And Kiely, at HSBC, thinks that the coming 12 months will have their own obstacles. Before Christmas he correctly predicted a cut in interest rates from the US: "I expect the US to go into a mild recession in 2001. Interest rates will probably fall about 1% to 1.5% and the euro and sterling sectors will follow." But others are more optimistic. Commerzbank was the third highest issuer of private trades in 2000 with $5.53 billion-worth. Thomas Behme, funding manager at Commerzbank, says: "2001 will be a good year for issuers. It's pretty stable at the moment, and because of a volatile equity-market last year investors will want to buy fixed-rate notes. This is good for us."
January 05, 2001
