A well-known issuer, based behind Liverpool Street station in the heart of London, has raised more debt than European Investment Bank or even World Bank. Tucked away in their unassuming offices in Bavaria House, the men from Bayerische Landesbank (Balaba) like to conduct their business away from the public gaze. And though many landesbanks issue yen, not one has issued quite as much or in such a variety of structures. It has been busy structuring its way into the yen market and isn't keen on being disturbed, which is why it keeps its trading floor hidden away mysteriously at the back of the building. Balaba is the top German issuer of non-syndicated deals to date in 2000, according to MTNWare. It has issued $9.83 billion off 143 trades so far this year, the majority of which are in yen. And it is at the forefront of the Euro-MTN market in other ways. It is one of the largest landesbanks, second only to Westdeutsche Landesbank. And Balaba has decided to run itself from two centres with two Euro-MTN programmes. One has a limit of $12 billion and issues out of London. The trades issued off this shelf are mainly small, non-syndicated, structured yen trades. The other programme's ceiling is euro30 billion ($27 billion) and issues out of Munich, Balaba's head office. It issues mainly syndicated public deals, which bolster the landesbank's issuance in the league tables. However the landesbank is better known for its structured private placements, which account for over 70% of its trades. Russell Williams, deputy head of capital markets at Balaba's London office, explains that London and the head office have different funding needs and strategies. He says: "Munich's focus is on head office funding needs and group-wide liquidity management, whereas London concentrates on opportunistic, structured issuance." Williams joined the bank in 1984 on the money markets and FX desk. He moved over to the MTN desk five years ago and remembers when the second programme was set up. He says: "We speak to Munich regularly. We want to avoid any potential for arbitrage between the two centres." But there is still a great deal of communication between the Munich head office and the London branch. Both issue daily off their Euro-MTN programmes, so they have to co-ordinate their operations. Klaus Wrobel is head of capital markets at Balaba's head office in Munich. He says: "We make sure we are posting the same levels and that there is no arbitrage. London uses its funds for its own operations and does not contribute to head office funding." This way of issuing takes a lot of pressure off Balaba's London branch because there is no urgency to raise funds for a particular asset. Unlike most banks which raise all their funds from one location, Balaba takes pride in the fact that the London branch is financially independent from its head office and is responsible for its own funding. John Gausepohl is Balaba's general manager of the structured issuance market. He joined the New York office in 1988, where he was head of trading. He then moved to the London branch in 1995. Gausepohl was previously head of capital markets at the Commonwealth Bank of Australia, between 1983 and 1988. Gausepohl points out that the way Balaba is funded from its regional branches is a great advantage. He says: "It allows us autonomy to exploit our in-depth knowledge of the local market and consequently gives us more freedom on both the asset and liability sides. Some other banks are starting to selectively revert back to regional autonomy." This means that trades can be agreed upon quickly, which is popular with dealers because the process of trading is smoother. Salomon Smith Barney (Salomon) is bookrunner off 13 trades for the London branch so far this year. Milon Jenssen, debt capital markets at the Frankfurt office of Salomon, explains what makes Balaba so easy to work with. He says: "Balaba is easily approachable over the phone: this makes them very quick and flexible to work with because if the structure is already known, then they don't require an indicative term sheet - this speeds things up a lot." Rolf Schafer, head of capital markets at Balaba, is responsible for assets as well as liability. Between 1986 and 1990 Schafer worked at Westdeutsche Landesbank and before that he was at NatWest in London. Schafer, who has been with Balaba since 1990, explains why the London branch can issue opportunistically. He says: "We only issue on demand and we only do private placements. The demand is 75% through our dealer group and 25% reverse enquiry. Opportunistic funding may be used to purchase assets for the London branch's investment book." Structures are really Balaba's strong point. It is open to nearly any structure that an investor requires. Schafer says that it makes a point of not doing any retail-targeted deals. He says: "Each issue is tailored to an individual investor. We have issued, in all, 1090 tranches with 98 different structures since the programme's inception in 1992." And Williams boasts: "There are a few structures that we cannot currently do, but not many." Balaba has a reputation in the market for its versatility with structures. The MTN issuers at Balaba are aware that this is crucial to the programme's success in the market. Gausepohl thinks that it is important to accommodate the customer and cover all the investor bases. He says: "We recognise that people want a quick response. We think it's important to be consistent with pricing levels and parameters. And in London, as a matter of policy, we bid consistently to buy back our paper when asked." This is certainly a policy that makes the bank popular with investors. And Balaba knows exactly which structures can appeal to its main investor base: Japanese institutional investors. Jenssen, at Salomon, says: "To satisfy their yield targets, investors look for reverse dual currency and power reverse dual-currency notes, with or without a Bermudan callable structure that works best for long-dated trades. A large portion of trades done for Balaba include both types in a broad range of variations." The vast majority of trades issued out of Balaba's London office are in yen - 78%, according to MTNWare. This is a clear indication of where the bank's investor base mainly lies. Its top dealers by volume of debt raised are Industrial Bank of Japan and Nomura. They have been bookrunners off $509.95 million-worth of non-syndicated trades out of London. This is another sure sign that the bank is selling most of its trades into Japan. Salomon, which has a strong presence in Japan, along with Daiwa SBCM Europe (Daiwa), have both issued the highest number of trades for Balaba. Each has been bookrunner off 13 issues in 2000, according to MTNWare. Balaba also has experience, which has given it staying power in the market and developed its reputation. Sam Amalou, debt origination at Daiwa, says: "Daiwa has worked with them in this market for over four years now, and over the years they have adapted to the market as new structures come along. They are quick to respond and can accept more structures than most other issuers." Balaba's quick response time has won it accolades from the bookrunners that do most of the bank's trades into Japan. Amalou adds: "What makes it easy for us is their quasi-sovereign status and flexibility to take on almost all types of products. Most business out of Japan is investor driven, and it's not always easy to find an issuer to accept structures designed for investors." The London branch of the bank has the edge over other issuers by allowing the investor to change details of a trade even after a deal is all but closed. Schafer explains: "We are slightly unusual in that we normally give the investor the option to increase the deal before the issue date, so long as we have four days between finalising the amount and the payment date to complete the paper work. We feel it is important that we don't change our targets too frequently so that dealers have a good idea of our posting levels when they are in the early stages of putting a deal together." This has made Balaba, which is 50% owned by the state of Bavaria and 50% owned by the Bavarian savings bank association, a popular issuer in Japan. Jenssen, at Salomon, explains that the landesbank has developed a good reputation there. He says: "Japanese investors have a very clear idea of what they want. But they are also looking for a yield pick-up, which is not easy with triple-A rated issuers as their traditionally favoured issuer group. Many Japanese investors see Balaba in the same category as limited-credit-risk issuers such as Kreditanstalt fur Wiederaufbau and Deutsche Ausgleichsbank." Amalou, at Daiwa, agrees. He says: "From our perspective, it is not so much that they have a better credit or that they are easier to work with, but that their name is familiar in Japan, so investors know the story. In some instances, they have a slight advantage in yen because they take proceeds in that currency." There is just one issue threatening the landesbank sector. The EU has decided to investigate the guarantee system of all landesbanks and the way their debt might be grandfathered if those guarantees were to be axed. Consequently Standard & Poor's placed Balaba's triple-A rating on outlook negative last December (see page 4). Wrobel explains why this sent a certain amount of shock though the German banking sector and why the EU's plans to remove the landesbanks' special guarantees has met with fierce criticism. He says: "Public banks play a very important role in Germany and the landesbanks have an important position in the German banking sector." Some dealers admit that this could pose a potential threat, but this is countered by Balaba's strong name recognition. Amalou, at Daiwa, says: "The negative outlook of the landesbank's credit rating might be a problem for some investors, but Balaba is still rated triple-A. And in Japan credit perception is still unaffected and familiarity with a name is important." Balaba has suffered a quiet period in 2000. So far this year its issuance is down to $1.49 billion off 108 trades, according to MTNWare, compared with $2.02 billion off 223 trades during the same period last year. But Williams claims that the threat to the guarantee system has had no effect on Balaba's issuance. He says: "The question about the future of the landesbank sector hasn't affected the business we do. Triple-A issuers are generally paying more than they used to. In line with our peers, we have been less active this year than last for a number of reasons. For example, at the beginning of the year there were a lot of short-term equity-linked notes for which investors were prepared to move down the credit spectrum, so triple-A rated issuers missed out." But with this threat seeming quite remote, the four-strong team in Bavaria House is left to get on with the day-to-day business of issuing large amounts of Euro-MTNs. They won't let the EU or rating agencies dampen their spirits. After all, they know that there is a lot of enjoyment to be had in the business. And Rolf Schafer speaks for all of them when he jokingly says: "Of course the most fun part of this job is making money."
December 15, 2000
