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On September 9 this year, the Polish government gave the go ahead for Cedel and Euroclear to settle trades denominated in zloty. It is a breakthrough for issuers and investors wanting exposure to the currency, since discussions have been in the pipeline for over a year. Dealers predict that with a more straightforward trading process now in place, investors will soon be grabbing opportunities for yield pick-up in the sector. First to take advantage of the relaxation in the law was European Bank for Reconstruction and Development (EBRD), the most active borrower in zloty so far this year. Within weeks of the announcement it had issued two Z250 million ($60.91 million) fixed rate trades, lead managed by TD Securities (TD). They were the first pure zloty notes enabling investors to get direct access to the currency. Prior to this, non-Polish investors could not hold zloty outside Poland. All zloty trades were synthetic, that is, trades were linked to zloty rates, but interest, principal payments and settlement were all transacted in other currencies. Zloty is a relatively small sector with $784.48 million outstanding off 27 trades this year, according to MTNWare. But most dealers agree this regulatory step forward will dramatically open up the market. Olivier Jalouneix, head of Euro-MTNs at Morgan Stanley Dean Witter (MSDW), believes it will encourage more investors to experiment. He says: "Clearing and settlement impediments always slow down issuance. The easier a currency is to trade, the more investors will feel comfortable getting involved." Yet Lourens de Beer, director of local markets at Westdeutsche Landesbank Girozentrale (WestLB), is uncertain that pure zloty trades will be snapped up. He says: "Now that notes can be fully settled in zloty it will be interesting to see if that becomes the dominant trend. Our investors have, in the past, preferred to settle their Polish notes in euros or dollars to avoid the FX settlement risk." TD is the leading dealer of zloty MTNs, this year. Edward Mizuhara, vice-president, debt syndicate at TD, explains one reason for zloty demand. He says: "In comparison to Czech koruna, where rates have fallen over the past two years, zloty offers an attractive yield premium and there has been a fair amount of interest. A number of investors have switched out of sectors that have appeared to have run their convergence plays, such as drachma and koruna, into zloty." But to date zloty issuance has only been possible for highly-rated credits. The majority of issuance in zloty has been from triple-A supranational borrowers and financials. No single-A or triple-B issuer has ever sold a zloty MTN. Investors taking currency risk won't gamble on credit too. Jalouneix, at MSDW, says: "Obviously with only top borrowers issuing in zloty investors are not taking more credit risk than for a standard Euro-MTN. The risk with the currency-linked note lies in the possibility of a political or economic event in Poland." But de Beer, at WestLB, believes that lower credits will soon be visible too. He says: "I expect to see triple-B borrowers issuing in zloty, but investor appetite is not there at the moment. Investors can get good returns with zloty without looking for more exotic credits. But if spreads tighten, then investors may move down the credit curve." And zloty issuance is investor driven in other ways. Due to the downward slope of the zloty yield curve many investors shy away from long dated paper. Out of EBRD's eight zloty trades in 1999, only two had maturities longer than three years. An official, at EBRD, says: "Zloty has an inverted yield curve so it is easier to sell shorter-dated notes but we are a flexible issuer and not opposed to issuing in the long end." Yet John Vax, managing director, Commerzbank capital markets, in Prague, points to the other side of the coin. He says: "There are investors keen to buy at the long-end. They are interested in convergence plays and if you have this view you want to go as long as possible." Last week, the first Polish issuer Telekomunikacja Polska, signed a $1 billion Euro-MTN programme. It will, no doubt, be the benchmark for Polish corporate issuers. Dealers believe Poland holds potential for new borrowers, although most agree that issuance in zloty would be particularly difficult for them. De Beer, at WestLB, says: "Looking at the experience in South Africa, we have not seen a proliferation of issuers coming to market. Investors who have done their credit work often prefer to go to the domestic market. The risk in zloty is very different to the risk involved with a Polish credit issuing in zloty." And zloty is leading the way for other Eastern European currencies. There has been demand for Slovak koruna, since the EU commission announced it might join Emu in the next phase. In 1998 there was no Slovak koruna MTN issuance, but there have been 10 trades this year, according to MTNWare. Zloty will remain an appealing option for investors seeking enhanced yield, but dramatic growth probably won't be seen until greater economic stability is achieved in Poland or membership of Emu looks more certain. An official, at EBRD, says: "It all depends on market conditions, the zloty is volatile now, but when rates hike again, there will be demand for the currency. There will always be interest now and then when the levels are good."

Zurich US (Zurich) unveiled a new political risk insurance product on October 25. It is the first private insurer to offer such a package. And if the company's claims are correct it could dramatically increase opportunities for emerging market issuers to sell private placement MTNs. But in the wake of Russia's collapse and volatility in Asia, investors are still nervous of risk. Insurance may not be enough to bring buyers back to high-yield markets. Daniel Bond is chief economist and vice-president in the sovereign and international public finance group at Duff & Phelps (DCR). He explains: "There are many strong corporates with credit worthiness that are kept away from the international markets because the sovereign foreign currency rating is below investment grade. With this type of coverage on offer, a corporate's rating can be raised above that of its sovereign and into investment grade." Zurich's insurance could provide emerging market borrowers access to previously unobtainable investors. Andrew Dell, director, global syndicate emerging markets at ING Barings (ING), says: "The product squeezes double-B issuers up to investment grade levels and opens them up to a new universe of investment grade buyers. It is another mechanism to aid the broadening of emerging markets." Yet he is sceptical about whether some investors will bother with insurance in a positive market environment. He says: "If the market is strong these products aren't needed. In bull markets investors want to take the naked risk and pick up yield." Other dealers don't think insurance will lead to significant expansion in Euro-MTN issuance from emerging markets because traditional high-yield paper buyers won't be interested. If an investor pays for insurance to reduce risk then its final yield will be less. One dealer says: "Credit-linked notes are already offering the same kind of insurance on a transaction when the principal is protected. There isn't any real added advantage to having an insured note." Issuance of emerging market debt plummeted in the fourth quarter of 1998. Non-syndicated debt issued by Brazilian borrowers fell from $160.73 million in the third quarter of 1998 to $37.03 million in the fourth, and Mexican non-syndicated trades fell from $775 million to $195 million for the same period. But dealers report a steady recovery in 1999 and are positive about growth in 2000. Daniel Riordan is vice-president and managing director of the political risk group at Zurich. He is confident Zurich's insurance product will make a difference for issuers who are having difficulty selling paper. He says: "There is continuing concern about emerging markets, particularly in the light of the crises last year in Asia and Russia. And many banks are still shy of underwriting bonds in such markets. This product should reassure investors who are nervous about risk." Zurich's policy covers political risk events including currency inconvertibility, political violence, and expropriation. Currency devaluation is not covered. The product will be bought by banks which act as trustees for the investors. From the date of an event, Zurich typically waits 180 days before taking over debt obligations. It expects its main areas of focus will be Mexico and South America. World Bank and Overseas Private Investment Corporation (Opic), a US government agency, already offer political risk insurance. Zurich has closely tracked the pattern of Opic's product. However, Opic has restrictions on coverage due to US government policy issues such as human rights. Zurich, as a private company, does not. But Bond, at DCR, points out that in buying Zurich's product investors take on the credit risk of the company. He says: "On the negative side Zurich US does not have a track record yet for payment on this type of policy. As a government agency there is little risk on Opic's ability to pay or willingness to pay. Zurich is a private company with business and profit pressures, it may be more likely to deny claims than Opic." Zurich will cover up to $100 million per transaction and maturities with a term of up to 15 years. Out of the 22 non-syndicated notes sold by Argentinean borrowers in 1999, only six had maturities longer than three years. Bond says: "Five years ago there would never have been this type of coverage for issues with lengthy maturities. Private sector insurers are entering a brave new world but it will encourage growth in issuance." The idea looks set to catch on. Riordan, at Zurich, expects more insurers will bring out policies in line with those of Zurich since he claims there is high demand for the product. He says: "We are already seeing interest from our competitors who are asking to see copies of our policy." Most dealers agree that insurance will be a tool to aid growth in emerging markets. Although some have reservations about how fast this will occur. One dealer says: "Big steps have been made in 1999 in emerging markets but there is still a lot of nervousness among investors. There is much scope for growth with this type of insured product but it is unlikely to be rapid." And Dell, at ING, points out that it is not a solution to wider problems. He says: "Insurance will encourage nervous investors, but it is not a universal panacea. It does not guarantee placement of paper - that always depends on the state of the market."

Fannie Mae set a new record in the dollar markets this week with a blow-out $11.5bn three tranche offering.

The market is breathing again after a stilted start to the year. The last six months have been marked by a fall in demand for structures and shrinking maturities. And desk reshuffles in many of the major houses have added to the sense of uncertainty. But as the market moves into the second half of the year business is picking up and at last positive sentiment is spreading. Dealers are preparing themselves for what could be a busy summer. Alisdair McDougall, head of capital markets at Abbey National (Abbey), says: "The market outlook is pretty rosy. I'm surprised because I thought we'd have a long summer and things would be a lot slower. I think we've come through the worst of the bear market. Now the atmosphere is quite bullish." From the statistics alone the market appears to be in good health. Non-syndicated issuance has increased by 30 traded in the same period last year, according to MTNWare. But many in the market agree that greater activity in recent months has compensated for a dire first quarter. Though demand out of Japan had increased by March, European investors were flagging until recently. Peter Jackson, managing director and head of Euro-MTNs, at Salomon Smith Barney (SSB), says: "In Europe many investors are nursing losses on bonds bought in previous years. Japan's relative importance has increased this year. Issuance volumes have increased and Japan has confirmed its position as the dominant buying base." Highly-rated issuers such as Svensk Exportkredit (SEK) and Abbey have become reliant on the Japanese market and its demand for structures since it is too expensive to sell into Europe. But there has been a big increase in notes with a tenor less than a year in Japan due to mark-to-market rules. Per Akerlind, executive director and treasurer at SEK, says: "It is still Japan which is driving our funding. The trends are still for power reverse dual currencies, although to a lesser extent compared with last year. We have also noticed an increase in non-callable structures. In the retail market equity-linked business still dominates and the exchangeable bond is a ballooning market, but the trend is for more protection." One bank which is not complaining as Japan drives the market is SSB. It was awarded best Euro-MTN house by Euromoney magazine this month, and has maintained its top position in MTNWeek's issuance league tables. It has also been added to 12 existing dealer panels this year, more than any other bank. It has been making a conscious effort to focus on origination. Jackson at SSB, says: "There are fewer real players in the market than there were a few years ago. Lots of banks are trying to get into the market but they're finding it difficult to get the right people. It will become more important for a business to have global origination and global distribution. As closed domestic markets open up and more cross-border business happens, it is global players that are best positioned to win the business." Credit Suisse First Boston (CSFB) is having a good year despite being barred from trading derivatives into Japan. This time last year it was placed at number 14 in MTNWeek's issuance league table, but this year it has staked its claim as one of the market's top dealers and now stands at number six. Simon Hill, head of Euro-MTNs, at CSFB, says: "CSFB is in a good position for selling structured deals into Europe as it still has a strong derivative franchise in Europe. But as for our Euro-MTN league table position, a large proportion of it is down to public deals and block trades." But he points out one disappointing aspect of the year: "I think triple-Bs are struggling. They can get stuff done in the public market if they pay for it, but for private markets it's still tough and volumes are small," he says. This time last year Morgan Stanley Dean Witter (MSDW) topped MTNWeek's issuance league table. But this year it has slipped down the ranks. Desk-head Olivier Jalouneix moved in March and despite hiring two dealers the three-strong London desk is now smaller than many of its major rivals. Yet it manages to top the euro league table (see league tables p23). Klaus Svendsen, vice-president, at MSDW, puts the league table decline down to increased dominance by Japan. He says: "The most significant feature has been the slew of yen issuance. It's been a much larger proportion of the market than in previous years. We're not doing as much yen as we'd like. We plan to focus more in Asian currencies." And Barclays Capital has fallen in the league table this year. Jens Nielsen, ex-head of the desk, left in February and Frair Appelby-Walker went to MSDW in April. But Geert Vinken, head of syndicate at the bank, says: "We have appointed someone to head the desk. Details will be announced in early August. We're going to have a full team up and running pretty rapidly." But most issuers don't believe desk changes affect trading. McDougall at Abbey says: "The desks we talk to don't seem to have changed. There can be a bit of stress sometimes if a desk is short of people but it doesn't really affect business that much." And despite its reduced numbers MSDW's desk is bullish. Svendsen says: "I never thought the summer would be quiet. When the public market slows down it means we get more attention from the sales force. So it's a good time for the private markets."

Fortis and Fortis Finance have substituted Fortis Bank for Generale Bank as both arranger and a dealer off their euro3 billion ($2.82 billion) Euro-MTN programme.

The Eu30bn jumbo loan backing the acquisition of Orange by France Télécom was signed this week and entered the secondary market. The jumbo faciliy was arranged by Barclays (books), BNP Paribas (books), Citibank/SSSB (books), Credit Suisse First Boston (documentation), Morgan Stanley Dean Witter (documentation) and SG (agent).

DRESDNER Kleinwort Benson's Martin Graham has resigned as co-head of global sales, leaving Laurent Caraffa as global head. DKB was already planning to appoint Caraffa as global head, but had not counted on Graham's resignation.

LEHMAN Brothers completed the £117.7m sale of Geo Interactive Media stock by directors of the company last Friday (July 28). Bankers connected to the deal said that when it was first mooted few in the market expected it to be successful.

Joining the Euro-MTN market can be like entering battle for a new borrower. And the only weapons it has are an assortment of professionals all offering different advice. The end product is a water-tight legal document, a Euro-MTN programme. But it can take months or even years to get it right. Often, the most difficult part can be where to start. But most issuers begin with a rating. Tony Assender, director, in the corporate ratings group at Standard & Poor's, says: "An issuer entering the market without a rating is restricting itself to its domestic market, because it will be reliant on name recognition only. A lack of a rating can cost an issuer 10 to 15 basis points due to lack of liquidity." This is especially true in the private market where a credit rating is a passport to a new investor base. If an issuer has an existing rating all it has to do is pick up a phone and the agencies can usually supply it with an MTN rating in 48 hours. And this is where the first of many expenses is incurred. Andrew Moorfield, director, corporate finance and capital markets at Diageo, says: "The rating agencies charged a separate fee for assigning us an MTN rating. It wasn't an in-your-face amount, more of a small administration fee." Unrated corporates commonly ask a bank's rating advisory department to help them get a rating. It is usually at this stage that an issuer meets its future arranger. Deborah Loades, head of Euro-MTN and Euro-CP origination, Morgan Stanley Dean Witter (MSDW), says: "It is a minority of people who use us as their ratings advisor and then go and use another arranger. Ratings advisory and MTN arranging usually go hand-in-hand." Finding an arranger is perhaps the single most important decision for a new issuer. Some banks have specialist product managers for Euro-MTNs, and not surprisingly it is these houses that tend to head the MTNWeek arrangership league table. But being a specialist is no guarantee of winning mandates. Most arrangerships are decided on existing banking relationships. Julia Ward, director, head of Euro-MTN and Euro-CP origination, Lehman Brothers (Lehman), explains: "Banks that get the mandate usually know the borrower quite well. Unless there has been some form of dialogue, it is unrealistic to expect the mandate simply by having one meeting and waving around your credentials." Scott Church, managing director, capital market services, Merrill Lynch, has been in debt markets for 13 years. He admits that competition is now fiercer than ever. He says: "I can count on the fingers of one hand the times in the last couple of years when we didn't need some form of formal pitch for a mandate." Some arrangers think that competition is getting too intense. Ward, at Lehman, says: "Arrangers always used to charge a fee. But unfortunately that's changed. Commercial banks who are trying to build up their business can be very pushy and competition is fierce - some will often pick up all the fees for the issuer." Church, at Merrill Lynch, agrees: "Unfortunately some arrangers are picking up some of the third party costs such as printers', lawyers' and IPAs' fees. It's a very aggressive tactic and a trend I don't like to see." Deutsche Bank is singled out by some arrangers as being one of the most aggressive competitors. But Robert Mohamed, director, head of transaction management at Deutsche Bank (Deutsche), is quick to quash such accusations. He says: "It is totally untrue that we pick up third party fees on behalf of the issuer. We're in the business of making money. And though arranging programmes does not make money, the value added is a money-making business: the debut transaction and the delivery going forward." And this is one of the main reasons why arrangerships are so competitive. Invariably the arranger, in lieu of fee, will insist that it acts as the bookrunner on the issuer's inaugural deal. Ward, at Lehman, explains: "If you spend two or three months with an issuer setting up a programme you generate a certain amount of goodwill. If you don't win the inaugural deal you would expect some other form of business from them. Arranging a programme is a time consuming process and we would hope to be paid for that in some way or another." All arrangers deny that they ever tie in the inaugural with the arrangership mandate. But 75the 134 issuers that signed in 1999 and launched an inaugural used their arranger as lead manager off their debut deal. Choosing a lawyer can be less fraught for the issuer but equally important. The lawyer acts on its behalf in the negotiations with the arranger about how the programme documents are put together. Options such as 144a, sub debt, overseas jurisdictions are decided at this stage. But these negotiations take time. Robert MacVicar is a partner in Clifford Chance's securities group. He says: "The process can take 12 to 16 weeks. And within that, the key areas are disclosure and writing a business description. This tends to be the part that takes the longest time. If it is a new company, or one that has never been in the international capital markets, or in a far-flung jurisdiction then it can be very challenging." Jean-Marc Doucet is Lafarge's treasurer. He helped set up its Euro1.5 billion ($1.43 billion) Euro-MTN programme in June 1999. Although he believes the documentation is not complex, he says: "What may be complicated is to prepare your back office to deal with all the administrative issues and procedures inherent to the issue of global notes, temporary notes, structured products, pricing supplement." Dealers are usually chosen after the arranger has been mandated, with a panel comprising those houses which pitched and failed to win the arrangership. But often the panel is chosen after the documents have been drawn up. Moorfield, at Diageo, explains that he set four parameters for choosing his arranger and dealers in 1998. He says: "One, the quality and consistency of their capital markets dialogue; two, their quality of fixed income credit coverage; three, their secondary trading of our bonds; four, the ability to distribute bonds in our key investor markets. We judged the banks solely on those criteria and took no account of whether they were specialist arrangers." Doucet, at Lafarge, also drew up a strict set of criteria to measure banks' experience in the capital markets but did take account of houses with reputations as specialist arrangers. He says: "We also looked at league tables - MTNWeek's, IFR's and Bondware's - to see who came top in arrangership and dealership polls." Once the documents are completed the arranger sends copies to all the dealers in the selected panel. IPMA recommends that the dealers are given 10 days to read and make comments before giving the documents back to the arranger. However, they are often allowed less time. One house in particular is accused by many arrangers of causing problems at this stage. A leading arranger says: "JP Morgan has a tendency to always question the documents when 99market participants are happy to accept everything. We know what is right and what is wrong and we get the best deal for the dealers." Though no arranger was willing to be named, almost all the top houses agreed that this was the case. JP Morgan is quite happy with its approach. Paul Hearn, managing director, head of European capital markets, JP Morgan, says: "We are more rigorous than most houses. And we are not ashamed of that. We read the documents which is more than can be said for many." And Mary Hustings, who heads the transaction execution department at JP Morgan, says that though they often complain about the standard of auditors' comfort letters, this is an issue that all market players are not happy about. But once all the dealers are happy it is time to launch the programme. Ward, at Lehman, recommends the tried and tested route of a public deal. She says: "Investors are more willing to do the credit work to open lines if there is a specific issue to be purchased." But MSDW's Loades warns that this approach is not suitable for everyone. She says: "The minimum amount for a public inaugural benchmark has changed. It used to be $250 million to $300 million but is now $500 million. Not all issuers will want to do so much issuance in one year." If a roadshow is decided on, Mohamed, at Deutsche, stresses how important it is to target potential investors and have plenty of one-on-one meetings. He says: "You want a mixture of attendees at a roadshow. If only two people turn up it is a disaster. A successful roadshow is where you attract as many investors as possible with a view to them buying. If they subsequently do not buy then that is not your fault." All arrangers have put together programmes that issuers have failed to use. This can be frustrating after all the work involved. Twenty seven issuers signed between January 1998 and July 1999 and have yet to issue any debt, including Czech Republic and Schipol Group. Cadbury Schweppes signed 10 months ago via Deutsche and has yet to use its programme. Terry Bird, group treasury manager, Cadbury Schweppes, says: "We haven't needed the money but we anticipated that there was a chance that we might. However, we are totally happy that we set up the programme. We still hope to use it. " But he admits that the facility has to be used for it to save the company money. He says: "We reckon that we need to issue two or three times a year to justify the set-up costs." And MSDW's Loades points out how expensive it can be for an issuer not to use its programme. "The annual update can cost anything between $20,000 and $50,000 for an issuer if it has to update its business description, change its dealer group and re-print its information memorandum. That is a significant cost to justify to your board," she says. Experienced arrangers and lawyers all stress that an issuer needs to have a clear idea of what it wants from a programme, before it sets one up. But Doucet, at Lafarge, believes all the hard work can be worth it. He says: "My advice to new borrowers is set up the programme as quickly as possible to gain access to the market's deep and broad investor base. The sooner you get it operational, the sooner your signature is in the market. It is important to select a perfect arranger. And your documentation must be perfect. If it is too restrictive you will not only be an inflexible issuer but also your annual updates will cause you problems. Bad documentation can mean that the update takes two months to complete. That is a loss of time and a loss of money."

Hilton Group (Hilton) made a splash in the private market last week when it launched two MTNs just days apart. Hilton is keen to focus on private placements off its £

Hilton Group has added Chase Manhattan and UBS Warburg to the dealer group off its £

Co-ordinating arrangers BOCI Capital and SG are seeking sub-underwriters for a benchmark setting fundraiser for Hutchison International Finance (BVI). The HK$5bn transaction will be guaranteed by parent company Hutchison Whampoa. The five year term loan is priced at 48.5bp over Hibor. Banks joining with HK$500m tickets will receive a 7.5bp underwriting fee and 32.5bp up-front on final takes. Participants providing HK$350m-$499m earn 5bp for underwriting and 30bp on final allocations.