Issuance is up in 2001 by over $200 billion to $1,237.37 billion compared to $1,030.20 billion in 2000. And while the split between syndicated and non-syndicated deals remains constant at 45:55, the structured market has been the scene of much volatility. STRUCTURES No one particular structure stood out in 2001. But power reverse dual currency (PRDCs) notes continued to be popular. Chris Jones became head of Euro-MTN trading at Deutsche Bank when Tiina Lee left the desk in 2001. He says: "More issuers have been willing to look at PRDCs. In particular, the supranationals and US agencies have been willing to consider these trades, and what is important is that they have been willing to accept the smaller sizes, under ¥1bn and frequently under ¥500m." But a high number of downgrades and a volatile stock market have made investors nervous, which has affected volumes in credit-linked and equity-linked trades. Most houses report that equity-linked business suffered in 2001 and all put this down to the unsure stock markets, while many said credit-linked structures had gained in popularity. Data from MTNWare bears this out. Private placement equity-linked trades were down in volume to $6.12 billion in 2001 from $7.56 billion in 2000, while credit-linked notes were up from $463.57 million in 2000 to $718.03 million in 2001. Despite the high number of unknown structures in MTNWare, this is still indicative of the swing in these two markets. Simon Hill, head of Euro-MTNs at Credit Suisse First Boston (CSFB), also cites the shaky Japanese economy as a source of investor nervousness in equity-linked trades. He says: "Worries about the economy in Japan have had an effect on equity structures, while the growth rate of equity products in Europe has slowed too." But this has not been the case across the board and some MTN houses saw their equity-linked business bloom in 2001. Andrew Devenport, who is head of Goldman Sachs's Euro-MTN and private placements desk, says: "The big change for us in 2001 was that the equity business expanded dramatically. About 6% of our structured business was equity linked in 2000 and this rose to 22% in 2001. In turn, the commodity business contracted." And Commerzbank also saw its equity-linked business improve after September. Gayle Turner, head of Euro-MTN trading at the bank, says: "Equity-linked business has picked up since September, although it has been geared towards equity indices rather than single stocks." But credit-linked business has been the one to watch for many houses. And volatility in the credit market has provided opportunities for those who moved with the market. Hill, at CSFB, says: "There has been lots of volatility in the credit market and investors have had to get used to the idea that spreads are not static anymore." Although this may have kept some investors away, it has also provided opportunities for new structures. Richard Proudlove, on the Euro-MTN trading desk at Schroder Salomon Smith Barney (Salomon), says: "The utilization of credit-linked products has evolved significantly in 2001. People have moved on from using credit-linked products for simple proxy purposes, and now we are seeing much more sophisticated and interesting deals getting printed, really using credit risk to economic effect." Devenport, at Goldman Sachs, agrees that there is potential in the market for new structures. He says: "This is a fertile environment for new structures and there have been quite a few this year. The market has moved on towards asset diversification, equity- and commodity-linked structures and hybrids of these." Jones, at Deutsche Bank, outlines some of the more interesting structures that have been developed in 2001. He says: "There are some areas of the structured market where there is potential for growth. Hybrid products will be important in future, where interest rate risk is overlaid with a credit default swap to create a hybrid instrument that substantially enhances returns. Synthetic securitizations are likely to be less popular in 2002. Given the much higher default rates experienced this year, the junior or first-loss pieces will be much more difficult to place. This will bring the transaction size down or even cause them not to happen at all." CREDIT AND DOWNGRADES 2001 saw Argentina's B1 rating from Moody's Investors Service drop to Ca, while Japan's AA+ rating from Fitch dropped to AA. Enron's default and bankruptcy also shook the market, affecting short-term debt. Moody's downgraded more than twice as many sovereigns and corporates outside the US than it upgraded in 2001. In 2000 that situation was reversed with over twice as many upgrades as downgrades. And one sector that has been a part of the volatile credit environment is the car manufacturers. They have been under attack from the rating agencies in 2001, but this has not stopped them from making good use of their Euro-MTN programmes. The sector is the leading issuer of private placements, after the banking sector, with over $20.31 billion raised during the course of 2001. Mike Bransford, Euro-MTN trading at Deutsche Bank, says: "The autos have stood out, much as the telecoms did in 2000. But they have made good use of their programmes. For instance, GMAC frequently adjusted targets to compete with secondary levels. As a result, they were able to obtain strategic and timely funding in relative discretion." And the downgrades in the auto sector have had effects across the board and have brought spreads out further for many other issuers. Anthony Everill, head of Euro-MTN trading at Merrill Lynch, says: "The autos have been affected by their issuance requirements and the economic environment and they in turn have affected other issuers in terms of spread comparables." Chris Cox, head of Euro-MTN trading at Salomon, says: "Some of the higher profile defaults in 2001 have produced real challenges for the markets on a number of levels. In some sectors we've seen recovery level valuations on defaulting assets triggering major runs on liquidity in large funds. Late November/ December was especially notable for the challenges and opportunities of this type." US RECESSION The deterioration in credit quality came hand-in-hand with the downturn in the US economy. This has not only provided a good environment for interest-rate speculation, but has also affected issuance at the short end. Private placements with a term of 365 days or less have dropped by $21.5 billion from 2000 to 2001. But the US recession has resulted in many windows of opportunity for structured deals. Cox, at Salomon, says: "The US recession and subsequent cuts in rates have generated numerous structured bond opportunities as the dollar yield curve has steepened and volatility has remained high. Elsewhere, the economic downturn has fostered credit downgrades, forcing a number of issuers previously reliant on the CP market out into the bond market as short-term ratings have been cut. And of course, it has fed weakness in the equity markets which in turn has fostered greater demand for fixed income products." SEPTEMBER 11 The terrorist attack on the World Trade Centre in September also shook investor confidence, albeit temporarily. Many dealers reported that short-dated trades suffered as a result. Although volumes of one-year-and-under trades are down on 2000, according to MTNWare, the database does not show a decrease on overall private-placement volumes after the events of September. There was a dip in private yen issuance under one year. Volumes from April to August were between $4.18 billion and $6.20 billion. But September volumes were just $3.84 billion. This figure decreased in October and again in November, and reached a low of $940.19 million in December. Hill, at CSFB, says: "After September 11, short-dated paper into Japan disappeared. It is a problem because it was a core part of the market and now it's not there. I suspect the sector will be quiet for at least Q1 in 2002 as well." And SNS Bank also reports lower volumes of private placements in 2001 as a direct result of less demand for short-dated notes out of Japan. Bas Snijders, director of funding at SNS Bank, says: "In privately placed MTNs, volume was down. The main reason for this was the falling away of short dated (up to 18 months) yen private placements. In the first half of 2001 we saw good activity and volume in vanilla issues in Czech koruna, Slovak koruna, Hungarian forint and Polish zloty." But Devenport, at Goldman Sachs, has a different story, reflecting the different business priorities of the Euro-MTN desks in each bank. He says: "It did have an impact and introduced more uncertainty into the market. We have seen a lot of short-dated, almost cash substitute, transactions since that time and this is still going on." Turner, at Commerzbank, noted other developments in the market since September 11. She says: "Since then our business has been 80% structured, due to the shape of yield curves and credit downgrades. There has been some pullback on autos and telecoms. Investors are seeking more public deals because they are more liquid. There is a lot of concern about where A3 credits are going and investors are very cautious about these issuers at the moment." NEW PROGRAMMES AND ISSUERS Last year saw 109 non-SPV borrowers sign Euro-MTN programmes, down on the 130 new issuers that signed up in 2000. Deborah Glenn, Euro-MTN origination at Morgan Stanley, says: "We have seen some interesting trends in 2001. The flow of corporates accessing the capital markets for the first time through the Euro-MTN vehicle has continued to grow, especially from Europe." Fourteen issuers rated triple-B or double-B by Moody's signed programmes this year. Glenn adds: "We also saw an increasing number of low single-A and triple-B borrowers establish debt programmes in 2001 from both the corporate and the bank sectors. While these credit sectors experienced some spread widening during the year, we were encouraged by the increasing number of investors willing to look further down the credit spectrum in search of yield and the large net inflow of money into the bond funds due to volatility in the equity markets." Of the 109 new signings in 2001, 73, or 66%, of the new borrowers were non-bank entities. This figure is up from 56% of the new signings that were non-bank entities in 2000. The higher proportion of corporates, sovereigns and local authorities coming to the market could make for heightened competition among issuers in 2002 vying for dealer and investor attention. Julia Abbott is global head of Euro-MTN and Euro-CP origination at Commerzbank and she has this advice for borrowers: "What opens up doors for an issuer is if it can set a low minimum size for a trade, for example euro5 million instead of euro10 million. Often the size of the trade will increase over the settlement period anyway." And Anthony Wainer, Euro-MTN and private placements trader at Goldman Sachs, agrees that borrowers willing to look at smaller trades are the ones that stand out, adding that a readiness to take on structures is also an advantage. He says: "The issuers that have impressed us in the structures market are those that rely on Euro-MTNs for their arbitrage funding, such as the landesbanks and the supranationals with smaller funding requirements. They need to raise money at aggressive minus-libor levels and are willing to take on complicated structures." An issuer that was mentioned by several MTN houses as having had a particularly successful year is Kreditanstalt f³r Wiederaufbau (KfW). In March 2001 the borrower lowered the minimum amount that it was willing to trade from ¥1 billion to ¥500 million. Beate Forell is senior manager of capital markets at KfW and she says: "The response was amazing. We did this as a trial and we saw very strong demand. In fact we increased our minimum trading amount back up to ¥1 billion in May because we saw too much demand. This worked for us, but each issuer has to take into account the cost involved in each transaction and see if lowering your minimum amount is right for you."
January 04, 2002
