It is only six weeks since the euro became a reality and already thoughts are moving to those countries outside Euroland. Sweden is tipped as being one of the first to join the second wave of Emu. If it does, there is one particular borrower certain to make heads turn. Svensk Exportkredit (SEK) has launched 34 deals off three different MTN programmes so far this year, and as a result it is the fifth most frequent issuer. However, investors aren't buying this paper just because of Sweden's convergence potential. By focusing on liquidity and credit-worthiness, the borrower always positions itself well. SEK's approach is built on innovation. It's debt portfolio boasts the first Samurai MTN programme, a Matador MTN programme, and the first litas issue in the Euro-MTN market. Having 22 debt programmes is an advantage. Per Akerlind, executive director and treasurer at SEK, explains: "It is the most efficient way. We always want to be prepared. If, for example, a Japanese investor wants Japanese law we can offer him a Samurai MTN as a fast, cost-effective solution." The secret to juggling many programmes successfully is being a pro-active issuer. SEK self-arranges its biggest programme, a euro15 billion ($16.98 billion) Euro-MTN facility, which has grown by one billion euros a year since it was signed in 1991. Akerlind explains: "For the last five or six years we have had our own in-house documentation team. You have to be in the driving seat." Sam Amalou, director, debt origination at Daiwa, a dealer off the Euro-MTN facility, echoes this sentiment. He says: "SEK's success lies in its flexibility. It is not constrained by the necessity to get the authority of higher powers as its management is very technically aware and always able to respond quickly. SEK is open to all kinds of ideas. If you ring it up to discuss a new product, it never says no." Having a named dealer group off a programme is not necessary for such a sophisticated borrower. Akerlind says: "Of course, I'm willing to accept reverse enquiry. For me, and for other market participants, dealership doesn't mean anything anymore." One of the reasons investors buy SEK's paper is its interesting credit story. Ever since SEK was established in 1962, it has been half-owned by the Swedish government. Moody's and Standard & Poor's rate SEK sovereign-equivalent: at Aa2 and AA+ long-term. Salomon Smith Barney (SSB), lead managed two yen-denominated FRNs for SEK this year. Peter Jackson, managing director and head of MTNs at SSB, says: "It has a sovereign-related status which means that it sells well in Japan where there are many investment restrictions. One of SEK's key funding advantages is that it combines this special credit status with a real banking expertise, something which is a relatively rare combination." However, SEK feels its quasi-sovereign status is constrained by Sweden's rating, even though SEK does not carry a government guarantee. Akerlind says: "Our balance sheet is stronger than our rating would suggest." According to one of SEK's dealers, its pricing levels in the private market support this argument. He also thinks that although the borrower usually trades in the mid-teens above Sweden, it would prefer to trade in single digits in the public market. He says: "The public market story is different. SEK cannot offer sustained liquidity and must pay a higher premium than it would wish against Sweden." Therefore, SEK knows where its priorities lie: concentrating on providing liquidity in the primary markets and generating better end-cost of funding than many of its rivals. For many years, it has managed to provide liquidity to its investors in the secondary markets by buying back its own paper and restructuring its deals. More importantly, it is open minded about structures. It was one of the first borrowers to issue equity-linked paper. And while most borrowers refuse to do credit-linked notes, SEK is issuing increasing numbers of them. Akerlind explains: "We have no problems issuing credit-linked notes. We want to take responsibility as a developer of this market. If you can lay off your risk to investors then the credit market can grow." It is a structure Akerlind feels has potential. He says: "Today the market is inefficient. The bid/offer spreads in the credit derivatives market are so wide as to be impossible to use for credit hedge purposes. But soon, with the help from credit-linked notes, the credit derivatives market will create a liquid corporate bond market in Europe." Yet, many dealers are still cautious. Jackson at SSB says: "Credit derivatives remain a very sexy area, but credit-linked issues still represent a relatively small percentage of the market. They are a good opportunity to achieve cost-effective funding, but are not central to an issuer's funding policy." There are also relatively few investors willing to buy highly-structured paper, but SEK has managed to capture a large percentage of those which do. SEK is the second biggest issuer in Europe outside of Euroland, according to MTNWare, in terms of value of trades. Its potential will be realised if, and when, Sweden joins Emu. Akerlind explains: "If Sweden should join Emu - and that likelihood, in my opinion, is far greater today than two or three months ago - our sovereign ceiling will be removed and we'll have a chance to be upgraded due to our strong asset quality."
July 28, 2000
