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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.

As one of the world's biggest savings nations, Japan is still a wealthy country with plenty of buyers looking for the right portfolios. The poor economic conditions and an unprecedented low interest rate environment have left them with heavy liabilities and fewer sources of income. But non-syndicated yen issuance from January 1 to September 1 1999 has reached $62.01 billion. For the same period last year the figure is $40.31 billion. Japanese cash is ripe for the pickings. As a result, changing patterns of demand from Japanese investors in the Euro-MTN market have meant new challenges for issuers. The market's move away from being heavily oriented towards big institutional buyers like life insurance or casualty insurance funds is the most obvious change. Prior to the financial crisis erupting in 1997, these investors drove demand for bullet maturities and reverse dual currencies. But the events of the last two years brought home to all investors the importance of a two-way crisis where credit and structural risk combine. They now prefer the liquidity of big public Eurobonds. Christopher Cox, director, Euro-MTN trading at Nikko Salomon Smith Barney (NSSB), explains how the difficulties faced by big institutional investors have triggered other types of flows. He says: "There's been a decrease in the importance of central institutions. But the importance of regional investors has significantly increased. The smaller institutions have become more reluctant to leave their investments with larger institutions. They want to manage them themselves." Regional financial institutions can't lend as much in the weak economic environment so they are cash-rich and turning to structured paper to earn a spread. And dealers say they consider the whole gamut of products but ticket sizes are small. They may have two or three separate orders per ¥500 million ($4.54 million ) transaction. Terms of one, two, 15 and 20 years are popular but call options are usually built-in. However, regional investors have to be cautious about structured risk. Koji Omachi, deputy manager, syndicate desk at Nomura Securities, says: "Recently many such investors have been told by their internal regulators to be careful about evaluating such highly structured products, especially if there is a variation in the coupon. They're afraid of undervaluing structured products." Moves to increase the sophistication of the Japanese financial system have meant changes to regulations relating to investments both internally by organisation and externally by central authority. Investment and trust managements (ITMs) have been sizeable investors in Euro-MTNs but the pattern of their growth is being restricted by new regulations. Kenji Setogawa, associate at Morgan Stanley Japan, says: "There is more and more concentration on the so-called central investments or ITMs. They are becoming gigantic investors for two reasons. Firstly, they had internal reasons to invest in unlisted bonds. Secondly, their funding is short-term but it is very difficult to get this tenor in the domestic market." While ITMs used to cover a wide spectrum of maturities, they have become restricted in what they can buy. As the one-year and 10- or 20-year sectors see increased demand, notes with mid-length terms have become less popular. Since June this year, yen notes with maturities of more than one year have to be marked-to-market which means investors have to publicly disclose their positions on a regular basis. Lawrence Temlock, vice-president, MTN syndicate at Merrill Lynch Japan, explains: "The biggest problem facing investors at the moment is the rules on disclosure for money managers are becoming stricter. Yen Euro-MTNs with maturities of more than a year have to be marked-to-market. A lot of money managers will buy notes for less than one year rather than go through that painful process." While Setogawa, at Morgan Stanley Japan, sees the growth of ITMs as a significant boost to the market for Euro-MTNs, others see it as business which the market can do without. One dealer says: "I hate to say it but it means yen Euro-MTN plain vanilla trading is almost like a money market now." But ITMs are increasingly hungry for short-term paper and that's a demand that can be met by issuers ready to be flexible. British corporate, MEPC, issued ¥28 billion-worth of fixed rate notes from June to August 1999. They are all non-syndicated yen deals with maturities of one year. They account for seven of the 10 trades the issuer has done since signing its euro1 billion ($1.06 billion) programme in March, this year. This is quite impressive for a real estate corporate rated A- by Standard & Poor's. And Australia and New Zealand Banking Corporation has managed three short-dated yen deals in the same period. Its ¥3.41 billion note was issued in June and pays 1.5%. It matures in September, this year. Cox, at NSSB, says: "Investment trusts have become more important in the last three or four months. But their overall impact on investor flows is limited. Because they can't now buy anything longer than a year without having to mark it to market, they've concentrated on shorter-dated paper and stretched for yield. Some of the Australian banks and UK corporates have benefited." Since investors would rather avoid the mark-to-market process, the attractions of the domestic market are very appealing. This is all the more acute since there is no public service in Japan to make sure the notes are priced accurately for mark-to-market purposes. Domestic bonds and Samurai MTNs do not need to be marked-to-market the same way as Eurobonds and years are given to the process. This may mean the domestic market could swallow much of the excess cash which may have otherwise gone into Eurobonds or Euro-MTNs. Temlock, at Merrill Lynch Japan, says: "The middle of the curve is not that active. Investors interested in the three- to seven-year sector are looking for Samurai bonds or Uridashi MTNs. It points to the resurgence of the Samurai market as competition for the Euromarket." An Uridashi MTN operates as if it is a hybrid Eurobond which is registered in Japan as a public sector offering. This allows paper to be sold like a Euro-MTN which can also be distributed publicly in Japan. But taking the relatively expensive Samurai or Uridashi route means dealing with complicated documentation procedures and satisfying various eligibility criteria from the Ministry of Finance. It may offer wider distribution channels but there's no guarantee on how well any big block issue will sell in Japan. Japanese investors are still very cautious as to the credit quality of issuers. That said, they will buy low-rated domestic names from well-known Japanese corporates which are domestically rated triple-B and above. They continue to focus on top credits from non-Japanese countries. Those with sovereign linkage are preferred but names rated single-A and above do see demand. Most dealers agree that the market would be quite challenging for issuers that can't meet these high standards. Borrowers like KfW International Finance and Svensk Exportkredit (SEK) are popular. SEK issued ¥401.61 billion-worth of paper off 211 issues between January 1 and September 1 this year, according to MTNWare. It is rated Aa2 and double-A+ by Moody's and Standard & Poor's, respectively. One dealer says: "A lot of investors, especially the smaller ones, rely on external ratings and have strict criteria for what they can buy. So no doubt, we will continue to see a higher rating threshold for borrowers, particularly foreign names." For borrowers to tap into the Japanese investor base, they have to look at short maturities, smaller issue sizes and structured products. The preference for chunky plain vanilla paper has been subdued. The Japanese retail investor's growing importance has boosted the demand for smaller ticket sizes and shorter terms. Individuals with fat wallets are turning away from the low interest savings accounts and pension funds and looking at products like Euro-MTNs for better returns. Knock-in dual currency notes, equity- and Nikkei-linked deals and trigger callables are all in demand. Cox, at NSSB, says: "At first glance it looks like there's been a move towards long-dated paper. But that's not true because so much of it is callable. At least 75% of notes 10-years and longer are callable." In a low interest rate environment, embedded options in notes can act as a substitute for a good base rate. Issuing a straight bond may give zero or negative return. Inserting a call or a put into the note can create higher coupons. Setogawa, at Morgan Stanley Japan, sees a wide range of opportunity. He explains: "Investors want to raise their portfolio average yield. The absolute rate in Japan is so low that they are looking at selling options in any form, such as selling a put on a JGB and getting a premium into the coupon. FX- and US Treasury-linked notes are very popular with a wide range of investors." Bar a major credit event or a sudden increase in the Japanese base rate, the market looks set to continue to demand structured products with in-built calls from top-rated issuers. But borrowers will have to be accommodating to investor demands. Omachi, at Nomura Securities, says: "The top 10 issuers that we've arranged are basically flexible in terms of structure and size or reasonable in terms of cost. The preferable structure is a one-year non-call that's callable six months thereafter. The average MTN issue size is ¥500 million to ¥1 billion."

Big Bang in Japan and the subsequent creation of a low interest rate environment, has encouraged cash-rich investors to consider all kinds of alternative products in their search for yield. Since traditional sources like bank deposits can't offer a good return, retail investors are looking elsewhere. Their niche in the Euro-MTN market has already begun to develop, with a focus on structured notes. The Japanese household sector has an estimated ¥1.2 trillion ($10.83 billion) in financial assets. Optimistic MTN dealers like to think that an increasing proportion of this wealth will find its way into Euro-MTNs. But it is debatable just how much of this will materialize. MTNWare shows that total yen issuance of Euro-MTNs in 1998 was ¥9.04 trillion ($69.28 billion). The market will rise by almost 20% of it sees an extra 1% if the household assets, as some dealers suggest. An increase is generally anticipated, but given the amount of alternative investment instruments opening up to individuals, it is ambitious to think that Euro-MTNs would increase to this extent in the coming year. The buying power of rich, Japanese individuals, the so-called mom and pop investors, is attracting attention from more than just local Japanese brokerages. Reiko Hayashi, Euro-MTN desk at Paribas in Tokyo, says: "People outside the market aren't aware of just how rich Japanese retail investors are. It's a suffering economy but some people still have a huge amount to invest." And these investors are becoming more valuable buyers of Euro-MTNs as the profile of the Japanese investor base changes. The spotlight has turned on them and on regional investors as additional sources of cash, since the market is no longer dominated by institutional buyers. David Bourne, associate director of Euro-MTNs at Deutsche Bank in Tokyo, says: "Big institutional buyers are less active in MTNs than they have been for a long time. It's tough to generalize but they are still a bit shell-shocked from the Asian crisis. They're looking for liquidity so they're more active in bond markets." However, it is difficult to pinpoint exactly what trades are being sold to retail, especially since all dealers are fiercely protective of their distribution channels and sales leads in Japan. What is clear is that the issue size is always small and term lengths are always short, usually between six months and three years. The trades aren't publicly announced and coupons of about 4% are common. Although retail investors in Japan got their fingers burned with structures about eighteen months ago, they are once again focusing on structured products. Issuers wanting to tap into this cash pool will need to consider products more risky than plain vanilla. Equity-, FX- and index-linked products are in demand and call options are also popular. Bourne, at Deutsche Bank, explains why a growing feature of the market since March this year is demand for equity- and Nikkei-linked notes. He says: "There's a lot of retail participation in this as those investors will pay an above market coupon. The retail sector needs to get some kind of pick-up on savings since bank deposits earn little or nothing. Such investors tend to stick with what they know, so equity- and foreign exchange-linked products are popular." However, Kirsty Traill, director at Daiwa Europe, points to the fact that the Nikkei has been increasing over the last six months and that this automatically leads to more demand for equity-linked products. Demand seems to seesaw between equity- and FX-linked notes. She says: "The retail niche has always been there. I would say it's the sector that's changed the least. Because the Nikkei was volatile or dropping, FX-linked trades into retail Japan were popular for the last three years. It generally comes and goes with FX volatilities." As with other retail investors, equity linkage is appealing to Japanese buyers because it is relatively familiar to them. They can benefit from the flexibility of Euro-MTNs by receiving tailor-made notes. Dealers can create a made-to-measure product with ticket sizes, term dates, and linkage to specific stocks. Hayashi, at Paribas, says: "Equity-linked notes are easy for them to understand and give quite high yield. It's usually too expensive for retail investors to buy stocks in for example Sony, but this type of bond allows them access to equity in small tickets which they can afford." Retail investors are willing to pay up to get the structure they want since the alternative returns available to all of them are so low, leading to excess liquidity in the sector. This is good news for borrowers ready to issue the right paper. Borrowers like Orix and Taisei Corp have been able to mop up some of this excess liquidity and raise funds at extremely tight spreads. In January this year, Orix's four-year retail-targeted paper traded at 75 basis points over JPY Libor. By July the spread had come in by 50 basis points. Accessing the Japanese retail investor base requires strong distribution capabilities developed from solid relationships with individual buyers. Japanese dealers like Nomura Securities and the newly-merged Daiwa and Sumitomo Bank have their own retail outlets. This gives them greater control over where paper can be distributed and the ability to cope with large volumes. However, with the collapse of so many of Japan's own banks over the last two years, the opportunity has arisen for foreign dealers to step in. Mergers such as Merrill Lynch's with Yamaichi Securities and Nikko Securities' with Salomon Smith Barney, have enabled international houses to gain local distribution. Morgan Stanley Dean Witter (MSDW) and Sanwa Bank (Sanwa) are the latest banks to collaborate on development and distribution strategy of investment trust products. They signed an agreement to cooperate in providing retail asset management services through Sanwa's distribution channels in August, this year. And Deutsche Bank has formed a joint venture with Kokusai Securities in asset management. They have cooperated on certain retail targeted equity-linked bonds. Non-Japanese houses, without domestic alliances, have to sell to local brokers first, which in turn sell to the retail buyers. They may not get the lion's share of the business but they can devote attention to individual needs. Bourne, at Deutsche Bank, explains: "We don't have our own distribution network in Japan. Therefore we have developed relationships with small retail brokerages. We can source the bonds internationally and they can place them locally." Hayashi, at Paribas, believes the reputations of the brokers Paribas uses are crucial to its success at selling indirectly into retail Japan. She says: "You need good name recognition and stable growth to sell into retail Japan. Image is very important. You also need a good underwriter with good Japanese contacts." But selling into retail Japan is not a cut-and-dried process for issuers. Firstly, prospective issuers must be approved by the Ministry of Finance and comply with strict criteria. The ministry is a safeguard for retail investors. It decides on the creditworthiness of borrowers. The lengthy and expensive legal process makes marketing difficult for dealers. Traill, at Daiwa Europe, says: "Issuers selling to retail Japan are having a great time. It's definitely a niche. But it takes a lot of time, effort and expense to organise. So some people think it's not worth it. There's a lot of documentation issues to resolve but we've seen a steady stream of issuers look into it." The restrictions on issuing into retail Japan mean that the same borrowers appear in the market again and again. For example, Eksportfinans, Svensk Exportkredit, Venantius and the World Bank. But others are also seeing demand. Statens Bostadsfinansierings (Sbab), the Swedish public corporate which finances government housing loans, is rated A2 by Moody's and A+ by Standard & Poor's. Sbab's two yen deals done between January 1 and September 1 this year, both had currency-linked redemptions, according to MTNWare. The ¥3 billion deals had four and five month terms. The growth of the retail sector looks set to take-off over the next year, as terms on other investments fall due. For example, the yucho or postal savings redemptions are approaching. A large proportion of these funds will be invested elsewhere, including, either directly or indirectly, in Euro-MTNs. Unless there is a significant glich in the market, Euro-MTNs should fare well in competition with other financial instruments for retail investor attention. Their inherent flexibility to accommodate size, structure and term compares favourably to alternatives such as Samurai. Traill, at Daiwa Europe, says: "Investors will have more choice as to what to do with their investments as they come up for renewal. But we're not at that stage yet. MTNs will play a key part in that because they can be tailor-made to individual buyers' needs. Securities houses can give retail investors the exact size and structure they want without having to do a block Eurobond or Samurai." On average, a sixty year-old Japanese person has savings of about $150,000 (¥16.5 million). This cash should be readily available for buying small-sized tickets of Euro-MTNs. The right market just needs to be nurtured.

John Deere, the world's largest agricultural equipment manufacturer, is set to sign a $1 billion Euro-MTN facility. It will be the third US corporate of the year to join the market following Textron and Combined Global Funding. Deutsche Bank has scooped the arrangership, its eighteenth this year. It is the leading arranger in 2000 so far. John Deere is a veteran of the debt capital markets. In its funding collection are two Euro-CP programmes, signed in 1989 and 1999, two domestic MTN programmes and two US CP shelves. It also issued a $150 million Eurobond in May 1998. Deutsche Bank was the bookrunner off the deal. The issuer, headquartered in Moline, Illinois, markets its products and equipment in 150 countries, and is probably best known for its tractors. The dealer group off the programme comprises the arranger, ABN Amro, BNP Paribas, Bank of America, Credit Agricole Indosuez, Credit Suisse First Boston, Deutsche Bank, JP Morgan, Merrill Lynch, Salomon Smith Barney and SG.

Brazil HypoVereinsbank (New York) has completed a $300m two year L/C facility for Banco Itau SA. Proceeds are to support a CP programme.

Ever the flash city trader, Gavin Eddy of Warburgs now has a new claim to fame. His swanky Shoreditch flat is to be the setting for the latest advert for the 4-wheel drive offroader - the Toyota Rav 4. But it seems that though the advertising agency was very taken with Gavin's pad, it decided it didn't really need his acting services. They're using a more muscular male model to drape over the bonnet. Better luck next time eh Gav? And the usual crowd turned up to Rupert Lewis' birthday bash in Fulham last weekend, including Gayle Turner, Conor Gallagher and Rob Stoole, also from JP Morgan, (all they need is Timmy the dog and they'd be the Famous Five). CCS' Sean Murphy also joined the party, as did Johnny Fine, the swaps trader from JP Morgan, now a regular in the Leak Table. It may even be worthwhile him setting his sights on Rupert's crown to be star of Leak 2000. With Diageo's Andrew Moorfield and Greenwich's Matt Pass now out of the glitzy world of MTNs, there's all to play for...

We all know that the MTN market attracts some pretty unsavoury types (and we're not just talking about the Diageo treasury team) but it would seem that a spiv of the first order has penetrated the sacred world of power reverse duals. Private Eye, the London-based magazine that roots out scandal and corruption in high places, has unearthed a scam artist with a predilection for young boys, sadomasochism and . . . medium term notes. If we are to believe the latest edition of the rag, this gentleman with a particularly sordid past has been trying to sell MTNs to poor unsuspecting grannies and pocketing the cash. Unfortunately the article also questions the MTN market's reputation as a place of high finance and high morals. It calls an MTN a "fictitious financing mechanism", a "scam" and describes the market as "secret" and even "non-existent". Dealers are outraged by the suggestion that they earn huge amounts of money for doing very little. But perhaps Deutsche's Tiina Lee can smooth their ruffled feathers. She's been appointed chair of IPMA's MTN subcommittee. An honour indeed. She follows such luminaries in the post as DLJ's Matt Carter and ex-Daiwa MTNer Tony Wilson, who is now at the treasury of Arab Bank.

Chase has finally appointed a head of MTNs after a year of head-hunting every dealer in the market. At last Hugo Varney never need look at an MTN ever again. But, alas, our lives are not to be enlivened by Bruce Cairnduff. Chase has decided that they should go for the best money can buy and that man is . . . Garrath Fulford. Yes, the star of the MTN conference circuit, whose speeches are always the highlight of the show, has managed to escape from UBS in Tokyo. He moved there when Gavin Eddy started at the bank in London a year ago. This is Garrath's first move, after spending eight years at Warburg, six of those in MTNs. Joining him on the desk will be Rob Nankivell, an internal transfer from the Sydney branch. Back at Warburg, Stuart Goodwin is being sent off to Tokyo to replace Garrath. But poor Stu is so attached to his new baby - a Jaguar - that he's having it shipped all the way over. Maybe someone should tell him that they do have cars in Tokyo? A new MTNer will be joining Gavin in London soon, someone new to the market. Lets hope he speaks better English than the new Barclays head . . .

The debut note off PSA Corporation's (PSA) $2 billion debt issuance facility has been launched. The five-year $500 million deal pays 7.125nd was lead-managed by Morgan Stanley Dean Witter and JP Morgan, co-arrangers off the shelf. It was signed on July 12. PSA is the second Singaporean borrower to join the market this year. Peter So, associate, capital markets at JP Morgan, believes issuance is tough for the sector. He says: "These issuers would like to place all their notes and have the price they want, but there must be a trade-off between the two." PSA is one of the world's biggest container terminal operators. Its dealers are Credit Suisse First Boston, Deutsche Bank, Development Bank of Singapore, Merrill Lynch, JP Morgan, Morgan Stanley Dean Witter, Salomon Smith Barney and UBS Warburg.

Rabo Australia has raised the ceiling off its Euro-CP programme from A$2 billion ($1.18 billion) to A$3 billion. Citibank and National Australia Bank have been added to the dealer panel. Captiva III Finance has been dropped from the group.