KfW proves transparently popular

Gerhard Lewark

Interrupted by loud banging from next door as builders make the finishing touches, Lewark talks about the progress the German state-owned development bank has made since the beginning of last year. Over coffee and biscuits he chats animatedly about KfW's game plan for the rest of 2002. He laughs a lot, joking about the problems analysts used to have spelling anstaltslast. It's hard to imagine any corporate treasurer being so relaxed these days, at least with a e5 billion global issue in the offing.

"A good credit like KfW is nice to have," admits Lewark. "In times when the corporate bond market was very attractive, it was a little bit harder to explain the attraction of an AAA rated issuer. Today you can clearly see the flight to quality and KfW is benefiting from this."

It helps that this year KfW's long-running debate with the European Commission over its state guarantee was resolved. In March, it was agreed that KfW could continue to enjoy the anstaltslast (institutional liability) and an explicit government guarantee. This enables it to raise funds at a cost only slightly higher than that of the German government to fund activities including the promotion of small and medium-size enterprises and domestic and foreign housing, environmental and infrastructure projects.

The confirmation of the guarantee, says Lewark, was an essential milestone in KfW's evolution from a small-time borrower mainly focused on the German market to an agency-type issuer with international appeal and annual funding needs of around $50 billion.

Equally important, though, is KfW's almost flawless reputation. "KfW has built a good foundation and created a lot of goodwill," says Sean Park, head of debt syndicate at Dresdner Kleinwort Wasserstein, one of the lead banks on the latest benchmark deal. "There is not a lot of credit differential between issuers in this segment of the market, so much of their success is down to how they present themselves to and communicate with investors."

According to debt capital markets bankers, investors like the fact that KfW doesn't spring surprises. Since it launched its benchmark programme with the aim of creating a liquid market in its paper, first in euros in March 2001 then in dollars at the beginning of this year, Lewark and his colleagues have done exactly what they said they would do. KfW pledged to borrow e15 billion in 2001 and the same again in 2002, as well as $9 billion in the dollar market. So when the last benchmark issue of 2002 was launched at the end of October, the market was prepared and its spreads barely moved.

Unlike other agency borrowers, such as Fannie Mae and Freddie Mac, KfW has not tied its hands by specifying in advance dates or maturity patterns for its bonds. As a result, it has been free to take advantage of sweet spots in the market this year. "Because KfW does not have a formal, scheduled calendar, it has been able to time the market very well, matching issuance with investor demand," says Anneka de Boer, head of sovereign, supranational and agency borrowers at Morgan Stanley.

In early October, for example, it launched a $3 billion deal that picked up on a huge wave of demand from institutions and is already being dubbed the dollar deal of the year. The deal launched into extremely tricky markets. Just the week before, German bank DePfa had been forced to downsize a transaction from $3 billion to $2 billion. Market participants widely expected KfW to issue five-year bonds. It soon became clear, however, that with equity-market volatility and the expectation of imminent interest rate cuts, there was more interest in shorter-maturity paper. "If you expect the curve to steepen then clearly the short end is the place to be," says de Boer. This factor also influenced the success of the third benchmark dollar deal at the end of the month.

Besides ensuring that its pattern of issuance is extremely transparent, KfW has established a reputation for behaving responsibly on pricing. That has mattered increasingly as market conditions have become more difficult and investors grow more wary of potential problems. Unlike some of its peers - reportedly European Investment Bank among them - KfW does not determine in advance a lower price limit below which it will not issue, say bankers.

"KfW have proven themselves to investors by consistently pricing their benchmarks at a market-clearing level. No-one can say they have been over-aggressive," says Philip Brown, managing director in debt capital markets at Citigroup. So, bankers say, all its paper gets sold - not reportedly the case for EIB's most recent deals. KfW may have gone a little too far the other way and underestimated demand. Spreads on its October dollar deal immediately tightened by 6 basis points, trading through its existing paper, and came in 2bp more in the next two weeks.

View graph.

Lewark declares himself highly satisfied with how the dollar programme is going so far. "In the primary market in the US we have a very good number of investors still holding the paper and we have a liquid secondary market which is clearly a success for us," he says. As well as being included in the portfolios of big bond investors such as Black Rock, KfW is also beginning to penetrate the middle market and regional investors through roadshows in the south and midwest.

The challenge for KfW over the next year is to deepen and broaden its investor base, in the US but also in Europe, so that it has access to sufficient accounts to absorb future funding needs. "We are very accepted with very big investors who are good for tickets of e100 million or e200 million but we have to broaden our investor base," says Lewark. He is especially targeting smaller financial institutions in Italy, Spain and France, where KfW is under-represented, as well as second-tier investors in the US.