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Hot on the heels of its blowout $6bn three year Reference note issued on Tuesday, Freddie Mac is expected to announce that it has mandated ABN Amro, Morgan Stanley Dean Witter and Salomon Smith Barney for its second EuReference note. The market is expecting a Eu5bn five year issue, with price talk at 8bp-10bp below swaps.

Nederlandse Gasunie plans to sign a euro1 billion ($856.1 million) multi-currency CP facility by the end of this week. The arranger is ING Barings/BBL. The Dutch gas supplier already has a Fls1 billion ($388.5 million) domestic CP programme, which it will cancel, and a cancelled $1 billion Euro-CP shelf. Gasunie does not expect to use the full limit of the programme this coming year. Jan Bruintjes, treasury operations at Gasunie, says: "With the new multi-currency CP programme we have more dealers than were on our domestic programme, which means we can be more competitive and hopefully get a sharper price." The dealers are BNP Paribas, Dresdner Bank, Fortis Bank, Goldman Sachs and the arranger.

There was standing room only in the River Room at the Savoy hotel in London. Issuer press conferences usually attract a slim and often reluctant group of clients. But Landesbank Rheinland-Pfalz (LRP), without anything to sell, had managed to draw a noisy crowd. The bank was in London to persuade everyone that Standard & Poor's had made a mistake in downgrading it. LRP had hired Michael Gruson of Shearman & Sterling, who had flown in by Concorde from New York, to present the bank's legal case. And the audience members were not going to let him finish until he answered all their questions. Dealers frequently interrupted him and Ian Bell of Standard & Poor's (S&P) was on his feet every other minute, determined that all present understood why his agency had downgraded the bank. And then came the killer question: "Are you here representing the entire landesbank sector or are you here to improve the performance of your bonds in the secondary market?" asked a dealer at the back. LRP failed to answer the question convincingly. For though all the landesbanks are affected by the guarantee controversy, LRP is the only one to have been downgraded. December 1999 saw all landesbanks placed on outlook negative by S&P - a situation that has not changed. But many landesbanks play down any effects on their funding costs. Andreas Strate, head of international funding at Westdeutsche Landesbank (WestLB) says: "Our funding levels in Libor terms are more expensive these days than a few years ago, but they have moved in line with the whole market." He is only prepared to admit that they have widened by just a few basis points more than other double-As. Jeffrey Spencer, public sector research at Merrill Lynch, says: "Issuing spreads for landesbanks have been wider. But it is difficult to attribute that just to news flow. As long as this controversy remains unresolved, there will be pressure on spreads." At the moment all the landesbanks benefit from both an anstaltslast (maintenance obligation) and a gewahrtragerhaftung (guarantee obligation) from their state owners. These are explicit guarantees that have given great comfort to investors. However the European Commission announced in July this year that it would be formally investigating the guarantees to see whether they contravened Europe's competition laws. All triple-As and double-As have had a bad time since investors started moving down the credit curve. But it is the investigation by the Commission into the guarantee system that has really hit the issuers. One landesbank funding manager, who did not want to be named, says: "We are being penalised twice and it's unfair." However some of the landesbanks have discovered that they can find refuge in the private Euro-MTN market. Though the private market is not immune from spread widening, structured Euro-MTNs offer some of the best value for these beleaguered German issuers. Achim Walter, funding team at Landesbank Baden Wurttemburg (LBBW), says: "The structured market has not been affected much. The plain vanilla private market has seen some knock-on from the public markets where spreads have widened. But we do not issue many plain vanilla private notes." Of the 62 notes sold off its Euro-MTN facility this year only two have been syndicated. The rest have mainly been structured yen trades, many linked to Sony shares or to the yen-dollar exchange rate. And most have found it difficult to get any long-term funding done. This year only 14.34% of landesbank private Euro-MTNs had maturities of more than 10 years. This compares to 42.15% for the same period last year. Manfred Steyer, head of new issues and syndicate at LRP, says: "Our maturities have gone down but the whole financial industry has seen this effect. In due course, if this situation continues, we will have to pay up for long-dated debt." And over half the private notes issued by LRP this year have been in yen. WestLB has also found comfort in the yen market. This year it has raised less than a third of the volume of yen it raised in the same period last year. But Strate, at the bank, says: "WestLB¦s specific advantage in the yen market in comparison to some other issuers is our presence in Tokyo and Osaka. WestLB has been in Japan for more than 30 years." But some dealers are quick to point out that landesbanks cannot become too reliant on yen. Peter Jackson, head of Euro-MTNs at Salomon Smith Barney, says: "Many Japanese investors are limited to buying sovereign paper. Sovereign is of course open to interpretation. Some say that notes issued by an entity that is 50% state-owned fit this criterion. So landesbanks, with their state guarantees, have slipped into the sovereign category. Many Japanese investors are worried that if the guarantees are removed they will have to sell their landesbank paper." And it seems increasingly likely that the Commission will scrap the landesbanks' state guarantees. A complaint was filed on July 26 by the European Banking Federation, saying that the guarantees constitute illegal state aid. With the Commission receiving an official complaint it has no option but to press on with its investigation. But Tobias Grun, senior credit officer at Moody's, points out: "The European Commission is primarily interested in creating a level playing field rather than exactly how such a level playing field should actually come about." Most market players agree that there are two possible options. Merrill Lynch's Spencer outlines them both: "The banks could compensate their owners by paying for their guarantees with a fee. Or it is theoretically possible that the banks could split, separating their public and commercial activities. But this would be practically very difficult to do. The landesbanks tend to have very complex internal structures which would make such a split very difficult." And many landesbank treasurers, in private, admit that paying their owners for their guarantees is the most likely option, saying that it makes no sense for the owners of the landesbanks to destroy value in the banks by cutting themselves off. But when and how this might happen is unclear. Until that moment most landesbanks have to reassure their investors that their paper is as credit-worthy as the day they bought it. And this mainly consists of persuading investors that landesbank paper will be grandfathered. This means even if the landesbank sector was to lose its guarantees and be downgraded, existing paper would keep all the guarantees and ratings that it carried when the investor bought it. Salomon's Jackson says: "It's my personal opinion that grandfathering must happen. There is a tradition in the bond markets that once you buy a bond the conditions under which you bought that bond will apply for the life of the deal." And many issuers go further in stressing grandfathering as a certainty. Walter, at LBBW, says: "There is no need for the German government to confirm that grandfathering will take place if the guarantee system should change. As far as I am informed, grandfathering is derived from the constitution." But despite many believing there is no need for this to be clarified, LRP has sought clarification. On August 31 LRP received a letter from Gernot Mittler, the state of Rhineland-Pfalz's finance minister, saying that at grandfathering would happen and that LRP's grandfathered paper would be fully guaranteed. Getting political backing is the latest tactic in LRP's fight against S&P's downgrading. LRP's Steyer says: "If the guarantees were eventually to be taken away it is possible our new debt could be downgraded to single-A. But our existing debt would remain unchanged. This is why the negative outlook by S&P is based on a misunderstanding. An outlook should only refer to outstanding debt, not any future new debt. Their action is unjustified." He believes that the rating agency knows it has made a mistake but cannot risk its reputation by admitting so. He goes on to say that its presentation at the Savoy was a successful move. He says: "The rating agencies did not oppose the legal opinions that we brought along. On the contrary, Ian Bell of S&P said that he agreed with the legal opinion of Shearman & Sterling and that we can rely on the guarantees." Bell is not wholly convinced however. He believes that LRP's ownership structure means that, in an insolvency situation, investors with grandfathered paper have less chance of having prompt recourse to the guarantors. He says: "In the case of LRP, the supporting states - North Rhine Westphalia, Rhineland-Pfalz and Baden-Wurttemberg - are all multiple steps removed and not direct guarantors. The connection between the bank and a better rating via these states is more tenuous and distant than in other landesbanks." Steyer is quick to rubbish this: "The idea that we are "multiple steps removed" from our guarantor is completely wrong. Each and every owner of LRP is obliged to guarantee 100%, without any restriction, the debt of LRP on first demand. If WestLB or LBBW didn't pay the investor he has a direct claim against the state. It doesn't cost the investor any time. He can get on the express train and be in Dusseldorf or in Stuttgart in one and a half-hours. If he receives no payment from WestLB or LBBW it only takes five minutes to go to the finance minister of North Rhine Westphalia or Baden-Wurttemburg and demand payment. There is no need for litigation." And Moody's has not downgraded LRP. Tobias Grun, from Moody's, says: "We have rated LRP since late 1993 and the ownership structure was just the same then as it is now." But S&P is unrepentant. And it seems the arguments will rage until the Commission gets its way. But many point out this could take a long time even if the Commission is determined. Steyer says: "The Commission cannot abolish the guarantees themselves. They must first go to Berlin and ask the federal government to ask the states to change the laws." However many insist that the Commission's political will is strong. Bell of S&P says: "The German government doesn't have a choice. Short of walking out of the Treaty of Rome, they are bound by any rulings from the European Commission." This is ultimately a political issue. And most agree the present German government is less supportive of the landesbank sector than Helmut Kohl's administration. Moody's Tobias Grun outlines the one stalling tactic that Germany might employ: "Many of the federal states see the Commission's investigation as a full attack on the entire public sector in Germany. They have publicly threatened to veto - within Germany's upper house - forthcoming EU enlargement plans." And though it may look like it is just the landesbanks which are suffering because of this controversy, others are anxiously awaiting the outcome. Many triple- and double-A issuers enjoy implicit state guarantees that have never been questioned before by investors. But the questioning has started. As Bell of S&P says: "The world has changed. Ten or 15 years ago it was inconceivable that a state would allow a bank or any institution carrying the state's name to go under. But you no longer get laughed at if you suggest the possibility now."

As the Euro-MTN market grows deeper and wider, German investors are still caught between tradition and innovation. German fund managers have long been seduced by schuldscheine and are finding them difficult to leave behind, but MTNs are increasingly the enticing alternative. And with tax advantages for buying low-coupon notes, international sectors such as the yen market are becoming more attractive. Jon Saunders, European head of MTNs at Dresdner Bank, says: "The older, more traditional investors still turn to schuldscheine, but the younger, more dynamic investors aren't so bothered and are more willing to access the MTN market." Schuldschein trades offer more privacy than privately-placed Euro-MTNs and are tucked away from the prying eyes of the market. The documentation is less onerous for issuers too, and as they are considered a loan they are not marked to market as bonds are. But these benefits do not override the need for some investors to jump aboard the accelerating Euro-MTN bandwagon. One of these young opportunists is Metzler Asset Management (Metzler). It was founded in 1987 and every one of its clients comes from Germany. Corey Young, senior portfolio manager at Metzler, says: "We don't directly target MTNs. What drives the decision is the credit analysis, and this has nothing to do with the type of bond being used." This unspecific, product-driven approach is becoming more common among German funds, and as a result Euro-MTNs have a bigger role in their portfolios. And issuers are noticing the trend too. Kreditanstalt fur Wiederaufbau (KfW) has two Euro-MTN programmes in the market, with combined outstandings of $45.33 billion. Twenty per cent of its issuance in 1999 was through schuldscheine, according to the borrower. Frank Czichowski, head of capital markets at KfW, says: "We have seen a general decline in demand for schuldsheine, especially on the structured side, and an increase in appetite for private-placement notes. This is possibly because some of the structured products in schuldscheine have not paid off. And I also think we will see a move towards bearer securities instead of loans." Liquidity in the schuldschein market is not what it could be. But those involved refuse to accept this as a reason for investors slowly moving towards Euro-MTNs. Saunders, at Dresdner, says: "The liquidity is limited in the schuldschein market, but how liquid is the MTN market really?" And liquidity is a big factor in the investment choices of BfG Investment Fonds (BfG), which has $7 billion of assets under fixed-income management. Roger Schneider, head of fixed income at BfG, says: "In my 10 years of experience in MTNs I've found that investors are not adequately compensated for their low liquidity. The billion dollar deals are okay, but whenever we wanted to sell smaller notes in the past we've not been the only ones." Young, at Metzler, has a similar view. He says: "As an investor, liquidity is very important. We need to be able to sell the paper when we want. I wouldn't say liquidity in the MTN market is strictly limited, but the advantage is with the issuer." This has led to some investors turning to the bund market. And with the interest rate-hike by the European Central Bank on August 31 it may become even more popular. BfG intends to build the bulk of its investments around the government sector because of its good liquidity and the paper's ability to develop a nice scarcity premium. The ease with which issuers can sell structures is one possible reason for the growing acceptance of the Euro-MTN in Germany. But investors are not convinced. Structured MTN issuance in euro and Deutschmark this year is only $13.48 billion, less than half of last year's figure for the same period, according to MTNWare. Schneider, at BfG, says: "We stay away from structures as much as possible because of their poor liquidity. Structures are really nothing more than cashing-forward instruments and I'd prefer to do the same thing with different trades rather than risk it all in one deal." But dealers report growth in some areas. Henry Nevstad, director, Euro-MTNs at Deutsche Bank, says: "The particular themes of 1999 were reverse convertibles and constant maturity swap-linked (CMS) floaters. If anything can be pointed out as themes so far this year, it must be an increase in credit-linked note issuance or other credit derivative-related products. We believe these will continue to play an important role in the average German investor's portfolio going forward." And Benedicte Guerin-Cribier, deputy head of MTNs at BNP Paribas, has seen other products. She says: "It's been quite quiet recently but we have done some equity-linked and interest rate-linked deals for German investors. But I would not pick them out especially; this is something most European investors are interested in." And despite this year's fall-off, investment in structured notes has not always been considered a gamble. Nevstad, at Deutsche Bank, points to a surprising willingness on the part of German investors to take on risky trades. "If you compare German investors to the Italians then they can seem quite cautious, but compared to the Swiss it is just the opposite. You could say the German investor base is conservative overall, but it really depends on what kind of structures you look at. Ultra-long-dated callables, being done quite frequently in 1998 and 1999, are quite a hefty risk to take on," he says. Bayerische Hypo- und Vereinsbank (HypoVereinsbank) is a highly active issuer in the German markets. German investors buy over 50% of its notes. It has two Euro-MTN programmes with total outstandings of $25.26 billion and is also active in the schuldschein and Pfandbrief markets. Isaac Alonso, head of funding products and MTNs at HypoVereinsbank, says: "All in all we don¦t have the typical investor any longer. Every investor is different. And they change their minds over the year depending on their performance on interest income and their spread performance." Alonso has also seen enquiry for Euro-MTN structures this year. CMS-linked notes have been popular. But he adds: "Since March the favourites with our investors have been FRNs. This has also been the case in the past, but the sizes now are smaller. And reverse convertibles, the favourite of 1998 and 1999, are no longer on the cards - who needs high coupons any more? Instead discount certificates are being bought." This is because German investors come to the market knowing exactly what they want. Saunders, at Dresdner, says: "There are still three distinct types of German investor: the short-term, low-coupon yen buyer, the interest-rate view buyer, and the credit buyer. And Germany is still very split in its preference for credit. It's either double-A and above, or triple-B, split about 70:30." This need for highly rated borrowers means banks and government-backed issuers tend to be the preferred targets. KfW is guaranteed by the Federal Republic of Germany and is triple-A rated. Czichowski, at KfW, says: "The prime reason investors come to us is that they can invest in a zero-risk, government-backed credit. This means they can concentrate on the structure and don't have to worry about the underlying debt." The other type of investor, looking further down the credit curve, is exemplified by BfG. Schneider, at the firm, says: "We mainly concentrate on the money markets, so liquidity is not the main priority here. Instead we look for good names and credit ratings, normally having a thorough look through the single-A sector." And this interest is directed at the domestic market first. Only German borrowers issue schuldscheine. And if the right product is found in the MTN market, investors will try to place their money with a German issuer before going to another. But this could soon change. Nevstad, at Deutsche Bank, says: "Investors prefer to look at names from their domestic markets first, but a lot of them have filled their lines with certain domestic players. This, in conjunction with the introduction of the euro and a larger pan-European focus, has meant that they are more willing now to look across borders for opportunities." This is why MTNs are gradually being phased into many funds' portfolios. The MTN market has the global characteristics that allow German investors to continue buying the paper they need. And investors are more willing to mark notes to market so the benefits in the simpler schuldschein sector are no longer relevant. However, smaller investors do not appreciate the extra work involved in marking trades to market. Saunders, at Dresdner, says: "Mark-to-market rules are a very big influence, especially for the smaller investor. It is quite an onerous task and so many move toward schuldscheine instead, where they don't have to mark-to-market." The larger investors do not mind making the effort however, when it means they can keep track of their money's performance. Young, at Metzler, says: "Mutual funds have to mark-to-market every day, because people are getting in and out every day. Institutional money is marked to market on a monthly basis. We are involved in both types and find marking trades to market a very useful exercise." And schuldscheine are not always an important part of a German fund's portfolio anyway. Those with clients from a variety of countries have to be able to access different products at will. Schneider, at BfG, says: "Schuldschein represents a small part of our work because we have restrictions on how much of our portfolio can consist of non-listed products. We also have to be sure of getting a sizeable premium to give the necessary liquidity." And once in the Euro-MTN market there are ways of increasing the value of the notes. German law has a tax incentive whereby mutual funds based in Luxembourg can receive discounts if they buy low-coupon paper. This is why many German investors go to the yen sector. Operated on a ladder system, one-year notes may only be taxed at 1% for example, two-year notes at 2% and so on. Nevstad, at Deutsche Bank, says: "There is an inherent tax advantage for these investors to buy low-coupon assets, as there is a difference in the treatment of capital gains tax and income tax. The fact that there is a limited supply of these low coupon, tax-advantageous bonds from the secondary market has led to the creation of a large new-issue market for such securities over the past years." BfG is one fund that takes advantage of these benefits. Schneider, at the firm, says: "We have some tax optimising schemes in place, one of which is where we buy low-coupon currency bonds and swap them back to euro, where the profit on the currency is not taxed." But these tax exemptions are little compensation when liquidity, the most important quality, is still missing from the MTN sector. German fund managers are still reluctant to embrace it wholeheartedly. Schuldscheine have a legacy of simple success, and some issuers prefer to take this tried and tested route. Schneider is happy to keep shopping around. He says: "At the moment it's worth playing the market on a trading basis, looking for undervalued products and taking your chances."

Continental, the German tyre and brake manufacturer, plans to sign a euro1 billion ($856.1 million) Euro-MTN programme on November 30. The issuer is rated BBB+ by Standard & Poor's. Heidelberger Zement and Metro are the only other German corporate issuers rated BBB+ or below. Continental has appointed Merrill Lynch to arrange the programme. Rumour has it that the seven-strong dealer group includes ABN Amro, Deutsche Bank, Lehman Brothers and Morgan Stanley Dean Witter.

Mandated lead arrangers Chase Manhattan, HSBC Investment Banking and WestLB have launched the syndication of the £3bn interim credit facility for Hutchison 3GUK Limited to arrangers and co-arrangers. Ahead of the launch, ABN Amro, Citibank/SSSB, Merrill Lynch and Royal Bank of Scotland were brought in as lead arrangers. In senior syndication, banks have been offered two tickets - arrangers committing £100m and co-arrangers with commitments of £75m. Arrangers earn upfront fees of 140bp flat, while co-arrangers receive upfront fees of 120bp flat.

Investors ignored Standard & Poor's (S&P) downgrade of Argentina this week and raced back into the country's bonds on expectations that the country had narrowly avoided a payment crisis by clinching an IMF-led aid package of as much as $24bn. Argentine FRB Brady bond spreads came down from a high of 1100bp last Thursday to 823bp yesterday (Thursday), as the IMF said it would spearhead an aid package to allay investor fears that the Argentine government would be unable to meet its now $21.8bn financing needs in 2001.

ABN Amro is preparing to launch an innovative securitisation of its Hong Kong mortgages in late November or early December. The deal will be the first public synthetic securitisation from Asia, excluding Australia. It will also be the first transaction by a non-German bank to use the structure in which the first loss tranche of a synthetic securitisation is protected by a sub-participation of interest on the reference portfolio. The technique allows the first loss tranche to be sold at the rating of the originating bank, since the interest is sufficient to cover the loss of the entire tranche.

US aircraft lessor Aviation Capital Group will today (Friday) price a $687m operating lease portfolio securitisation, via First Union Securities. Aviation Capital Group Trust Series 2000-1 is backed by 30 Airbus, Boeing and McDonnell Douglas aircraft, valued at $751m, and on lease to 22 airlines in 13 countries.

Abbey National's monster residential mortgage securitisation, offering £2.4bn of dollar, sterling and euro notes, will price today (Friday), with the leads reporting strong demand. Globally coordinated by Schroder Salomon Smith Barney, the benchmark deal is the bank's second securitisation this year and the largest ever European mortgage backed issue.

* Deutsche Bank this week launched a ¥22bn auto loan securitisation for Japanese finance company Quoq Inc, the issuer's third public ABS. Hexagon Funding 2000 Ltd offered a single triple-A fixed rate tranche rated by Fitch and Moody's. It has a 0.84% coupon with an average life of 1.5 years and was issued at par. Expected maturity is December 2003 and legal maturity 2005. An official at Deutsche Bank in Tokyo said the deal was oversubscribed: "As investors become familiar with Quoq and its auto loan securitisation structure we see a high level of interest."

JP Morgan this week launched a Eu90m tap of Colonnade Securities BV, the club funding vehicle for local social housing institutions in the Netherlands. The deal tapped Colonnade's fourth deal, which offered Eu170m in March this year.