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Hypothekenbank in Essen has added Credit Lyonnais as a dealer off its euro10 billion ($941.44 million) debt issuance programme.

India Sumitomo Bank has won the mandate for a ¥5bn refinancing for National Thermal Power Corp.

Bank of America, Bank of Ireland and Chase Manhattan have won the mandate to arrange a Eu1bn loan facility for Independent News and Media to support its acquisition of the Belfast Telegraph titles. The debt is split into three tranches: a Eu600m five year term loan; a Eu250m one year bridge; and a Eu150m five year revolving credit. Pricing starts at around 200bp.

FRENCH TYRE manufacturer Michelin is set to raise $1bn through a novel syndicated loan that has been sold not only to traditional bank lenders but also to insurance companies. By adopting this structure, Michelin has become the first European borrower to combine the two sources of liquidity on such a large scale. Initially Michelin wanted to raise $750m over 12 years, split between a $500m tranche sourced from the bank market and a $250m piece from the insurance industry. But the company has increased the overall size to $1bn after a strong response in syndication. The split between bank and non-bank investment has not yet been settled.

FRENCH TYRE manufacturer Michelin is set to raise $1bn through a novel syndicated loan that has been sold not only to traditional bank lenders but also to insurance companies. By adopting this structure, Michelin has become the first European borrower to combine the two sources of liquidity on such a large scale. Initially Michelin wanted to raise $750m over 12 years, split between a $500m tranche sourced from the bank market and a $250m piece from the insurance industry. But the company has increased the overall size to $1bn after a strong response in syndication. The split between bank and non-bank investment has not yet been settled.

Experts have accused the Japanese domestic MTN market of being inefficient, slow and out of date. The clearing system is time consuming and paying agency services are risky. Radical reform and improved technology have been called for. The market harbours a wealth of opportunity. If improvements take place, borrowers of all nationalities could unlock the market to find a fresh set of investor sources in Japan. Accounting practices are central to the instability of the domestic system. Paying agency funds are not separate from a bank's main balance sheet. And in a shaky market environment issuers have cause for concern. If a bank collapses its paying agency funds are also lost and it will default on debt repayments. This is unlike the Euromarket where these funds are protected. The problem is more acute given the antiquated computer systems and procedural delays. Trades can take up to three days to settle. Most Japanese banks and paying agents acknowledge the limitations, but the subject matter is sensitive and many declined to comment. The market is small and undeveloped. Dealers estimate that there are around 10 domestic programmes in Japan. And there is only one Samurai facility - a ¥500 billion ($4.54 billion) programme signed by Svensk Exportkredit (SEK) in October 1997. The choice for regulators will be whether to update the domestic system or to allow international paying agents (IPAs) and the international clearing houses to regulate the market. As yet there are no plans for change. The domestic paying agency service is the most worrying aspect for borrowers doing business in Japan. Per Akerlind, executive director and treasurer, at SEK, says: "The paying agency side of the domestic programme has been worrying us very much. We have been speaking with the authorities in Japan, but so far nothing is being done to change the system." SEK has only issued ¥6 billion off its Samurai programme and has done no recent trades. Akerlind, at SEK, has a pessimistic outlook. He says: "If non-Japanese issuers want to find Japanese investors, it is probably less work and less risk to use a Euro-MTN programme." Market instability has led issuers and investors to be reluctant to trade highly structured paper. But Japan's low interest rate environment means investors need structured notes to gain higher yields. Therefore the domestic market is not an attractive option. Koji Omachi is deputy manager of the syndicate desk at Nomura Securities (Nomura). He says: "There are several Japanese issuers with domestic MTN facilities but issuance off them is just like issuing corporate bonds. It depends on the issuer's preferred type of trade. But generally they don't issue highly structured notes off these programmes." Yet Yutaka Fukushi, senior manager at Industrial Bank of Japan Securities (IBJS), believes he has seen some improvements. He says: "In the past there was too much regulation in the market. For example, callables and floaters were not permitted. Due to deregulation in the past few years such rules have been reduced and Japanese issuers are going back to domestic programmes." Bank of Tokyo Mitsubishi (BTM) has the largest share of arrangerships and dealing in the domestic MTN market. It is the arranger and principal paying agent off SEK's Samurai programme. But even a spokesman at BTM says: "For the last two years there has been virtually no issuance in the domestic MTN market. The Euro-MTN facility is much more convenient for frequent issuers." There is potential, but the market is crippled and some experts are far from optimistic. Omachi, at Nomura, is scathing. He says: "I don't believe a lot of effort will go into deregulating the domestic market and it probably wouldn't be that helpful anyway. Even for Japanese issuers the Euro-MTN programme is a much more flexible tool. The domestic market won't grow any more, if anything it will shrink." International paying agents (IPAs) could revolutionize this market. Graham Cox is global product manager for programme debt at Deutsche Bank in London. He comes from Bankers Trust before it merged with Deutsche Bank. As chairman of the International Paying Agents Association (IPAA), he believes that if the Japanese market was willing to become more open and inclusive change would happen very quickly. He says: "If regulators want the system to work as efficiently as possible real time settlement, clearing and the role of paying agents will all have to be considered. "For the market to be attractive to foreign issuers it has to be user-friendly. That means if foreign issuers want to use their global IPAs, those IPA businesses have to be able to have membership and access to the domestic clearing systems." But a spokesman at BTM is sceptical about whether IPAs could be successful in the domestic market. He says: "Non-Japanese banks could not serve as paying agents in the domestic market. They have not focused on this operation in the past and they do not have the necessary client relationships." And in the Japanese market relationships are crucial. Many domestic MTN facilities have two paying agents, primary and secondary. But this is simply to keep relationship banks happy. The Japanese domestic market is closely guarded by those involved. This will be the greatest hurdle for international banks looking to break into the business. Fukushi, at IBJS, thinks Japanese banks have the edge on foreign houses when dealing with Japanese investors. He says: "Now there is much greater competition in underwriting between security houses than five years ago, particularly since more American banks have arrived. However, in the domestic market I think the Japanese houses will continue to dominate because they have the long-term relationships with both issuers and investors." Yet, if changes were made to improve the domestic system and foreign banks were able to enter the market as paying agents the rewards for issuers, Japanese and non-Japanese, could be great. SEK believes there are benefits to having a domestic platform if only the problems in the market could be eradicated. Its Samurai facility enables SEK to reach investors which its Euro-MTN programme cannot. Akerlind, at SEK, explains: "SEK felt that if it standardized the documentation once it would mean less work in the future. Many Japanese investors wanted Japanese law for certain structures, so if we signed a domestic programme with domestic law we could have a competitive edge." If the market was opened up the Samurai facility would become more attractive to other non-Japanese issuers. A spokesman at BTM says: "Some small and medium regional investors in Japan are restricted from investing in paper off Euro-MTN facilities, not because of official legislation but due to their own limitations. If a corporate has a domestic programme in place it can tap a much wider investor base." And Fukushi, at IBJS, points out the advantage of domestic issuance for Japanese borrowers of lower credit, particularly in difficult market conditions when investors are risk adverse. He says: "The Samurai market is very small now due to the Asia breakdown. However, more lower-rated issuers in Japan will look to this type of facility, especially now it is easier to do structured trades." He continues saying that if market conditions were more suitable many Japanese issuers would sign domestic facilities for language reasons. He says: "Within the next few years increasingly more Japanese issuers and subsidiaries of Japanese companies in the Euromarket will shift towards domestic issues Reporting and documentation is easier for them in Japanese. It is much more work to have to do everything in English." Most dealers consider that if the regulators concentrated on updating the procedure the impact would be positive. A BTM spokesman says: "It is the documentation process that is time consuming and expensive. It is not very efficient. Deregulation in this area is not on the agenda at the moment, but if it did occur, and I hope that it will, issuance would be much more convenient." Deregulation could turn the market around. But success will depend on the attitudes of investors. And change will only happen if it is considered economical. The BTM spokesman continues: "There could be potential in the domestic MTN market, but it all depends on costs and the workload involved. If reform takes place in the system and investor appetite is there I think we would see expansion." Cox, at Deutsche Bank, says: "The decision will be whether to settle the problems in the domestic system or to use the infrastructure set up by Euroclear and Cedel. The challenge for the professionals in the local market will be to create an infrastructure that can support traditional business and local requirements, but that is flexible enough to attract foreign investors and issuers and does not restrict entry. Protectionism versus internationalization." The Japanese government is committed to rejuvenating its financial system. But whether the domestic MTN market will be considered worthy of an overhaul is uncertain. For now, IPAs are sitting back and weighing up the pros and cons of taking on the challenge. And in the meantime hidden potential in a dormant market lies waiting to be realized.

PARTNER Communications, the Israeli cellular operator, is due to launch a $250m 10 year senior subordinated notes issue next week, targeting both high yield and emerging market investors. Rated B3/B-, the deal will be lead managed by Chase Manhattan and Schroder Salomon Smith Barney. The deal was roadshowed in the US this week, after the lead managers completed the European leg on Monday.

International paying agents (IPAs) have a lot on their plate. Consolidation in the industry is relentless and politics is hampering progress among clearing systems. "Competition is stronger than ever, and with banks fighting more aggressively to increase their share of the market, IPAs are being forced to reassess their strategies in order to stay ahead of the game. Global M&A activity is rapidly shrinking IPA numbers. And niche providers could disappear as larger banks gobble up smaller ones. Within the last two years Citibank has bought JP Morgan's business, Deutsche Bank merged with Bankers Trust, Bank of New York acquired the service of Barclays Capital and BNP's merger with Paribas has resulted in increased market share for the group. And there is more to come, according to Graham Cox, global product manager for programme debt, at Deutsche Bank, and chairman of the IPA Association. He believes that there will be room for domestic players. Yet, for global providers, he says: "We're going to end up with two or three large players who can demonstrate that they have invested in the necessary technology and infrastructure that global issuers will demand." Gary Webb is the London representative for BNP Paribas Group's (BPG's) global corporate trust. He has witnessed rapid developments in the market in recent years. He says: "Thirteen years ago, when I first joined this area of business, there were around 25 paying agents active in the market. This has narrowed down considerably. There are six or seven serious players now. Competition is going to be hot among this smaller group." Citibank was the most active IPA in the Euro-MTN market last year, according to MTNWare. It recorded a 29new Euro-MTN programmes signed in the past year. John Hood, global sales director, global agency and trust services, at Citibank, considers it is the bank's dedication in a range of areas that keeps it at the top. He says: "Citibank's success lies in its continued commitment to the market and its strong relationships with clearing systems. It reinvests all the money made from the product back into the business, into technology and people. This is also a highly client-focused business. And we have loyal clients, even clients of JP Morgan weren't dislodged after the move." But although banking machines such as Citibank and Deutsche Bank look set to dominate the market, Tom Casteleyn, vice-president at Bank One, believes there is something extra that smaller businesses can offer. He says: "There is room for niche players because some MTN programmes incorporate features that demand a certain flexibility from the IPA. These features might be related to the issuer or to certain countries it wants to issue in. For some of the larger IPAs this flexibility is undesirable. This is where the niche player can add a lot of value." And many market players consider that traditionally-strong domestic houses, such as BNP in France and Dresdner in Germany, will find more opportunities for business because Emu is blurring the lines between domestic securities and Euromarket issues. They also have well-established relationships with domestic clearing houses. Webb, at BPG, explains: "BNP hasn't been a particularly large player in the capital markets, but it is strong domestically. It has a strong focus in France and good links with domestic clearing systems as evidenced by the ground-breaking same day Euro-CP trade which it executed for General Electric Capital Corp, last year." One event which could dramatically alter market dynamics is a merger between the two Euromarket clearing systems, Euroclear and Clearstream. If it occurs, and many market participants think it could happen before the end of the year, IPAs will have to reassess their own efficiency. Having only one clearing house would simplify and speed up many market procedures. Also the way IPAs are paid would change. Casteleyn, at Bank One, says: "A major shakeout in the market will only occur if the clearing systems rationalize and Eurobonds become dematerialized. It is highly likely that sometime in the next two years Euroclear and Clearstream will merge. And in the event of this the common depositary structure might disappear and the way the IPAs are paid will change. This may change the economics for quite a few players." But Euroclear and Clearstream are at loggerheads. Both have different strategies for the way they see the settlement system moving. Euroclear prefers what it terms an evolutionary route. This involves links or alliances between central clearing systems and domestic houses. Euroclear formed an alliance with Sicovam and ParisBourse in November 1999. But Clearstream wants a clear-cut merger with only one central securities depositary (CSD) left standing at the end. Clearstream was formed on January 1 2000 by the merger of Cedel and Deutsche Bourse. The market is eager for cooperation between the two CSDs, but for now there looks like being little change. With over 30 settlement systems in Europe there is a long way to go in streamlining. and one official from a top IPA house thinks more fragmentation is likely. He says: "Last year, with Emu, it seemed that there was every possibility Euroclear and Cedel would merge. But as the year progressed the houses have increasingly gone their separate ways. Over the next five years there's likely to be more divergence." Denis Peters is a vice-president at Euroclear Operations Centre. He puts forward Euroclear's vision that alliances are a positive step forward. He says: "To compete in the market place today clearing houses need a greater degree of integration, most obviously through alliances with domestic houses. Competition will change in nature if the market moves towards a common clearing process, but it depends on how that evolves." Yet David Cowan, chief of corporate communications, at Clearstream, is sceptical about this approach. He replies: "Euroclear keeps talking about links and alliances but really it's just like playing musical chairs. The same organisations are all still there, they're just moving around giving the appearance of action whilst leaving the chairs in place by protecting the same territory. At some point the music's got to stop and the market will see one clear strategy of mergers." Cox, at Deutsche Bank, is realistic in his outlook. Although the US market can successfully have one clearing system he emphasises that Europe has more complex nuances. He says: "There are benefits to both Euroclear and Clearstream's models. But the emergence of one CSD is unlikely to happen for a long time, and in any case having more than one creates healthy competition. There are currently too many vested interests, political, national and personal, which get in the way in Europe." Market pressure will no doubt force a solution in this matter and it will be left in the hands of regulators to make the CSDs comply. But even with one common settlement platform for the Euromarket there are hurdles to overcome. Peters, at Euroclear, says: "Laws and regulations have to change before we can have one harmonised system. Even when we have one pan-European system it will be difficult to have a seamless process because of different tax and registration laws in different countries. Such changes need to come in tandem with changes in the clearing systems." Online trading in Euro-MTNs began in 1999 and IPAs are addressing the implications that increased speed and efficiency will bring. An official at a top IPA firm, says: "Lots of businesses are at a crossroads now. E-commerce is high on the agenda. Most IPAs know they've got to invest in technology. But they have to weigh up whether there's enough value in it and how it will enhance the business." But ultimately all banks accept that technology will be the main component to keep them at the top of the pile. Hood, at Citibank, says: "Online trading will bring a quicker turnaround on trades. This will mean IPAs will have to develop systems and technology to keep up and respond to the new speed of dealing." Deutsche Bank put a web-based system in place for clients early last year and Citibank rolled out its system, Citibank Agent.Direct, on August 16, 1999. These services allow global issuers to access trading details, programme outstandings and payments. Issuers can also send documents and receive research information and settlement reminders electronically. Hood, at Citibank, claims that as well as being more efficient, Citibank's system can highlight any changes or trading discrepancies to clients. But as traditional methods of business change IPAs have to re-assess where they can add value. Paying agencies used to make money from bearer certificates. For example, when an investor didn't cash in its bond on the day payment was due, the IPA would benefit from holding that cash. But this is being phased out. Hood, at Citibank, says: "IPAs have to be resourceful and creative in the way they get paid. Banks attach to market inefficiencies and by filling those gaps and adding value there they make money. But the areas where, in the past, IPAs benefited are disappearing. IPAs have to be alert to changing market dynamics to find new opportunities elsewhere." An area most IPAs believe holds great value is dealing in more complex and structured securities. An official at a major IPA, says this is one area the business plans to focus on strongly. He says: "The increase in structured products, asset-backed facilities and more complex repacks will restore the value or perception of value to the IPA service." Other firms are equipping themselves with all the necessary services in order to rattle the top houses. Webb, at BPG, claims the bank's strategy is to be a one-stop-shop. He says: "A major step we're hoping to make in the first half of this year is setting up a subsidiary company in London to offer trustee services. This service will also complement the offshore trust activities of BNP. At the moment we are at a disadvantage with US houses in not offering this product. We believe this will put us on a level playing field with our competitors." If eventually there is only one business left standing, IPAs agree that it will be a bank which has focused on the business as a core offering. Cox, at Deutsche Bank, concludes: "IPAs are striving towards achieving straight-through processing. There are many inefficiencies which will take time to iron out. We are not originators, but intermediaries and therefore cannot change the market, but we can work with others and influence its development. Where our business can add value is in the enhanced services we offer. This could be through technology, cash management, or handling more of issuers' back office and treasury."

This time last year many Japanese issuers faced the toughest funding environment they had ever seen. Spreads widened to levels most issuers had never experienced. This happened while international credit agencies were slashing Japanese credits to such an extent that there is now not a single triple-A Japanese issuer left in the market, according to MTNWare. But now that spreads have returned to tight levels many are left wondering whether such a situation could happen again. Flora Kawasjee, director, credit products at Dresdner Kleinwort Benson in Tokyo (DKB), looks to last year's situation. She says: "Clearly some of the Japanese issuers were caught out when their spreads blew out in the fourth quarter of last year. There was a rush to get some refinancings done and some of them had to pay well over their normal funding cost to roll their funding." This could not have come at a worse time with banks reining in their lines for some Japanese borrowers. So some of them, at least temporarily, became quite reliant on their MTN funding. Given the instability of the market, it is difficult to judge how MTN issuers would cope next time around. There are many who believe that such a spread explosion could not repeat itself. MTNWare shows that Bank of Tokyo-Mitsubishi (BTM) has issued more yen-denominated debt than any other Japanese borrower this year. Between January 1 and September 1 1999 it issued $3.28 billion-worth of paper. A senior member of BTM's debt capital markets hopes that last year's funding squeeze which hit so many issuers was a one-off. He says: "If another crisis hit and it became too expensive for issuers to raise funds in the capital markets, they could use banks as the last resort. They could not do this before, but with the reforms and the consolidation sweeping the banking sector it will be possible to rely on the banks." Many are optimistic that the announcement by International Bank of Japan (IBJ) that it is merging with Dai-Ichi Kangyo Bank and Fuji Bank will speed up consolidation throughout the banking sector. Rolf Schafer is head of MTNs at the London branch of Bayerische Landesbank Girozentrale (Bayerische) which was responsible for issuing the most amount of non-syndicated, yen-denominated debt in 1998, according to MTNWare. He is not as optimistic. He says: "It will not be until next year that we will be able to see whether banking consolidation will improve the situation. I am not being pessimistic, just conservative." But many MTN issuers have already protected themselves in the short-term and are not waiting for the benefits of banking sector consolidation to effect them. Kawasjee, at DKB, says: "There is always a risk of another credit event which could move spreads. But many Japanese issuers have already taken advantage of the current tight spread environment to over-fund themselves. So I think they are much better prepared now than the last time." Many issuers have covered themselves well into next year. A senior member of the debt capital markets team at BTM says: "Since April this year the situation has changed dramatically. In the last four months we have achieved a year's-worth of funding at record levels. Last year we were funding at Libor plus 30. But we are now achieving sub-Libor levels." Since April the issuer has raised more than double the amount it raised in the whole of last year. But BTM found funding was easier because it was in the enviable position of managing to retain its A2 rating from Moody's throughout the crisis. Of the 131 Japanese issuers in the MTN market that are rated by Moody's, MTNWare shows that 61 have been downgraded. This means 47the market was hit by downgrades. Indeed between September 1 1998 and September 1 1999, 109 Japanese issuers in total were downgraded by Moody's, according to the agency. Yutaka Fukushi, senior manager at IBJ Securities (IBJS), has sympathy with the issuers which were hit by the ratings actions and believes the downgrades were partly avoidable. He says: "I do not think the international rating agencies rate Japanese companies properly. More specialist analysis is needed. But I am biased because I am Japanese." But not everyone places all the blame on the rating agencies. Some issuers realize that the rating process is a collaborative one between the issuer and the agencies. Mitsubishi Corporation Finance (Mitsubishi) was downgraded by Standard & Poor's from A+ to A- in February this year and is candid about the rating process. Yoichi Shimoyama, general manager at Mitsubishi, says: "Japanese issuers need to explain their activities and their problems clearly to the rating agencies and disclose what investors want to know. We want to explain ourselves to every potential investor. We will do that through the press, through marketing, directly or through rating agencies." Another downgraded issuer is Marubeni International Finance (Marubeni), the industrial conglomerate. Marubeni has, however, managed to raise considerable funds in the present environment. Yasuhiko Ogura, director at Marubeni, says: "Marubeni's funding costs have tightened by about 40 to 50 basis points since March. And since April we have been able to issue ¥100 billion-worth ($9.08 million) of new issues." This is quite an achievement considering Marubeni's MTN rating was slashed by Moody's from Baa2 to Ba2 in June, this year. Ogura, at Marubeni, says that to be suddenly classed as non-investment grade was a major funding headache. He says: "There are still European investors which find it difficult to invest in us. But our MTNs are mostly bought by Japanese investors, so we can still issue." In the short-term the downgrades have deterred European investors from buying Japanese credits. This has hit various sectors harder than others. Fukushi, at IBJS, explains: "Now is not a good time for Japanese manufacturers, construction companies and industrials. With so many downgrades happening European investors do not want to buy such names. Things are improving but only slowly." Rolf Schafer, at Bayerische, which is on the buy as well as sell side, agrees. He says: "Many European investors are cutting back Japanese credits from their portfolios." But Marubeni managed to overcome the Moody's downgrade by obtaining an A+ rating from Japan Credit Rating Agency (JCR) in April. Marubeni only managed to launch eight trades in the six months prior to April 1999. But in April and May of this year 30 deals were launched off the programme. This was not an uncommon tactic. A number of Japanese issuers which were downgraded by Moody's decided to concentrate on wooing domestic investors by receiving a rating from domestic-based rating agencies like JCR, Nippon Investors Service and Japan Rating & Investment Information. Nissan International Finance was downgraded from Baa1 to Baa3 by Moody's in August 1998. In September it obtained an A+ rating from JCR. This helped it issue six trades in November after doing only one in August and one in September. This tactic from a few issuers may have had far reaching consequences. Many think that downgraded issuers have helped split the market by ignoring international investors and concentrating on Japanese buyers. Fukushi, at IBJS, explains how he sees the future of the MTN market: "The Japanese market could develop into two groups. With one group featuring the double-A and single-A rated banks and only a few corporates with good swap lines developed. The second group will feature lesser-rated issuers which will no longer afford to raise funds in the Euro-MTN market, but will raise funds in the increasingly deregulated domestic market." Many agree with Fukushi's view of a fractured market, even if they do not share his belief in a deregulated domestic market. The senior member of BTM's debt capital market's team says: "Yes, a two-tier market could develop. Investors demand yield but are now only willing to take either structure risk or credit risk, but not both. So investors will only go to top-rated issuers if they want to buy structured notes." Data from MTNWare suggests that structures have yet to become the sole preserve of credits rated single-A and above. Nomura Europe Finance, rated Baa2 by Moody's, is responsible for all the credit-linked notes issued in yen this year. But what the data does make clear is that during the blow out in spreads, at the end of last year, buyers of structured notes were only interested in buying from Japanese issuers. Following on from this, foreign issuers of non-syndicated yen have started to issue more structured notes now that spreads have tightened again for Japanese issuers. But the data is a general indicator and some individuals have a different view. Schafer, at Bayerische, says: "We have seen very constant business, even in the so-called summer lull. I do not believe, however, that European issuers are picking up any more business now than before." And BTM believes that non-Japanese issuers do not pose any sort of threat to Japanese issuers. BTM's senior debt capital market official says: "Japanese investors want to diversify away from the European Landesbanks. And especially since the recovery of the Nikkei in April Japanese investors are more willing to take on Japanese corporate risk." There is one reason, however, why Japanese issuers have recently found it hard to dominate the structured market. And that is the lack of swap counterparties available to most Japanese issuers. This is a direct result of the downgrades that have swept the market. Ogura, at Marubeni, says that they tend to avoid complicated structures. Indeed, of the 45 trades that the issuer did between April 1 and September 1 this year, 43 were fixed rate notes and two were FRNs. Ogura says: "It is easier to issue plain vanilla type notes. The terms and conditions are very simple and the risk is very low, which is what the investors like." Ogura goes on to explain why this is so. He says: "The problem with structures is you have to look for a swap counterparty. And if the term is longer than 15 or 20 years it is difficult to find swap counterparties." Kawasjee, at DKB, points out that this is a credit matter more than anything else and not something to hinder market growth. She says: "Some of the lower-rated Japanese issuers have only a small number of potential swap counterparties." Single-A-rated BTM agrees and is positive that the ratings downgrades will not hinder its ability to be the top issuer of yen. The debt capital market official says: "If we can find an investor to buy a note we can find a swap counterparty."

Over 60 active borrowers replied to the MTNWeek issuers' survey this year. They represent a considerable portion of all borrowers that have issued more than once off their MTN programmes in the past 12 months. Here we reveal what they really think of their dealers. And dealers are in for some tough criticism, as issuers tell them exactly how they can improve their service. The replies were upfront and some didn't hesitate to name the dealer they are least satisfied with. Congratulations go to JP Morgan, which features high in the polls for reverse enquiry and innovative structures. The survey also revealed some surprising results, with almost half of borrowers surveyed favouring yen for cheap funding, while sterling and dollar are tipped to lose popularity. Perhaps most surprising of all is that the internet is not a priority for almost half the issuers polled. Two thirds of those who answered thought it was not important as a means of distributing notes, although most expected it to play a major role in the future of trading. ISSUERS AND DEALERS Issuers are mostly very faithful to their dealer panel. Over two thirds of issuers polled issued over 61their notes through their appointed dealer group in the past year. On average issuers conduct 76their business through the dealer group. Many of the issuers who replied said that they are happy with their dealer panel, but 15aid that they would appreciate more contact with their dealers and more friendly dialogue. When asked what the most important aspect of an issuer-dealer relationship is, one issuer said: "Contact, contact, contact." The issuer added: "There is not enough contact, but too many dealers call without a serious deal to offer - there is too much beating around the bush." Another issuer confirms this and gives the following advice to dealers: "Encourage investors to be more specific on credits and levels at which they are prepared to deal. And reduce fishing expeditions with investors asking for quotes which often lead nowhere." Also under criticism were banks which were appointed to as many dealerships as possible, but could not then keep in contact with their issuers. One issuer said: "Some of our dealers forget us from time to time." Another issuer feels that there is strong competition between the dealers and as a result they sometimes provide incorrect information to the borrower, in an attempt to receive more trades. Several issuers called for more transparency from dealers and one complained that the dealer panel had advised them to issue more than they really needed to raise. One of the heaviest criticisms was banks putting themselves first. An issuer said: "We still find it disappointing that dealers market their own name so heavily that their customers come second sometimes." But dealers can take some comfort from the fact that only one third of issuers who replied actually named the dealers they are least satisfied with. It seems that most borrowers would rather not comment - whether out of politeness or genuine satisfaction with their dealer group. But one issuer said: "If we're dissatisfied with anyone then they'll not be on the programme much longer." Top banks Merrill Lynch and Lehman Brothers share first place as most disappointing dealer. BNP Paribas Group and UBS Warburg came a close joint second. It seems that doing well in league tables does not necessarily mean keeping your dealer group happy. But other dealers should not become too complacent: fourteen other banks were also mentioned for their poor performance. DEALER PERFORMANCE This year sees a turnaround in the reverse enquiry tables. Although Salomon Smith Barney are in first place again, this year it shares the number one spot with JP Morgan which has gone from number three last year (joint with four others) straight to the top of the table. JP Morgan, despite being dropped off several dealer panels earlier in the year, also has second place as dealer providing most innovative structures and has the majority vote as most active dealer. UBS Warburg has also featured highly this year, scooping third place in the most active dealer poll and for the most innovative structures. This year's survey saw the surprising absence of Merrill Lynch from the top dealer tables. Last year they were voted best dealer, best dealer for distribution and number two dealer for innovative structures. Nomura has also fallen out of the same league tables. CURRENCIES The most disappointing aspect of the market for many issuers so far this year is the performance of the euro. This was mentioned by many of issuers polled. And another borrower cites the weakness of the euro and the uncertain development of interest rates in Europe as a growing concern. In a complete turnaround, 43issuers expect the yen to give the cheapest funding in the coming year. Last year's survey showed that issuers would be relying heavily on euro and dollar funding. Three years ago the MTNWeek issuers' survey showed that issuers were reliant on Asian currencies, particularly yen. Now the market is set to put full confidence in yen once again. The euro has fallen in popularity with only 23the votes and dollar and sterling had only 10ach. Other currencies thought to offer attractive opportunities were Swiss franc, Singapore dollar, Swedish krona and emerging market currencies. INTERNET As online systems become a part of daily life for all the major houses, many dealers will be disappointed to discover that issuers are showing little enthusiasm for the internet as a means of distribution: almost half of the issuers polled believed that the internet was not at all important in distributing their notes. Nevertheless, UBS Warburg's reputation as foremost internet dealer is confirmed: an impressive 29 per cent of issuers polled think that UBS Warburg provides them with the best internet dealing capabilities. Almost one quarter believed that more transactions would be done over the internet in the future. And issuers frequently suggested that dealers should offer better internet resources. FUNDING The survey revealed that many issuers are relying less on their MTN programme for their core funding. In last year's survey 42issuers said they used their MTN programmes for over 61their funding. This year only 36issuers used their programme for over 61their funding. Many issuers in the present environment are driven to the public Eurobond market, rather than relying on their MTN Programmes. MARKET IN 2000 The market has been difficult for issuers in 2000. There are many reasons and among the reasons given were: lack of long maturities, instability, lack of liquidity and spread widening. One issuer comments: "Spreads have widened so much this year. It's no-one's fault but it's hurt many people's programmes. Sterling has particularly been crucified." A supranational issuer says: " The market is hard for everyone and for us particularly, as a supranational, funding has become more expensive than last year." The Landesbank sector highlighted concerns and one issuer comments: "The Landesbank sector has gone bad. We can't always achieve our targets at the right price." Despite many issuers taking the opportunity to air concerns about the market, the general consensus was that the market is maturing and developing in line with expectations. Many borrowers used the survey to stress that the market has been efficient for their funding needs in the past 12 months.

Never before have a country's local authorities been responsible for so many signings in so short a space of time. Ten new market entrants in two-and-a-half years mark Italy's regions out as the keenest borrowers of the moment. Forty-nine trades have raised the equivalent of $16.92 billion, turning the sector from a non-player into one of the fastest growing issuer bases in the market. And there is room for more to come. Only Canada, with nine government programmes, can compete with this surge of interest. But it has already passed its peak, having signed only two new facilities in the last four years. But it has not been straightforward for the Italians. Restrictive laws have kept issuers away from the private market and excessive bureaucracy slows the signing process. The Italian treasury is eager to re-establish its presence in regional financial affairs too, having handed over much of its responsibility in 1996. Andrea Giordani, vice-president, Italian capital markets at Merrill Lynch, is quick to point out that the local authority debt market in Italy has been one of few benchmark transactions and low liquidity. He says: "Only in the past few months have we been able to see the beginnings of a true asset class which can be classified as the Italian sub-national debt market." Nevertheless, the sector has been extremely busy. The first to take the plunge into the market was Region of Lazio (Lazio), which signed its $1.5 billion global MTN in November 1997. It issued its inaugural less than a month later and has not looked back since. Andrea Augello, budget minister for Lazio, says: "The programme has made it possible to find people likely to invest, but the idea started as an experiment." This experiment is the second most successful government programme in Italy, with the equivalent of $1.13 billion outstanding off seven trades, all of which have been syndicated. But Augello is still pushing for more. He continues: "It is only valid if it has a second phase. In phase two we want greater access to investors worldwide." The most successful government programme in Italy is that of the republic itself. It was also the next to sign, in July 1998, and the facility has a ceiling of $16 billion. The programme is arranged by Morgan Stanley Dean Witter and has $13.06 billion outstanding off 31 issues, split almost 50-50 between public and private placements. The Republic of Italy was the only signing of that year, but 1999 saw an influx of new names. City of Florence (Florence) and Province of Naples (Naples) both signed in April. Florence is the most highly rated borrower in Italy with a Moody's rating of Aa2. Later that year City of Rome, Region of Marche and Region of Umbria also joined the market. And this year three more issuers have already signed programmes: Region of Liguria, Region of Abruzzo and Region of Sicily. This tide of local authority signings was triggered by a ruling in the 1992 Maastricht Treaty. It forced the Italian government to reduce its debt exposure to its dependent regions. In 1996 Franco Bassanini, now the Italian public affairs minister, passed a law that allowed these regions greater autonomy. The Bassanini law stipulated that they were to receive greater responsibility for their own funding, and could not rely on government financing. Fabrizio Ghisellini, head of funding at the Italian treasury, says: "According to the Maastricht Treaty the responsibility of containing deficit and debt exposure of the general government falls with us, the treasury. But the way debt is formed and the cost of debt is partly down to the local authorities, with no control on our part. We find ourselves called to justify the relevant financial dynamics in Brussels, but the treasury has no say in the specific choices of the local authorities on how debt is originated." Italy's state sector borrowing requirement has grown a lot over the last year. It now stands at L16.5 trillion ($8.08 billion) compared to L9.81 trillion at the same time last year. This has been put down to over-spending by some regions which the treasury has to cover. Before the Bassanini ruling local authorities used bank loans as a source of long-term finance. Now, with access to a global investor base and cheaper funding in the international debt markets, it is likely that many borrowers will ditch bank loans in favour of their MTN facilities. Another source of financing widely used by the local authorities is the Cassa Depositi e Prestiti (CDP). Though it is separate to the Italian state, it offers its services to those local authorities, regions and public companies that need short-term funding. Augello, at Lazio, thinks that because of the difference in the type of funding, competition between the CDP and Euro-MTN market will be minimal. But Pietro Gonsalez del Castillo, minister of finance and strategical resources at Naples, thinks differently. He says: "The Bassanini law meant the provinces and regions were turning away from the CDP, which offered comparatively high interest rates, and towards the international markets. As a result the CDP has lowered its interest rates, but this in turn will cause a reaction from the international banks." And he thinks the new system has benefited local regions. He adds: "This has been a great advantage for the local authorities. The privatized system has meant cheaper funding and the people of Naples will feel the direct result." Naples signed its euro250 million ($236.56 million) programme to help refinance a loan it had received from the CDP. This was used to retrieve itself from the severe financial difficulty that was being experienced by many local Italian authorities at the time. It has issued one trade so far, in the private sector, raising the equivalent of $32.99 million. Merrill Lynch is the arranger off Naples' programme, and co-arranger off Lazio's with Banca di Roma. The American bank has managed to corner the market, arranging six of the 10 programmes signed by Italian state borrowers, and is a dealer off nine of them. Rodolfo Diotallevi, assistant vice-president, debt capital markets at Merrill Lynch, says: "Despite being first time issuers, most Italian local authorities have a very good understanding of the forces driving the international debt capital markets." But he is aware of the work that needs to be done when showing new borrowers the best way to use a programme. Arrangers will invariably need to set aside at least three months for the administrative processes for governmental issuers, rather than the customary two. Lazio's programme was worked on for a year before it signed. Ghisellini, at the Italian treasury, thinks the lack of familiarity with the Euro-MTN market delays many new signings. He says: "Problems during the origination of programmes in some cases arise from the scarce experience of debt managers at local level - some don't know how to compare banks or how to measure actual all-in costs." And Julia Ward, director, head of Euro-MTN origination at Lehman Brothers, says: "These borrowers need a lot of hand-holding as they are completely new to the markets." The process is also extended because of the numerous levels of approval each local authority must obtain. The council for each region or province must approve the programme itself, the arranger and each dealer before progress can be made. But Diotallevi at Merrill Lynch, explains why caution is needed. He says: "They need to be seen to be impartial in their decisions. Local authorities have to justify all expenses. Every decision has to be put out to tender." Ghisellini, at the Italian treasury, is not so accepting. The treasury has to justify all of Italy's market activities to Brussels, including the actions of the local authorities. But the Bassanini law has limited its control in these areas. He refers to this legal framework as "completely inadequate." Each authority is encouraged to keep frequent contact with the Italian treasury. Gonsalez del Castillo at Naples says: "During the setting up of the MTN programme the treasury minister was very concerned that we should get it right and provide an exemplary model to be imitated by other regional and provincial authorities." But some do not heed the advice as well as they could. Ghisellini is keen to see an amendment to the current law that will allow the treasury greater say in how each locality uses its facility. A draft law is being constructed that, if passed, should allow this to happen. Ghisellini says: "In the draft law, we are working to strike the right balance between interaction with the treasury (to ensure local authorities approach the market in a co-ordinated fashion) and further market liberalization - mainly via the removal of obsolete legal constraints on the choice of debt instruments." Before the Bassanini law local authorities might have raised just 20% of their own funding. Today this could go as high as 75%. But it has taken a long time for these issuers to reach this level of independence. Though Law 724, passed in 1994, regulated the issuance of bonds by municipalities and provinces in the capital markets, many issuers felt daunted by the complicated legislation. It ruled that all government bonds had to be amortizing and at no time could the volumes of debt raised surpass pre-set levels. Other regulatory intricacies such as pre-defined maturities scared off potential issuers. As a result, most borrowers have shied away from the private market and only used their Euro-MTN programmes to issue public Eurobonds. Only Florence, Naples, City of Rome and the Republic have issued non-syndicated notes so far. But this has not stopped the wave of new state issuers rushing to join the market in the last three years. And two more signings are expected before the end of the year, one of which may be the Region of Friuli-Venezia Giulia. Giordani says: "Regions are asking more and more to approach the capital markets. The first step is the assignment of the rating." Region of Friuli-Venezia Giulia was assigned an AA rating by Standard & Poor's at the beginning of May. And Region of Veneto was assigned an Aa2 rating by Moody's at the end of March. Republic of Italy is rated Aa3 by Moody's, as are four other government borrowers. Sicily is rated A1, while Region of Marche is not rated. City of Rome is rated AA- by Standard & Poor's. But not all dealers are optimistic about the opportunities on offer in Italy. Julia Ward, at Lehman Brothers, has some advice for potential new issuers. She says: "Be realistic. Make sure you know what to expect from the market and that you aren't going to be disappointed." Despite this caution most Italian issuers think the recent changes to funding policy will require a leap into the unknown. Augello, of Lazio, offers a glimpse of the future when he says: "It will happen very soon. By the year 2002, in one way or another, all the Italian regions will have accessed the international markets."

Two years ago Italy was driving the structured market. Dealers even called it the new Japan. But that appetite for exotic deals has vanished in the last six months. Mark-to-market rules and the growing credit market have led investors to drop structures for something more liquid and easier to manage. And at the same time the Italian investor base itself has been changing. Pension funds are growing and retail investors are retreating by putting their money into the safety of funds. Italy has one of the biggest savings records in Europe and there are rich pickings for those that can tap the growing source. But issuers must be alert to its rapidly changing trends. Lira ranked only below dollar, yen and Portuguese escudo for all structured trades in 1998 with $3.8 billion-worth of non-syndicated tickets sold, according to MTNWare. But last year Italian investors fled from structures in their droves. And so far in 2000 the trend is holding strong. An official in fixed income sales at Merrill Lynch in Milan says: "The turnaround last year came as a result of a combination of factors. The poor performance of the bond markets at the end of 1999 led investors to switch money into the equity market, which was going like a rocket. Investors were burnt by structures and have continued to stay away because of mark-to-market regulations and widening swap spreads." Dealers and issuers have observed a big change in Italian investor sentiment since last year as an increasing number are looking to credit products for yield enhancement. Simon Hill, head of Euro-MTNs at Credit Suisse First Boston, has seen this trend, but believes some structures will remain popular. He says: "On the institutional side there's been a shift away from interest rate structured deals as investors look to have fewer illiquid deals in their portfolios. However, there is still demand for structures such as equity-linked and reverse convertibles." Yet Saverio Cacopardo, head of capital markets at Fiat, says: "Eonia-linked, equity-linked and CMS were popular last year. But the market has been changing. Italian investors have been moving down the credit curve and looking at spread products in line with the rest of Europe." Roberto Villareale is head of fixed income at IMI Fideuram Asset Management, one of the top five investment funds in Italy. He says the majority of his portfolio contains single-A credits and higher, although it does hold some triple-B names. But he admits the fund has not entertained structures in 2000: "We have only invested in vanilla products since January this year. But the mark-to-market rules are not influencing that. As a fund, we have to accept such regulations on the reporting of trades and take on the responsibility of accurate pricing," he says. Italian institutional investors have had to mark-to-market since 1983. But the Bank of Italy reinforced the regulation in September 1998 - in the wake of the Russian crisis - stressing its importance in dealing with structured transactions. Since then, many investors have shied away from structures because pricing involves too much work. Assogestioni is the association of asset managers in Italy. Fabio Galli, from the association, believes that the regulation has restricted smaller investors from buying structures. He says: "Fund managers must be able to judge independently the price of each component in a structure, especially for those that could be illiquid. This has undoubtedly put a break on investment in structures since some investors don't have the resources to do it." The constant maturity swap-linked (CMS) trade was the darling structure for Italian investors up until recently, particularly on the retail side. In 1998 $2.43 billion-worth of CMS-linked notes were sold in lira, according to MTNWare, and demand was strong in the first half of 1999. The Republic of Italy issued two record-sized euro1 billion ($948.34 million) CMS-linked notes in May and June 1999. Yet many buyers were hurt by some structures in 1999 and the effects are still being seen, as Daniel Cogoi, head of Euro-MTNs at BNP Paribas, explains. He says: "Inverse floaters and the CMS structure are ones that many Italian investors lost a lot of money on. The impact has been that although equity-linked deals have continued to be popular they've stayed away from many other types of structure." Other traders report a decline in Italian retail investors looking at the market. Gavin Eddy, executive director, head of Euro-MTNs at UBS Warburg, says: "The retail side has changed radically. The motivation to buy structures, such as inheritance tax avoidance, has diminished. Also, changes to mark-to-market regulations have reduced appetite for exotic products. But more importantly retail money is becoming more institutionalized. In Italy this has been accelerated by the consolidation of the regional banks and the erosion of their traditional deposit base in favour of fund management." Italian dealer Caboto Holdings (Caboto) launched an internet trading system in January 1999 in an attempt to tap a wider source of investors from the largest institutions to small fund managers, responsible for retail flows. The web system, RetLots, can be accessed by any institutional investor. Peter Fraser, global head of sales at Caboto, says the number of clients on the system has tripled since September 1999. He says: "We have been able to market the whole family of bond products to a relatively large customer base in a cost-effective and efficient manner. RetLots was designed to target the retail side of business, to service clients with smaller orders, thus ensuring a more efficient use of our sales team's resources." The biggest trend dealers are tipping for the Italian investor base, and indeed Europe, is the growth and development of private pension funds. French corporate borrower Eridania Beghin Say (Eridania), has had great success selling into Italy. It raised $96.77 million-worth in lira off 10 private placements between 1997 and February 1999, amounting to 46its total funding for the period. Paolo Falcone, manager, capital markets at Eridania, believes demand from Italy is set to increase. He says: "We understand from dealers that there is going to be more and more interest coming out of Italy in the next few years from the pension funds. There is great potential for funding in the future from the region, it is just a question of being ready for those opportunities." Most traders are highly optimistic. Eddy at UBS Warburg says: "The potential increase in business from pension funds is huge. Demographic statistics for most European countries suggest there will be a large shortfall in tax receipts given the size of the population that will have to be made up. And these pension fund managers are making their first ventures into credit which will drive larger volumes of business in the capital markets." Others point out that the real impact probably won't be seen in the short-term. Cogoi at BNP Paribas says: "The private pension system is not very well developed in Italy yet. Some entities are starting to grow, but it is early days. They are nowhere near as big as those in other markets. That said, the trend will be for expansion." Giovanni Russo, chief financial officer at Cofiri, also has more cautious expectations. Yet he hopes pension funds will bring demand for longer maturities: "We're going to see gradual but steady growth over the next 10 years from these funds. But ultimately big changes are taking place in Italy. The arrival of pension funds will have a big impact for the market. There is good potential there for buyers of long-dated and structured MTNs," he says.