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Market report Compiled by Vusi Mhlanzi

BSCH International Ltd Guarantor: Banco Santander Central Hispano SA

Western Power Distribution (WPD) regained the initiative on Wednesday in its battle with Nomura for control of Welsh electricity and water company Hyder plc after a possible investigation into the US utility's bid by the UK's competition commission was ruled out. But although regulatory clearance has put WPD back in the running, bankers said that a successful bid from the US company would not necessarily save bond investors from a sub-investment grade rating of Hyder's debt.

The sterling sector is stagnant. After the surge of issuance at the end of last year and the beginning of this year, buyers of sterling just do not seem to be interested. $8.5 billion-worth of sterling was issued in the last two months of 1998, but in June and July of 1999 tickets worth only $6.8 billion were printed. Matt Pass, head of MTNs at Greenwich NatWest, sums up the disappointment among many dealers. "Sterling was a complete winner for much of last year and going into 1999 when it was obvious rates were going to come down." But, he continues: "At the moment the sterling sector is quiet and the main investors are reticent. Despite coming up with what feel like good value trades we are seeing few people with an interest in dipping a toe back in the water." Not all market participants agree, however. Chris Hutton is head of debt capital markets at Halifax, one of the top issuers of sterling this year. He says: "I'm very bullish about the sterling market. Despite everyone saying it would be in the shadow of the euro this year, it has performed terribly well as an out currency. It has come to the fore as a bit of a currency play and there are not many of those left." However, there are many who believe that whether sterling is inside or outside Emu is irrelevant because the only real buyers of sterling are UK investors. Jens Nielsen, head of MTNs at Barclays Capital, says: "A major problem for the sterling sector has been the strong pound. This has lead many international investors to hold only a small proportion of their portfolio in sterling." Matt Pass at Greenwich NatWest voices a widely held view. He says: "This is a fairly cannibalistic market. People issuing sterling notes are often the very same people buying them." The main issuers of sterling notes are UK building societies and recently de-mutualised building societies, known as converts. Fergus Kiely is head of MTNs at HSBC which has lead managed more sterling notes this year than any other house. He dismisses Pass's view. He says: "I disagree that this is purely an incestuous market. We place a large proportion of paper issued in sterling outside of the UK financial world." But even the top UK issuer of sterling this year agrees with Pass. Antony Swalwell, senior manager at Northern Rock, says: "The sterling market is pretty incestuous. We buy other building societies' and converts' paper. And we anticipate that Northern Rock paper is bought by other building societies." Swalwell believes that UK financials should try and diversify their investor base away from such a reliance on the UK. And he admits Northern Rock issues probably too much into the UK. Supranationals however have been issuing large amounts of sterling this year. This is explained by the lack of gilts due to the successive cuts in UK interest rates from 7.5¥r last year down to 5¥ne this year. Kiely, at HSBC, says: "As the gilt supply becomes further reduced, triple-A issuers offer an excellent substitute." This has further been helped by a recent ruling from the Bank of England. John Borthwick is chief financial operations officer at International Finance Corp, a supranational which has benefited. He says: "The recent announcement by the Bank of England allowing various supranationals' issues to be eligible for repo operations has helped liquidity in the sterling sector. We have seen more opportunity to issue gilt surrogates." But many think that this will have only a marginal affect on the private markets. Indeed some believe the very success in the sterling sector in the public markets this year is taking investors away from the private market. Nielsen, at Barclays Capital, says: "The increased issuance in the public sterling market has to some extent hindered sterling issuance in the private markets for plain vanilla products. With the attraction of a more liquid deal and an often generously priced public issue, why would you bother going to the private market?" Volatilites remain low in the structured market with the consensus that the Bank of England will not cut rates further. The popular trades of March and April do not hold any enthusiasm for investors. Investors are no longer willing to pay to have a cap put on floating rate notes. Flippers, where the investor can convert the coupon from fixed to floating rate, were very popular but are unattractive now. HSBC, however, is not daunted. It has specialised in putting together trades and splitting them amongst many issuers. This is particularly popular with potentially risky FTSE-linked trades. Kiely, at HSBC, explains: "Where an investor is looking to take exposure to a specific market such as equity performance, we can alleviate mutual counterparty risk between investor and arranger by packaging the underlying into a series of Euro-MTN tranches issued by a number of third parties." Many think that the sterling sector will only fully take off again when the UK financials see some competition. Nielsen, at Barclays Capital, says: "I would like to see a greater diversification of issuers. And the increased number of UK corporates signing new programmes this year is a welcome breath of fresh air." Kiely, at HSBC, agrees. He says: "In a market historically preoccupied with financials, corporates will present a challenge as the search for yield pick-up grows."

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Swedish krona showed great potential in the MTN market in 1998, with $3.9 billion-worth issued. Dealers thought opportunities for convergence plays would open up in 1999 as Sweden prepared to join Emu. But the currency has yet to live up to expectations. Issuance so far this year is six-times less than for the same period last year. Credit Local de France (CLF), the leading issuer of krona in 1999, believes the potential is being realised. It issued a skr500 million ($58.74 million) fixed rate note on Wednesday, this week. Jean-Luc Petitpont, head of long-term funding at CLF, says this is a convergence play to take advantage of the higher interest rate in Sweden over those in Europe. General opinion in the market is different. Many dealers believe that uncertainty over whether Sweden will join Emu, together with lower interest rates than expected, has led investors to look at other higher-yielding currencies. David Eley, head of distribution, SEB debt capital markets, says: "In the last couple of weeks [Swedish] interest rates have been choppy. They still aren't attractive enough to encourage convergence plays." Issuance in Norwegian krone since January 1999 is $892 million-worth - three times that of Swedish krona. High interest rates in Norway have caused the increase in demand. It's a strong contrast to last year, when issuance in Swedish krona was over $1.8 billion-worth at this time. Eley, at SEB, explains: "The credibility of the Swedish market is currently not as strong as that of the Norwegian krone. And if rates rise too quickly in Sweden, investors may worry about volatility and stay away anyway." Danish krone is also an attractive option since Denmark has an ERM2 agreement with the European Central Bank. Although interest rates are lower than in Sweden, the currency is appealing because risk is reduced. Fluctuations greater than 2.25 bove or below the euro rate are prevented. Traditionally investors in Swedish krona have come from the retail sector, not only in Sweden but Germany and the Benelux area. Also, issuers are seeing an increase in interest from institutional investors, especially in the UK and US. Sweden has a strong and diverse domestic MTN market, established in the mid 1990s. Neither Norway nor Finland can boast this. Many large Swedish corporates still prefer to issue off domestic programmes rather than their Euro-MTN facilities since the local market can be more flexible. It is easier to issue smaller notes of around skr50 million and it is often a cheaper option than the Euromarket. Borje Wigfeldt, head of funding at Statens Bostadsfinansieringsaktiebolag (SBAB), says: "For Swedish issuers there is a premium involved when issuing in the international markets because Sweden is outside Emu. The premium is not recognised in the domestic market, and from time to time it is cheaper, yield-wise, to issue domestically." For some Swedish issuers concerns will grow if the euro strengthens. Per Akerlind, executive director and treasurer, Swedish Exportkredit (SEK), says: "If the krona is weakening against the euro issuers will have to pay a premium in absolute levels above the euro interest rate to attract investors." For investors however, this could mean excellent opportunities for high pick-up. Historically, the most popular debt type in Swedish krona notes issued in the Euro MTN market has been plain vanilla. However, more recently equity-linked structures have been in demand. Swedish investors are comfortable buying equity, and the capital guarantee is an added attraction of the note. Investors get the opportunity for higher risk, but have the assurance that they will not lose their principal amount. The maturity of notes issued in Swedish krona in 1999 has been generally shorter than those issued in 1998, with very few having a duration longer than five years. Dealers and issuers all have opinions on the trend but most agree that the major factors are hesitancy with regard to Sweden's future in Emu and the fact that the yield curve is not steep enough to attract long-term investment. The progress of Swedish krona issuance will now be unavoidably affected by that of the euro. And the success of Emu will inevitably influence Sweden's decision whether or not to join. This is a hotly debated topic and issuers and dealers of Swedish krona see the benefits and problems on both sides. Akerlind, at SEK, says: "The Swedish economy is stronger now than five years ago, but if we remain outside Emu, it will be necessary to hold inflation down and control interest rates. If we can continue to do this, the Swedish economy will have a good opportunity to remain strong." Other issuers are less confident. Anders Arozin, head of debt capital markets, Svenska Handelsbanken, says: "Investors won't care whether Sweden is in Emu or not. But Standard & Poor's will take it into consideration if Sweden doesn't join. This may have a negative impact on the ratings of Swedish issuers." If Sweden does vote to join Emu in the new millennium, Arozin is confident that Swedish issuers will have no problem adapting. Though issuance in legacy currencies has occurred in Europe, post-Emu, he doesn't think this will happen in Sweden. He says: "Sweden and the Nordic area in general is fast to adjust to new situations. If Sweden joins Emu there will no longer be any need to issue in krona."

? Allmerica Global Funding LLC Rating: AA-

Televisa, Latin America's biggest media company, this week completed its migration out of high yield and into the world of investment grade with a blow-out $200m five year bond sold almost entirely to cross-over investors. Although the deal, led by Chase Securities and Merrill Lynch, came just 18bp cheap to Mexico's recent 2006 bond, it tightened in the secondary market to trade at 99.65-99.70 from a fixed re-offer of 99.502. The issue was launched at a spread of 260bp over Treasuries, tighter than initial 262.5bp spread talk.

The Council of Europe Development Bank has dropped Goldman Sachs as a dealer off its euro10 billion ($9.41 billion) Euro-MTN facility. Tokyo-Mitsubishi International has been added to the group.

Total issuance by Japanese borrowers topped $25 billion, on September 1 1999, surpassing the $21 billion traded in the same period last year. The Japanese Euro-MTN market has been on a rollercoaster ride in the last two years. Now it is fighting back. But the nation is still reeling after the economic crisis. And the psychological impact on issuers and investors will take a long time to fade. The government is striving hard to get things back on track. Radical changes are happening in the capital markets and the banking sector. Dealers have been relieved to see business pick-up in Japan, but some are concerned whether it can keep going. Hisashi Sumiyoshi, deputy general manager, debt capital markets at Daiwa Sumitomo Bank (Daiwa), is hesitantly optimistic. He says: "We all have our fingers crossed and hope that the trend will continue. But real recovery may not be established for a while. It would only take another blip in the economy and premiums would rocket again. That's why we are concerned about year-end." Despite the Japanese government financially supporting its banking sector at the end of 1998 by injecting over ¥7,000 billion ($63.7 billion) in an attempt to boost the industry, conditions are still shaky. And, in August 1999, Kiichi Miyazawa, the newly appointed finance minister, announced an additional budget would be needed in fiscal 1999 to ensure buoyancy of the economy. Akifumi Sakurai, assistant manager, debt capital markets at Nomura Securities (Nomura), believes the public cash kick-started activity in many flagging sectors. He says: "Japanese institutional investors saw this as an opportunity to increase their investment in Japanese corporates. The number of Japanese Euro-MTN trades off our desk increased after that. The number of deals we did in the second quarter of this year was more than double that of the first quarter." But Japan is not out of the woods. The lasting effects of economic breakdown are still being seen by Euro-MTN traders. Sumiyoshi, at Daiwa, believes the investor base contracted during market difficulties and some valuable buyers were lost. He says: "The Japanese investor base hasn't expanded that much in the last three years. Some investor categories like regional banks were pushed out of the market in 1998 because the stamp premium was too high." Until last year issuance by Japanese borrowers had been rapidly increasing. The loss of confidence in the economy radically reduced business. Total issuance of non-syndicated debt in 1998 by borrowers of Japanese nationality reached only $14.6 billion-worth. This was only half the amount traded in the previous year, when figures topped $28.9 billion. This is according to MTNWare, excluding financially repackaged borrowers and self-led issues, and deals of more than $250 million and with a term less than 365 days. Sakurai, at Nomura, noted a shift in types of issuance in 1998. He says: "Issuers increased their issuance of straight domestic bonds to raise funds, because the banking sector was reluctant to finance domestic companies." But figures recorded on September 1 this year show improvements in the market from last year. And a glut of issuance is expected in the autumn as issuers rush to get funding done before the end of the year. Many issuers have been pleased to see this turnaround in 1999. Hiroaki Nagasaka is the deputy manager of the finance department at Asahi Chemicals. He says: "We think investor confidence is returning. The issuance of bonds is fewer this year than last. And we feel that investors have good appetite for our issuance of Euro-MTNs now." But Asahi Chemicals has done only one trade so far in 1999. Its ¥1 billion ($9.08 million) reverse-dual currency note was issued in March. Though issuance is rising again, investor nervousness continues to linger. For some borrowers it is proving increasingly difficult to sell paper. Christopher Cox, director, Euro-MTN trading at Nikko Salomon Smith Barney (NSSB), says: "A few years ago we could sell the full range of credit ratings here, but that is not true now. Sovereigns and highly rated credits are in demand and there is appetite for low rated issuers offering high yield opportunities. But many European single-A borrowers have fallen on stony ground." Sakurai, at Nomura, observes the problem is also true for low rated borrowers. He says: "For those downgraded below triple-B it has become hard to issue notes, not only off Euro-MTNs but also domestic bonds. Most Japanese investors do not want the credit risk involved with these notes." Even established Japanese issuers with familiar names in the market are finding themselves in difficulty because their ratings were downgraded in 1998. Concerns about market volatility across Asia also led Japanese investors to be cautious in their spending abroad. Emerging market borrowers in Asia suffered because Japanese investors were reluctant to take credit risk. Though dealers believe this situation is improving, there are still obstacles to overcome. Cox, at NSSB, says: "Japanese investors will look at Asian credits. They feel more comfortable with regional credits than those of Latin America, for example, but they still need convincing that stability can be assured." The type of notes sold into Japan has been affected by market dislocation. Twenty-nine percent of notes issued in yen between January 1 and September 1 1999 have had terms of 365 days or less. And for notes with longer maturities investors increasingly request the safety net of a built-in call option. Sakurai, at Nomura, says: "Notes with very short terms such as six months, one year or two years, have become favourable with Japanese investors who want to limit credit risk. Also as the yield curve of the yen has flattened at a very low level, investors wanting to get higher interest rates with structured notes have tended to take risk such as yield risk or foreign exchange risk and have chosen callable notes. Bermudan callables and knock-in options have been especially popular." Dealers have been under pressure during difficult market conditions to please both issuers and investors. Cox, at NSSB says: "The flat, stable dollar yield curve and low interest rates in Japan means that our challenge is to create increasingly complex structure ideas. If this situation changes going forward and Japanese rates rise the market will revert back to comparatively vanilla business again." Historically, Japan has been viewed by the rest of the world as a land abundant with cash-rich investors. Five years ago yen topped the currency league table for Euro-MTN issuance according to MTNWare, for non-syndicated debt, excluding financially repackaged facilities and self-led issues and trades of more than $250 million and with a term less than 365 days. Between 1994 and 1997 yen remained in pole position with over $200.7 billion-worth traded and a 50the market, compared to only $88.5 billion. But in 1998, the number of yen trades plummeted. Yen lost its spot at the top of the currency league table. Only $32.3 billion-worth were traded. On September 1 1999, issuance was still down from previous years at only $31.4 billion-worth. In the wake of Emu, yen has a new competitor in the euro. It has stolen the crown in 1999, over $36.8 billion-worth has been issued. If Japan is to recover its former glory as a Euro-MTN superpower it must combat the hurdles of market deregulation and reform in its banking sector. Difficulties in the Japanese economy last year led to the collapse of many domestic houses such as Yamaichi and Hokkaido Takushoku. Yamaichi's downfall culminated in an official of the bank crying on national television. Mergers occurred between others, including Daiwa and Sumitomo Bank and Mitsui Trust and Chuo Trust. And the merger of Fuji Bank, Industrial Bank of Japan and Dai-ichi Kangyo Bank, scheduled for autumn 2000, was announced in August, this year. Consolidation and the arrival of foreign banks in Tokyo has led to fiercer competition within a contracting sector. American house, Salomon Smith Barney, dramatically increased its distribution in Japan when it merged with Nikko Securities, in 1998. And when smaller domestic banks began to crumble, the new global bank seized the opportunity to step in. Cox, at NSSB, says: "We've seen a number of scandals within domestic banks which has affected their business. Some public sector accounts have been restricted from trading with institutions which have been reprimanded or fined. This has led to a general increase in the openness to deal with non-Japanese houses." But Sumiyoshi, at Daiwa, believes foreign banks don't have the necessary relationships to compete with local banks: "Competition within the banking sector is increasing but foreign houses still don't have the placing power, with the exception of those which have merged with Japanese banks." But he adds that some domestic houses are being left behind in a rapidly changing industry. He continues: "Some Japanese banks are late-comers and are having a hard time finding and opening accounts with investors now. If they haven't built up good relationships it is difficult for them to get a foot in the door with the real investors involved in private placement." The government's Big Bang initiative, begun two years ago, has been a positive step in cleaning-up Japan's ailing financial sector. The Ministry of Finance is hopeful that growth in the capital markets will be boosted through improved technology, the injection of public cash to pay off bad debts and deregulation. Koichiro Arai, chief economist and director at the Institute for International Monetary Affairs, emphasises that deregulation is essential for sustained progress in the markets. He says: "The Financial Supervisory Agency is working hard to streamline and restructure the financial system. Our economy moves very slowly compared to London, which has electronic trading. But over the next few years, with increased computerisation, we should see gradual but steady growth." And Clifford Dammers, secretary general at International Primary Markets Association, is confident that Japan will emerge from economic crisis battling again. He believes the nation has the necessary requirements to get itself back to the top. He says: "In the long run the Japanese economy will pull out of its malaise and resume its past strength. The Japanese have a good savings rate and are prepared to take a long-term view, these two things are essential for sustainable economic recovery."

For the past two years credit analysts have pointed to the Japanese credit market's gradual transformation into a real credit market. The general widening in spreads from 1997 indicated that Japanese investors were demanding greater rewards in return for assuming credit risk. In addition, credit spread data showed that investors were beginning to differentiate more among credits. But from the second quarter of this year, despite progressive downgrades by rating agencies, there has been a dramatic tightening in Japanese credit spreads. Why has this happened? Credit spread data for Japanese borrowers was not particularly reliable until about 1997. This was partly due to the lack of liquidity in the market. More importantly, the data which existed was not particularly interesting or useful. Investors did not demand markedly different pricing for issuers of different credit quality. After 1997, as the market became more liquid and investors began to differentiate more among credits, the data became a useful tool for analysing the Japanese credit market. The database of Japanese credit spreads developed by Dresdner Kleinwort Benson in Tokyo enables us to analyse the Japanese credit market at different points in time. Prior to 1997, Japanese investors were relatively insensitive to credit risks in the domestic market. In general, Japanese investors believed that their holdings of bonds issued by Japanese issuers were risk free. Therefore in most cases there was very little, if any, risk premium demanded of lower rated issuers. In addition to the belief that their investments were essentially risk free, Japanese investors adopted a buy-and-hold investment strategy which limited the development of the secondary market. These factors contributed to a highly illiquid corporate bond market in which spreads were not a true reflection of credit risk. The lack of sensitivity to Japanese credit by Japanese investors was clearly visible in the new issue MTN market at the time. Deep sub-Libor spreads for Japanese borrowers were commonplace. This type of funding enabled many borrowers to buy highly-rated assets with matched funding through their MTN programmes at substantial spreads. Since this is a low risk business, with decent returns, this anomaly was of course exploited by many offshore Japanese issuers. Following a series of events in the Japanese credit markets since 1997, Japanese investors were forced to change their view. Investors had to accept that a major Japanese company could default. This was a major change in perception and had a dramatic impact on credit spreads. For some years, Japanese banks had been charged a premium for their borrowings in the international markets - the Japan Premium. However from 1997 for the first time, there was an emergence of real credit spreads for Japanese issuers in the domestic market. The change from the first quarter of 1997 to the first quarter of 1999 was enormous. This change occurred for a number of reasons. Credit collapses: Since 1997 there has been a series of unprecedented credit collapses of institutions and companies previously believed immune from default or collapse by Japanese investors. The well publicized troubles of the financial sector, along with the bankruptcies of certain large retailers, construction companies and trading companies resulted in a dramatic change in the perception of Japanese credits. Investor losses: In the face of deteriorating portfolios, many of the previous buy-and-hold investors disposed of assets. This gave some investors their first taste of losses from the depreciating credit value of bonds. The lack of liquidity in the market exacerbated these losses. Investors therefore began to feel they were not being compensated for the credit risks they were taking. Increased corporate bond issuance: These events occurred at the same time as an increase in issuance and outstandings in the corporate bond market. The reasons for the growth in the corporate bond market include the reining in of balance sheet growth by the banking sector, increased emphasis on corporate bond underwriting by subsidiaries of the Japanese banks and the general move in the market towards disintermediation. Development of credit derivative market: Another factor which contributed to the development of the credit market in Japan was the growing use of credit derivatives. This provided opportunities for investors and dealers to price and trade Japanese credits in ways which were not possible previously. What did all this mean for the new issue MTN market? This outward movement in spreads was also reflected in spreads for Japanese corporate issuers in the MTN market, including those overseas subsidiaries of Japanese companies which had often been able to raise funding at deep sub-Libor spreads. In the last quarter of 1998 many were caught out. Some single-A rated Japanese corporates, which had previously paid sub-Libor in dollars for their funding, had to pay in excess of dollar Libor plus 100 basis points in order to raise even one-year funding (although this example was temporary and was partly a liquidity issue). This had the effect of crowding out non-Japanese issuers from some sectors of the Japanese MTN market. Japanese asset managers and corporate investors found they were able to achieve returns on Japanese credits which they had previously only achieved by buying MTNs with market-risk structures embedded. For many foreign issuers, therefore, Japan was no longer a market which provided them with good quality funding. By this stage a large part of the investment was going to the Japanese issuer sector. As a result, issuance for foreign borrowers was concentrated on smaller sized, structured deals which were often multicallable, such as inverse FRN bermudan callables and hyper reverse dual currency callables. Issuance in this area tended to be dominated by a small number of highly-rated borrowers, reflecting the fact that investors were focusing on the market risk of these structures and wished to minimize credit risk. If we had written this article four or five months ago, it would have ended here. The conclusions would have been that Japan has changed dramatically, that we have the makings of a real credit market in Japan, and that a large part of the MTN market will continue to be dominated by Japanese issuers paying attractive credit spreads. But in the last few months, the dramatic tightening in Japanese credit spreads has confounded some credit analysts and had major implications for issuers wishing to access the Japanese market. From the latter half of 1998 into the first quarter of 1999, some analysts noted that the Japanese market was the most attractive G7 country in terms of credit spreads. This was due to the over-sold situation on some Japanese credits and the related lack of liquidity. There was therefore some expectation that credit spreads would tighten. However, nobody foresaw the recovery in spreads, which has occurred. Once again, spreads have narrowed dramatically. The first factor is that a demand/supply imbalance has emerged as many issuers completed their refinancings prior to the end of March 1999. Yet, the investor base has remained very liquid. In addition, the injection of public funds (kou-teki-shikin) into the banking sector has played a part. Although, overall bank lending numbers continue to register year-on-year declines, lending competition among banks has been increasing for certain types of borrowers. For example, some Japanese banks have been focusing on expanding their loans to higher-rated issuers. This is partly due to the proposed Bank of International Settlements risk weightings, based on rating. Along with these factors is the added impact of a slew of retail-targeted deals, which have enabled issuers to raise funds at extremely tight spreads, as some of the excess liquidity in the retail sector is mopped up. Along with these factors is the added impact of a slew of retail-targeted deals, which have enabled issuers to raise funds at extremely tight spreads, as some of the excess liquidity in the retail sector is mopped up. So does this mean we are back to where we started? Are Japanese investors now ignoring credit risk again? And what are the implications for MTN issuers? It is important to note that the market has not completely gone back to the pre-1997 situation. While spreads have tightened dramatically, there is substantial variation of spread among issuers of differing credit quality. But according to some observers, the credit spreads available on Japanese borrowers do not fully reflect the inherent credit risks. Instead, the current situation primarily reflects the demand/supply imbalance between the liquid Japanese investor base and an issuer base in Japan which does not have a huge requirement for funding. For non-Japanese borrowers, this tightening in spreads on Japanese issuers has presented opportunities for issuance. This opportunity is evidenced by the rise in the share of yen MTN issuance by non-Japanese issuers. Whereas in the first quarter of 1999 non-Japanese issuers made up around 55% of total non-syndicated issuance in yen, so far in the third quarter of 1999, that share has now risen to around 78%, according to data from Capital NET. In the third quarter of 1999, there has been a large amount of issuance by non-Japanese single-A and triple-B rated corporates and banks in the one- to two-year sector as the spreads for these issuers have exceeded those available on similarly rated Japanese issuers. In addition we have seen increased issuance of plain vanilla and reverse dual currency deals by non-Japanese issuers in the 10- to 15-year sector. While this is also partly to do with the relative credit spread versus Japanese corporate issuers, the real comparison here is with the Japanese government bond (JGB). In recent months, we have seen a substantial widening out in the spread between JGBs and swaps - back to around the same levels which we saw in the last quarter of 1998. For example, this spread in the 10-year maturity is around 50 basis points at the time of writing, whereas in February, this year, the spread was below 20 basis points. With many investors targeting a spread over JGBs, this widening out of the JGB-swap spread has enabled some double-A rated non-Japanese issuers to raise 10-year funding at attractive Libor spreads, while at the same time providing investors with an attractive return over JGBs. Gazing into a crystal ball is always hazardous, but providing the tight demand/supply position does not change dramatically, the current situation is likely to continue until we have the next credit event in the Japanese market. When or what this might be is anyone's guess. But in the meantime, some non-Japanese issuers will continue to enjoy access to funding from Japan of the type which has not been available for years.

In a low absolute yield environment where investors are comfortable to move down the credit curve in search of better returns, top sovereign borrowers like Republic of Austria (Austria) must be hard pushed to find private placements at the right price. But Austria's message to the Euro-MTN market is that it's ready to be flexible with investors and boost liquidity on the private as well as the public side. There is always appetite for good quality paper from a European sovereign but even in this clique Austria is well placed. According to MTNWare, it is the only sovereign rated triple-A by both Standard and Poor's and Moody's. Since signing its euro5 billion ($5.08 billion) Euro-MTN programme in March, this year (see MTNWeek, issue 120) the borrower has done two public deals. It is the only one of the three sovereigns to come to market this year to make it into the new issuer top ten league table. As a sovereign, Austria is keen to take advantage of its rarity value and its top notch rating. Dr Helmut Eder, managing director, Austrian Federal Financing Agency, says: "We knew some Asian investors insisted on buying MTNs which we didn't offer. So setting up the programme is a good way to stop that leak and standardise documentation. The MTN platform is an easy-to-handle, quick procedure and the least formal." The response from investors to Austria's $500 million fixed rate issue in April this year was good. The Deutsche Bank-led deal has a five-year tenor and an annual yield to maturity of 5.539t primarily to Swiss and UK investors. This marks new territory for Austria since its government bonds are mostly bought by Austrian and German investors. Although public markets will still pay a premium for a high quality sovereign like Austria, it is difficult to find good yield pick-up compared to the early 1990's when absolute yields were relatively high. Private placement may be the alternative Austria is looking for. David Shasha, senior associate director, Deutsche Bank, says: "All markets are rather emotional. Arbitrage in the public markets has all but disappeared since the start of the year and triple-A issuers have not been too frequent. Structured private placements could do it for Austria. It's just a matter of finding the right structure." Dr Eder, at the Austrian Federal Financing Agency, stresses that the Euro-MTN programme will be used opportunistically when he sees the right deal. He says: "We're certainly prepared to do private structured transactions but we have not yet seen real arbitrage material. We'll be really flexible if such an opportunity comes along." However, one dealer says: "I suspect price is a problem. It shouldn't be but it is. There just isn't the market for prices like minus 30." But the difficulties in selling Austria's paper are offset by the advantages. Matthew Carter is head of MTNs at Credit Suisse First Boston which led Austria's inaugural 10-year transaction of Sfr500 million ($307.09 million). He says: "On the demand side, many investors are pursuing higher spreads and hence weaker credits. However, on the supply side, there's a fairly limited universe of issuers in Austria's peer group and not many of them are borrowing or willing to do exotics. Austria is therefore well positioned, especially if it is open to more sophisticated trades." Shasha thinks that the key to a successful MTN programme is an issuer's flexibility in terms of size, structure and posting targets. He says: "Austria could lose out on some opportunities if it isn't able to do smaller trades. Also, if Austria actively posted its targets a lot of the guess work would be removed." An official at Warburg Dillon Read, the Euro-MTN programme's arranger, sums-up the reputation of Dr Eder and his team. He says: "Republic of Austria is always impressive with its innovation and ability to react to opportunities. The MTN programme will further facilitate its funding flexibility." Austria's Euro-MTN facility is regarded as supplementary to other funding vehicles. It also has a Treasury bill programme and a government bonds auction procedure with a debt issuance programme for syndicated bonds connected to it. All have equal priority in the funding strategy. But, it is open to any dealer to come up with ideas since Austria has no named dealer group. Dr Eder says Austria is focused on pleasing investors. He explains: "We try to create liquidity for the investor community. That's what's important. We want to intensify and develop a liquid market in notes, bonds, derivatives and repos."