Floaters on the up but yen plummets in the third quarter In a quarter that has seen telecoms steal the show with big public bonds, and mergers and acquisitions unsettle some of the market's biggest players, non-syndicated Euro-MTN trading volumes have continued to rise. The number of new entrants to the market has fallen compared with the second quarter, but existing issuers are using their programmes more than ever. Issuance in US dollar has come close to $50 billion for the first time in a quarter, and euro issuance has steadily increased all year. But yen has slipped. After deals worth $59.19 billion were traded between April and June, according to MTNWare, the volume traded this quarter has almost halved to $32.76 billion. Peter Jackson, head of Euro-MTNs at Salomon Smith Barney (Salomon), explains the fall-off. He says: "Yen issuance has gone down because funds in Japan did a lot of buying of short-dated vanilla paper in the first half of the year, and now don't have the same amount of money to spend." The interest-rate hike in Japan was a concern for some dealers (see MTNWeek, issue 194), but short-dated trades are still growing and yen is likely to pick up again before long. Klaus Svendsen, head of MTN trading at Morgan Stanley Dean Witter (MSDW), says: "Yen is patchy but it's still there. Investors are just more picky later in the year with telecoms now trading at yen Libor +20." Telecoms started issuing large amounts to fund license bids, and they affected every part of the debt markets. British Telecommunications is the fourth highest non-syndicated MTN issuer this quarter with $4.81 billion outstanding, behind Federal Home Loan Banks, HSBC Holdings and Freddie Mac. Deutsche Telekom is in fifth place, with $3.78 billion outstanding. Jackson, at Salomon, says: "Telecoms have in some ways dominated the market. When one group of issuers suddenly appears, each of them requiring many billions of dollars of funding, this is bound to move the market." There have been 36 programme signings this year with a Moody's rating of single-A or triple-B. But issuance for both sectors has dropped this quarter, and some dealers think the market is suffering a case of corporate-paper demand without the supply. Svendsen, at MSDW, thinks it is due to the seasonal lull. He says: "I'm not surprised that single-A and triple-B activity hasn't been great. July and August are pretty quiet normally, and there has not really been any noticeable movement in the credit market." One sector that has significantly increased its profile is that of US borrowers. This quarter has seen an increase in issuance of over 100% on last quarter. Although large trades from the likes of Freddie Mac may bolster these figures abnormally, the influx of gics cannot be discounted (see MTNWeek, issue 196). Daniel Cogoi, head of MTNs at BNP Paribas, says: "I'm not surprised that the US is back on top. Gics have had quite an impact this year and are definitely a factor. They are now quite well established in the MTN market." Trades with a tenor of three years or less have continued their domination of the market. Notes in this sector have made up almost 65% of total issuance this quarter. With the drop in yen issuance this is something of a surprise, but Cogoi explains: "You have to distinguish between one-year activity and the rest. Fixed-rate issuance tends to go together with one-year yen deals, and this area has been very quiet lately. Floaters though, particularly in the short end of the market, have been good." This predominance of the short end is often attributed to banks trying to raise their profiles in the league tables at as small a cost as possible. Jackson, at Salomon, says: "League table position is very important in gaining public mandates, and most banks are prepared to some degree to buy league table position. Short-dated floating-rate notes (FRNs) will therefore always be a significant part of the market, as they provide the cheapest form of league-table trade." FRN issuance increased by almost $22 billion this quarter compared with last. Fixed-rate trades have slumped, with the volume this quarter decreasing by over $14 billion. These two changes are probably linked, according to Jackson. He continues: "FRNs are more popular in rising-rate environments and there may be some of that in these numbers. But it is more likely a function of the decline in the short yen business which was all fixed rate." But Svendsen, at MSDW, thinks there are other reasons for the surge in FRN issuance. He says: "Floating-rate notes have seen good demand because of changes in the BIS regulations. They've also been popular because of the interest-rate climate we've had in Europe recently. But as it's now steadied I think fixed-rate issuance will be on the increase again." And vanilla trades overall have been dramatically more popular than structures. Cogoi, at BNP Paribas, says: "September has been okay, but the summer has generally been very quiet. When you compare this quarter's business to the average then vanilla trades have managed to keep afloat, but with the exception of Japan, structures have been slow."
September 29, 2000