European governmental borrowers have already issued more private debt this year than they did during the whole of 1999. This is despite two of last year's top borrowers issuing, in 2000, less than one tenth of their debt for last year. A key to the growth of this sector lies with Kommunalbanken. The Norwegian triple-A local government funding agency burst onto the scene in January this year with a euro2 billion ($1.69 billion) Euro-MTN facility and has become the second-highest issuer of governmental private debt behind the Kingdom of Denmark. And its success looks likely to continue well into 2001. Michael Bransford is assistant vice president, Euro-MTNs at Merrill Lynch, which was added to the issuer's dealer panel. He acknowledges that at the moment times are tough for triple-As but has nothing but praise for Kommunalbanken. He says: "Kommunalbanken has utilized its new programme extremely well. They are flexible in terms of structure and realistic in terms of levels. They have laid the groundwork for on-going success." The issuer has already made plans for next year after raising euro1.7 billion off its Euro-MTN facility this year. Kristine Falkgard, head of foreign funding at Kommunalbanken, admits that she is surprised by the success of the programme. But she is keen to look to the future. She says: "We did not expect such strong growth and now we are looking to extend our programme to euro4 billion. Next year we estimate that we will issue euro1.6 to euro1.8 billion." Seven of Kommunalbanken's 18 notes have been in yen. Triple-A credit has been a consistent driving force for Japanese investors and Falkgard is quick to acknowledge this. She says: "Japan has always been an important market for our peer group and for us. Japanese investors have a good understanding of our type of credit. We are planning to go to Japan again next quarter." But Tomas Werngren, executive vice president at Kommuninvest, last year's highest issuer of governmental private debt, does not share Falkgard's faith in the Japanese market. With the increase in Japanese interest rates, Japanese domestic products have become more attractive and Werngren is aware of this. He says: "We were in Japan the week before last and Japanese investors have changed. In the past they were drawn to sovereign credits but recently they are moving to lower double-A and single-A credit names." Werngren does however see hope in the Japanese markets for Kommuninvest and the other Nordic issuers. He says: "Strong governments have reduced their funding but investors must still fill this portfolio area. We sell ourselves as an excellent alternative as we have very strong links with our government." Kommunalbanken gained the ability to access the foreign markets when it was restructured in November 1999. Although the Norwegian state still has an 80% stake in the issuer, with the other 20% stake owned by the National Local Government Pension Fund, the local authority has lost its explicit state guarantee. Paul Brown, vice president, northern Europe at HypoVereinsbank, welcomes this change. He says: "The Norwegian ministry of finance decided that restrictions in the foreign market should change. The shackles came off this year after a few fingers got burnt in the 1980s because of unhedged issues. The belief is that institutions now have expertise in this sector." Despite this expertise Brown recognizes that current conditions are not ideal for triple-A issuers. Investors are craving spreads that are closer to libor for vanilla notes and triple-A borrowers have had to find markets where their credit is better priced. Brown says: "There is a perceived lack of pick-up from investors with some large name triple-As getting a hard time in the press. Twenty percent risk-weighted triple-As are finding it difficult at sub-libor levels with even a few issuing at close to libor. The days of -20 and -30bps are long gone for plain vanilla." Kommunalbanken has been a healthy issuer of structured trades. In June it issued two five-year equity-linked trades that tracked the Global Large Tech price index. Earlier this year it issued two two-year currency-linked notes that were tied to the yen/dollar exchange rate. Brown, at HypoVereinsbank, which was bookrunner off the two equity-linked notes, explains the issues. He says: "The equity-linked trades provided attractive sub-libor funding. Investors were betting on the stock market moving up. They were capital-protected structures and were sold mainly into the European retail market and were popular with German-speaking investors." And for the issuer, Europe is seen as a vital investor base. Falkgard, at Kommunalbanken, says: "We have had good enquiries from Switzerland, Britain, France, Benelux and parts of Germany. In addition to Japan, Europe is an important investor base for us. Next year we will continue to promote the bank, focusing on other parts of Europe and Asia." Falkgard is keen to keep pushing the Kommunalbanken name in order to build on the success of this year . And for borrowers looking to join the market she has this advice: "For new issuers we believe that it is very important to market and establish your name. We are very cost-focused and did not launch the EMTN programme with a benchmark. It was natural for us to get a feeling for the market before we launched such a transaction in July this year. But we will consider another benchmark next year depending on market conditions."
December 01, 2000
