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Euro-MTNs were an alien concept for Deutsche Bank before 1997 but today the bank ranks as one of the top dealers in the market with over $6.65 billion traded in 1999 off 203 issues (non-syndicated deals for less than $250 million excluding SPVs, self-led deals and issues with a term of less than 365 days). The retail bank's transformation into an investment bank meant turning attention to private Eurobonds and Tiina Lee was poached from her position as co-head of Euro-CP and Euro-MTNs at Lehman Brothers, to build the business from scratch. In three years she's done just that. She joined the MTN desk at Lehman Brothers in 1992 after 18 months as a graduate trainee at Hill Samuel. Over the past eight years she's seen the market mature and grow to a point where over 1367 borrowers have signed programmes, according to MTNWare. She says: "When I started about 20 issuers were in the market and most of the business was done by issuers like Gmac and Kingdom of Belgium. But we now have a market where every major borrower in the world has a programme." Big leverage-plays on interest rates in 1993 gave birth to the structured note market and boosted the use of the MTN facility. But when the Fed raised rates in 1994 the bottom fell out of the market and investors were hit hard. Lee believes this period was a turning point for the market as banks scrambled to restructure bonds and issuers such as Abbey National, Beta Finance and Svensk Exportkredit supported the market with buy-backs. This laid the foundations for a mature and complex market. Lee says: "Right at the beginning everyone said the MTN was very flexible but nobody really knew what that meant. As dealers, investors and borrowers became smarter and more sophisticated, nearly any form of perpetual debt could be done off an MTN. Structures such as callables and equity-linked notes are now run of the mill." But if dealers and investors learn to push the potential of the product, the pressure is on borrowers to keep up. Lee's advice to prospective new entrants to the market is simple. She says: "Decide what you can and can't do off a programme early on. This cuts down on wasted phone calls from both sides. Say it up front if you can't do certain deals like credit-linked notes."

Central Bank of Tunisia (Tunisia) surprised many market players when it closed a euro225 million ($234.5 million) 10-year fixed rate trade on August 2, this year. Sceptics believed the long maturity from a triple-B credit would never sell, particularly in a spread widening environment. And some European investors did pull out. But for those riding the credit curve Tunisia is an appealing option. With its investment grade Baa3 programme rating from Moody's and BBB- from Standard & Poor's, it has an edge over other emerging market borrowers. But Tunisia found it difficult convincing some European borrowers of its credit-worthiness. The pricing of its first trade was 280 basis points over 10-year Bunds, although this tightened in the secondary market to around 270 basis points. The lead bookrunners, Morgan Stanley Dean Witter (MSDW) and Merrill Lynch, which is also the arranger, struggled to fill their books. And a 144A option was hastily added as they looked to US investors, already familiar with Tunisia from its Yankee bond issuance, to make up the remaining 30the account. Nabil Menai, vice-president, at Merrill Lynch, says: "US investors know Tunisia well and are comfortable with this type of risk. Also they are keen to diversify their portfolios away from South America and Central Europe." Tunisia issued eight bonds between 1994 and 1997 in the Yankee and Samurai markets. The MTN issue was the first in the Euromarket. Darius Ahmed-Nejad, debt capital markets, at MSDW, says: "It was a classic benchmark transaction in terms of selling a new credit story. Many European investors were not familiar with the issuer's credit prior to the transaction, and market conditions were challenging at that time, so it did well to achieve the level it did." But Ahmed-Nejad admits the issuer's demand for a long maturity did cause problems. He says: "Tunisia can achieve aggressive funding levels in the five- to seven-year loan markets. The bond market provides 10-year funding levels, which the syndicated loan market does not. It involves a bit more credit work for a 10-year offering, but the success of the issue demonstrated it was do-able." Menai, at Merrill Lynch, says: "Investors in the Euromarket don't like long maturities, they don't have the same appetite for risk because the rewards are not there as they are in the US market." But Habib Sfar, director of forex and external finance at Tunisia's Central Bank, considers Tunisian paper is a safe gamble. He says: "Tunisia is the only country in North Africa with investment grade ratings. It offers good diversification for investors who buy its paper. And Tunisia is in the Mediterranean basin so it has the benefit of close proximity and tight relationships with Europe." Ahmed-Nejad, at MSDW, says: "Tunisia has a very compelling credit story. This, combined with the fact it is a rare issuer in the Euro-MTN market, makes it a very attractive investment. Many investors have credit lines open for Tunisia because it isn't coming to the markets that often." Tunisia has a comparatively small funding requirement for a sovereign. It hopes to raise between euro400 million and euro500 million in 1999. Republic of Lebanon signed in March 1999 and already has $525 million outstanding. Tunisia signed its $1 billion facility on July 2 1999. Sfar, at Tunisia, explains it was set up for convenience. He says: "Market volatility over the past two years has meant fewer windows for issuance. With the MTN facility we have the documents ready in place for when there is a formal need for government funding." Sfar continues saying: "Tunisia needs to raise more before the end of the year but it hasn't yet been decided in what form. We have other sources of funds open in the loan markets or we could issue another bond. It is important to be present in different markets." Tunisia's debut issue off its Euro-MTN programme was a plain vanilla note but the issuer insists it is open to structures. Though Sfar, at Tunisia, says private placements are not a priority. Ahmed-Nejad, at MSDW says: "This is a new issuer in the Euro-MTN market. Someone new doesn't start with fancy structures. It will take things step by step. And anyway the straight market is very good at the moment so there was no particular incentive for a complex structure." Tunisia's is one of only a handful of African issuers in the Euro-MTN market but its successful trade could pave the way for other African sovereigns looking to diversify. Sfar, at Tunisia, says: "Tunisia hopes that its successful issue will encourage African borrowers, like Morocco and Egypt, to look towards the Euromarket for funding." Yet Danielle Coolen-Prentice, head of funding, at African Development Bank, is sceptical about how economical such funding would be for African borrowers. She says: "African issuers that come to the international markets without a guarantor are paying a high price for that. And without investment grade ratings issuance will be very difficult. The Euromarket in particular is very expensive right now." But Tunisia doesn't think it will have any problems finding investors in the Euromarket and believes it will continue to achieve good levels. Sfar, at Tunisia, says: "Spreads in the Euromarket have widened since the crises in Russia and Argentina, but for a first issue in a new market, Tunisia was pleased with the level. We got cheaper funding than some borrowers with higher credit ratings. And the range and quality of investors was very good." Tunisia plans further privatisation and increased liberalisation of its economy. Government figures report 5.5:rowth in 1999, and Standard & Poor's outlook is stable. Menai, at Merrill Lynch, thinks the issuer will stand apart from others in emerging markets. He says: "Tunisia has a well diversified economy which is doing well. Its never defaulted or restructured its debt. It also has strong connections with Europe through its EU trade agreement. Investors know this and have strong confidence in the issuer."

JOINT ARRANGERS Chase Manhattan, Deutsche Bank (bookrunner) and DLJ have extended the deadline for sub-underwriters to join the jumbo £588m debt facility backing the leveraged buy-out of United Biscuits (UB). The facility is being syndicated under the name of the new company, Regentrealm. The sub-underwriting phase was due to close today (Friday) but the three leads have given banks another week to push the deal through credit.

Ever since the UK utilities were privatised a decade ago they have led the private utility sector in the Euro-MTN market. But 1999 was a tough year for UK gas, electricity and water companies as they struggled with increasingly strict regulators. And only this month is it clear what options are left to these issuers. Ofwat, which regulates the water sector and Ofgem, which oversees the gas and energy companies have finalised their reviews. Scottish Power, with $2.43 billion outstanding off its Euro-MTN programme, is the largest UK utility issuer in the market. Its profits will be cut by £

In a virtual roundtable Jo Thornhill and Harry Wallop put questions to issuers about funding strategies and changing conditions in the Japanese Euro-MTN market. Q. How did the crisis in Asia affect issuance in Japan off your Euro-MTN facility in 1998? Motokawa: "Many Japanese companies were downgraded by the US agencies last year. And Toshiba Corporation was no exception. Having the ratings downgrade made issuance very difficult for Toshiba in 1998. But we were helped by the fact that the Japanese investors knew our name and our activity was good. Although, we had to supply lots of information. European investors were much more cautious of our credit. Because of the problems Japanese banks experienced last year Japanese companies had to pay a premium to raise funds in the Euro-MTN market, for example we paid plus 50 basis points, which was a severe increase." Shimoyama: "Many Japanese issuers found it more expensive to raise funds off their MTN programmes. During the crisis we decided to limit new issues to avoid such costs. That is why we were able to minimize the effect of the crisis on our funding costs while the total amount issued off the programme obviously decreased during that period." Akerlind: "Strangely, the volume coming from Japan has been big, both this year and last. However, the investor base was different. Demand from the retail sector was lower in 1998. Though recently we have seen this turning again. The number of regional institutional investors buying structured products increased last year." McDougall: "I agree there were definitely less retail investors in the market. Abbey has not issued off its Japanese retail programme for some time now. And there was definitely less cash in the market. The fall-off could have been greater but people started to become credit conscious and investors appeared to be comfortable with Abbey's name so we escaped reasonably lightly. This year, we are raising funds in Japan at the same level as last year but we have seen a drop-off in volume. We are probably down to 70last year's volume." Ro: "Our Eurobond was due for refinancing in March 1999 and so we set up the Euro-MTN programme to replace this. The Euro-MTN was much more convenient and flexible than our domestic Eurobond, which was not really cost effective when issue size is small." A. How much of your funding is achieved in Japan? Akerlind: "In 1998, 55% of our total issuance was into Japan. In 1999 this will increase to around 75%. Confidence is definitely growing again, particularly the volume from the retail sector. There is more demand now and for a wider range of structures." Ro: "All our notes so far have been bought by Japanese investors. As a single-A rated issuer, European investors are cautious about taking our paper. It is much easier for us to sell into Japan at the moment." Shimoyama: "Almost all our paper is sold to Japanese investors. However, both this year and last year some European investors bought Mitsubishi Euro-MTNs. Before the crisis we were planning to issue more and more into Europe but we had to postpone that. However, from now on we will be planning to increase issuance into Europe." McDougall: "It's 50%. But we only use the programme for small private placements. We try not to chew up the programme by issuing standalone bonds off it." Q. Is investor confidence in Japan growing in 1999? McDougall: "I think so. It has definitely got busier as the year has gone on. And July and August have been very good for us." Motokawa: "The injection of cash from public funds from the Japanese government has aided the improvement of the situation. I think last year was rock bottom for the Japanese economy, but now we will see recovery." Ro: "The Euro-MTN market is a convenient and efficient, well-developed market already but I am sure it is set to grow going forward. Investor confidence in Japan is certainly growing again." Shimoyama: "In the short-term investor confidence is growing. But one never knows what will happen by the end of the year. You do not know what the catalyst is that could set off another crisis. The situation is like a coin with opportunity and panic on different sides. Which way will it turn? So I think confidence could decrease in the long-term, but I doubt as seriously as it did during the crisis." Q. How have structures and maturities that Japanese investors look at changed over the last few years? Akerlind: "We've seen an increase in equity-linked, Nikkei knock-in structures and inverse convertibles. But by far the most active is the burmudan callable powered reverse dual currency structure. With this note small institutional investors have an opportunity to take risk and achieve a good coupon, and get 100% redemption when the note is called." Ro: "We do not have high financing needs this year. The notes Fuji Xerox has issued have all been yen-denominated and of a simple structure." Motokawa: "Issuance is getting much more complicated, we are seeing increasingly structured trades such as index-linked notes and other options. It is cheaper to do structured trades and Toshiba always has a swap contract anyway. Japanese interest rates are very low so investors expect that in the long-term they must rise again. At the moment 10-year callable options are really popular. However, we prefer shorter maturities in the one- to five-year category." McDougall: "I don't think they have changed much. Investors have backed off from foreign exchange risk a bit recently, and are perhaps a little more conservative than before. Callables are particularly popular at the moment." Q. Have you been encouraged to look at more complex structures since interest rates in Japan are so low? Akerlind: "In the structured market we still aren't seeing many domestic Japanese borrowers. Non-Japanese issuers are more likely to do the structured trades. Japanese issuers are hesitant about the swap exposure and in order to execute these trades you have to have the knowledge and expertise as well as flexibility. They don't have the history of structured issuance. Ro: "We don't care what final form of note investors take, but our preference as an issuer is a simple type. We don't look for complicated structures." McDougall: "We've never had a problem with structures as long as they are legal and do not upset either the rating agencies or our investor base." Q. Do you think competition is increasing among borrowers in the Japanese Euro-MTN market? Akerlind: "We see more competition in Japan now than we used to. There are more issuers, both Japanese and non-Japanese looking for investors there. But SEK has been issuing into Japan for over 20 years. We have established a name and good reputation there and have the relationships in place." Ro: "As most of our investors are Japanese it hasn't been a great problem. But if we wanted to find European investors the competition would be much stronger between Japanese and non-Japanese issuers. Because currently European investors are less confident about investing in Asian companies, including Japanese. Fuji Xerox's credit rating would need to be higher and market conditions would have to be more favourable before these investors would probably buy our paper." Q. Do you think foreign borrowers are becoming more successful at attracting Japanese investors? Shimoyama: "It depends how you define successful. Now spreads are tight in Japan foreign issuers can seem generous in the coupons they offer to investors." McDougall: "Not really. We all lost out in Japan to a certain extent when during the crisis Japanese issuers' levels were very wide." Q. What have been the lasting effects of the economic crisis for the Japanese market? Motokawa: "Last year it was difficult for Toshiba to find investors. In 1999, so far, I think it has been an issuer driven market. Japanese investors have the cash, especially after the government injection of funds, but the sentiment among Japanese companies is weak, we are more cautious and watchful with our funding since the crisis." Akerlind: "It's a matter of credit worthiness. If an investor is buying a particular structure and is nervous about the risk it will want an issuer with a good credit rating. Many Japanese borrowers have had their ratings downgraded, so investors have been wary of buying structured paper from them." Shimoyama: "Last year's crisis had a huge impact. But I think the economy has reached rock bottom and is starting to recover. Japanese corporates need to restructure more and more. The mergers that are starting in the banking sector are a good thing for the Japanese macro-economy. Other sectors should follow the lead banks have taken in restructuring." McDougall: "The biggest and largest effect is that there is now more credit awareness, but that applies globally. Investors want to develop portfolios with a wide range of credits from around the world. At the end of the day, you have to look after your investors by educating them."

Brazil is believed to be planning to issue a jumbo 40 year non-call 15 exchange bond of up to $5bn as early as today (Friday). Bankers were yesterday suggesting that the sovereign had mandated Chase Securities and Goldman Sachs to launch an exchange issue, and that the deal could be done today if the US July payroll numbers due out in the morning are favourably received.

A record $11.5bn three tranche offering from Fannie Mae dominated the primary market this week as fixed rate debt markets slipped into their customary August torpor. The transaction, which targeted two, 10 and 30 year maturities, is the largest non-government corporate or agency bond issue in dollars and the second largest non-government security in any currency, behind the $14.6bn Deutsche Telekom deal launched in June.

The UK and Irish building societies have historically enjoyed cheap funding from their domestic investor base, not least from their own sector. But the bubble is about to burst. The rapid expansion of a credit market in Europe is sending UK investors running to buy cheaper paper from issuers of the same rating on the continent. Dealers say building societies will have to reassess funding strategies in order to compete. "The market is growing up and the good times could be over for building societies", says one dealer. He adds: "The incestuous nature of the sector in funding itself may continue short-term, but I question how much longer it can go on. UK building societies' levels are no longer looking attractive compared to their peers in Europe. Over the next few months building societies may find their levels forced to come in line." But building societies are highly sophisticated issuers and argue they have been quick to respond to changing market dynamics. Nationwide Building Society was the most active borrower in the sector last year. Kelvin Yarker, capital markets dealer, at Nationwide, says: "We acknowlege that in order to move away from our traditional investor base it will cost more, and we are prepared for that. The only danger is you move your levels and the same people buy the paper, then you haven't diversified at all." Yorkshire Building Society (YBS) has issued in a wide variety of currencies since 1995, including yen and Deutschmarks. But all its issues in 1999 off its £

Market report: Compiled by Frank Hracs