Several new borrowers have come to the structured EuroMTN market in 2004 in an effort to broaden their investor bases and benefit from cheap funding. However, many investors remain reluctant to go down the credit curve. HBOS has been the most high profile name to debut in the structured EuroMTN market this year, but other names including Anglo Irish Bank and Bank of Ireland have also entered the market. All have been successful in launching their first notes in the market, but the volumes they have been able to print have varied widely. This is a reflection of some investors' continued reluctance to combine credit and structured risk. Retail buyers, while more willing to buy heavily structured and tailored MTN products, are especially more selective when it comes to the credit rating of issuers from which they will buy. According to one MTN trader at a European house, this is well known in the dollar retail sector. ?The private banking network really wants to buy double-A European investment banks. That's who they bank with, that's what they're exposed to, and that's what they tend to buy,? he said. ?You've probably got about 20 issuers ? 10 of which are dealers anyway ? and they're taking the lion's share of the flow. It's a very selective buyer base.? Of the top 20 structured note issuers in the EuroMTN market, 11 are mainstream investment banks. There are about 230 borrowers that have issued structured MTNs this year, but as the trader suggests, the core group is relatively small. Of the total $169bn that has been issued, about $100bn has come from the top 20 names, a 59% share of all structured volumes, while just 40 names have issued more than $1bn. ?It's amazing how concentrated the structured business is,? said one head of EuroMTNs. ?If you look through who really benefits from it, it's a very small group of borrowers. ?This year it has not mattered that much because many borrowers have had lower borrowing requirements, but in 2005, when issuers are hunting for funding, it's going to become much more obvious that that business only goes to a small group of issuers.? The demand for double-A names can easily be seen by the success that HBOS has enjoyed in the market this year. The UK bank started issuing structured MTNs in June and has printed more than $1bn of deals. Name recognition and structured note capability have been key, but HBOS's Aa2/AA-/AA+ ratings have also been crucial. Similarly, Commonwealth Bank of Australia, one of the market's most prolific interest rate-linked issuers, has used its Aa3/AA-/AA ratings, and flexible models, to print more than $8.4bn in the structured market over the year to date. About $2.1bn has been in range-accrual structures, more than $3bn in CMS and range notes, and over $900m in snowballs. Double-A names have printed about $222bn from about 14,891 trades in the structured market so far this year, compared to single-A borrowers which have launched about 5,188 deals for just over $75.2bn (see table). Remaining upbeat However, while some single-A borrowers might be frustrated, the likes of A2/A rated Anglo Irish and Aa3/A+/AA- rated Bank of Ireland maintain that they are happy with the progress they have made this year. They say that they are upbeat about the potential for strong growth in the coming year. ?From where we are sitting as an issuer, it has seemed a bit slow,? said Russell Waide, senior dealer on the funding desk at Bank of Ireland. ?But we recognise that we have to put the work in and that dealers are pushing our name. It takes time ? investors and structurers have to get comfortable with the name; investors take time to get credit lines in place; and it is a bit of a self-fulfilling prophecy in that the more trades we can print, the more interest we see from investors and dealers.? Bank of Ireland has issued about Eu100m since it started issuing structured MTNs at the end of July. Waide is confident that the increasing familiarity of investors with the borrower's name will ensure that that rate of issuance picks up next year. ?Our target is to have around Eu500m in the market by the end of our financial year, which is the end of March 2005,? he said. Frank Wall, MTN and CP dealer at Anglo Irish Bank, is equally positive. ?We never thought we'd be inundated with demand for structured MTNs from the off, but as time goes by demand will grow and grow,? he said. ?It takes time for investors to accept a new name in the structured market and I am confident we will get more deals done in the first quarter of next year.? Anglo Irish has so far done six deals, including Bermudan callables, inflation-linked and step-up deals for a total of about $80m. In the past couple of weeks the borrower has also put the systems in place to be able to print snowballs and inverse floaters. Bank of Ireland's issuance has come in range accrual and step-up deals, with CMS spread structures expected to follow shortly. The main problem for both Bank of Ireland and Anglo Irish is that investors, especially retail buyers want to buy double-A names. However, Wall and Waide maintain that this merely means they have to focus elsewhere. ?The nature of retail buying means that some products are just not available to us as they are sold primarily by double-A names,? said Wall. ?But that's not a problem as we are focusing on other products.? Demand from institutional buyers for larger issues and products that are non-callable or have a lower incidence of calls is an obvious route for single-A names. However, Waide and Wall believe that comprehensive marketing ? both are committed to visiting Asian investors ? flexibility, and increased name recognition should also allow them to print increasing number of deals from the more traditionally double-A product suite.
December 17, 2004
