Sovereign issuers are having a tough time in the Euro-CP market. Issuance from the sector is down by nearly 25% to $14.66 billion in the third quarter of this year compared to $19 billion in the first quarter. And despite a surge in volumes in the month of the New York attack, sovereign issuers are finding it difficult to issue at the levels they want. Oesterreichische Kontrollbank (OKB), the Austrian sovereign, knows this only too well. It had outstandings of $1.12 billion in March 2001, and last month this had fallen to $320 million-worth. But this does not worry Waltraut Burghardt, senior director of international finance at OKB. Compared to the same period in 2000, OKB has increased its issuance by 32% in 2001 and Burghardt is happy with the way things are going. Burghardt says: "Triple-As have benefited from the flight to quality since September 11 but it has been difficult to achieve the levels we want. Investors look at the spread (Ted) between the T-Bill and Eurodollar futures, which has compressed and so we have not been as active in the market as we were before the summer. Now we are in the market maybe two or three times a week. But we are liquid and have the capacity to shift funding between our different instruments." JPMorgan is one of the appointed dealers off OKB's euro10 billion ($8.98 billion) Euro-CP programme and Steve Anthoney, head of Euro-CP at the bank, explains why OKB and other similar issuers have experienced problems. He says: "OKB trades in line with other sovereign names. Over the course of the year its funding levels have widened from Libor-18 to 20bps to Libor-14 to 16bps, primarily as a result of the Ted spread narrowing. The one-year US T-bill is no longer issued and that combined with an increase in supply of one- to six-month T-bills and agency discount notes has meant these products are trading more cheaply." Consequently traditional buyers of sovereign CP are not able to get the pick-up in yield they have been used to and are preferring to hold the more liquid T-bill and agency discount note products. Jan Wipplinger, ECP trader, at Deutsche Bank, agrees. He says: "Decreasing volumes are the story of the market at the moment for ECP sovereign borrowers. A lot of the investor appetite for sovereign paper comes from the Asian central banks and at the beginning of the year conditions were very favourable for them. But at the moment ECP is not looking interesting for sovereign investors in comparison with US domestic paper like US T-Bills and agency discount paper." OKB was one of the first issuers to set-up a Euro-CP programme when it signed its $750 million programme in 1985. The programme was increased to euro3 billion in June 2000 and six months later the ceiling was upped to its current size. When the programme was first launched the issuer adopted an auction system for placing paper but this was later changed to a posting system. Burghardt believes this has made a big difference to its issuance. She says: "The move from an auction system to a posting system has been very important. Investors are now able to purchase our CPs on almost a daily basis in good sizes and across the curve. Changing our technique has allowed us to diversify our investor base and attract other high quality investors." In September, OKB's issuance soared by 33% to $607.59 million on the previous month. And although the whole sector saw an increase in volume, dealers do not think that sovereign issuers in the CP market saw marked gains from investor movement to high quality paper. Anthoney, at JPMorgan, says: "OKB and the other sovereigns did not really benefit from a flight to quality following the September 11 tragedy. There was a bit of a move away from the A-2/P-2 borrowers, and sectors such as the airlines and the insurance companies were carefully reviewed. But fund managers still had to maximize their returns so the higher yielding high-rated corporates and financials were the main beneficiaries."
November 09, 2001
