The guaranteed investment contract-backed (gic) sector is enjoying great success. While the intense buzz surrounding the gics' introduction to Europe may have died down, its future is bright. Regulations banning issuance in the US have been done away with and a dawning investor base in Asia lies on the horizon. As with any new product, there was great excitement when the double-A rated gics and their funding agreements first touched down in Europe. But this is one sector that has been able to live up to the hype. UBS Warburg (UBS) is the leading bookrunner of gic-backed notes issued since the beginning of 2000, according to MTNWare. Gavin Eddy, head of MTNs at UBS, gives his reasons for the success. He says: "Unlike the average double-As, whose ratings are gravitating south, gics are very stable. They don't experience the same cyclical influences and changes that corporates and banks do. Their spreads are also relatively high, averaging Libor+25 to Libor+35. These two things together make a very compelling argument." Brian McCarthy, head of Euro-MTN trading at Lehman Brothers, believes that part of the reason for the gics' initial success in Europe was due to the relatively low price of their paper. He says: "Their funding agreements came cheap originally because of legal reasons, since they were not allowed to be issued directly into the United States where all of the issuers were already household names." Because gics did not have this name recognition in Europe, they had to cut their prices in order to attract investors. But these regulations blocking gics from issuing in the US have finally been removed. It was a long and drawn out process. The complications arose as the matter had to be settled on a state rather than federal basis. Each state had to approve the gic structure independently. Now that gics are allowed to place paper in the US, many have set up global MTN programmes in order to meet the demand there. Pacific Life Funding (PacLife) brought its $5 billion Euro-MTN programme to the market in 1998 so has seen the sector develop from within. And Chris Cicoletti, structured products analyst at PacLife, says: "The biggest change the sector has experienced is definitely the advent of the global programme." But Cicoletti explains that PacLife has so far declined to set up a global shelf. He says: "This is simply for the reason that we are presently able to achieve all our funding needs in Europe with our Euro-MTN programme." Principal Life Insurance Company (Principal) signed its $3 billion global debt issuance programme in February of this year and Christopher Freese, director of risk pricing at Principal, believes that the global programme will be key to the sector's development. He says: "We believe that the US institutional investor base will begin to fully embrace the global MTN structures as many companies begin and continue to offer global programmes. This will create demand in multiple locales across the globe." McCarthy, at Lehman Brothers, agrees that success lies ahead in the US markets. He says: "Now that more of these issuers are able to set up global programmes, spreads are tightening because the US investors see the value in these names that are very well known to them." But with one market now conquered and another fully accessible, a new challenge lies elsewhere. Gics have struggled to fully exploit the opportunities available in yen. Despite reaching the equivalent of $1.35 billion off 29 yen trades in 2000, yen issuance by gics is down to just five trades in 2001. Eddy, at UBS, is perplexed as to why the Japanese are not flocking towards gic paper. He says: "It is a strange thing. The Japanese should really like the strong ratings, strong industry and the Libor+ spreads. I think the problem is that the Japanese are still looking at gics as being structured issuers. It is not that gics haven't made an effort in Japan - they have roadshowed and met the principal investors. But the Japanese are traditionally conservative investors and will take some time to come around. But when they do, they will be big buyers." Cicoletti, at PacLife, believes that while it will take time to bring the Japanese investors round, there are already inroads being made. He says: "Asia is very much the new frontier for the gic sector. It won't be any harder to issue there than it was in Europe, but it will take time. The process of breaking into Japan has started in the last year, and will develop further in the next 12 months. There is already more acceptance to gics now than there was in Japan a year ago. There was a great buzz when the product broke out in Europe. I hope that Japan will welcome it in the same way." Whichever new markets gics do look to enter, educating investors on the product will always be key to its success. Jackson National Life has both a $7 billion debt issuance programme and a $3 billion global MTN programme and Victor Gallo, vice-president at Jackson National Life (Jackson), believes that gics are wrongly seen as having a rather complex structure. He says: "The structure is not actually very complicated once you look at it. The SPV is there just to get the notes issued. But once they are issued and the funding agreement is put into the trust as collateral, it's pretty easy to see that the issuer can almost be ignored and the investors can look to the funding agreement as the source of funds for the note payments. There is none of the structural complications of the asset-backed sector." Getting this message across to investors has been a key goal for Sun Life Assurance Company of Canada (US) (Sun Life) which set up its $2 billion Euro-MTN programme in February of last year. Jack Donnelly, vice president, US equity at Sun Life, says: "Dealers have been hard at work spreading the gospel of gic-backed programmes, so investors seem to be getting more and more comfortable. We are agreeable to helping dealers with this educational process, and have participated in several gic-backed conferences sponsored by dealers over the past year, and are eager to help more." Part of the gics' battle to educate investors is taking place online where both Jackson and PacLife are showing an enthusiasm for transparency by setting up their own websites. On these, dealers and investors can find information on funding levels, issuance statistics, credit, spreads, programme updates, roadshow presentations and financial statements. UBS Warburg acts as a dealer for both of these issuers, and Eddy is a big fan of their websites. He says: "Investors will always naturally veer towards doing business in whatever way is easiest for them. These websites help to spoon-feed investors. They make all the information investors need very palatable. Just from looking at the websites it is clear how much research has gone into them. It shows they have expended some effort and they could really teach other issuers a few lessons on how to further develop this side of their marketing." If these technological advances continue and if Asian investors open up to gics, the future growth of the sector will be ensured. Gallo, at Jackson, says: "There is room for the investor base to grow. The sector is still a baby in a capital markets sense, with about $50 billion outstanding. Its attraction has been both in economic value and in diversification of risk. As for value, most of the issuers are of high quality, and pay spreads that are attractive relative to more established credits. Of course, we hope that as the sector grows and becomes better understood, widely held, and liquid, this newness premium will erode." McCarthy, at Lehman Brothers, has one piece of advice for investors unsure about gics. He says: "More issuers will be getting involved and the sooner investors get involved, the more upside they will enjoy. Investors are doing themselves a disservice if they are not moving quickly to get involved in this sector. I think it is the best show in town."
August 03, 2001
