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The US treasury market reaches breaking point

The US treasury market reaches breaking point

The structural issue that could cause the world's market of last resort to grind to a halt

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September 2000

Difficult decisions in debt


The increasing pace of developments in both the syndicated loan and the debt capital markets




Roundtable participants:
Carlo Buora, General Manager Finance&Administration, Pirelli María Ángeles García Jiménes, Director of Finance&Administration, Amena Stephen Hodge, Director of Finance, Shell International Georg Lambertz, Finance Director, RWE Dr Herbert Lohneiß, Managing Director, Siemens Financial Services
The inherent flexibility of the syndicated loan is facilitating the parallel growth of capital markets issuance, as has been seen in the US. What unique opportunities will Europe offer corporates for international debt raising relative to other markets?
Buora: The increasing number of capital market issues from corporates and banks has been a clear tendency since the end of 1999. Our focus was already primarily on Europe, due to the concentration of our investments there and to better brand recognition in both the Italian and wider European markets.
García: In our opinion Europe will offer the same opportunities as other geographical areas such as the US or Japan. Right now we seek funding mainly in Europe.
Hodge: I don't feel any large capital market is "unique" anymore. That said, the US remains the leader in depth and liquidity and Europe will only match it if it, and the borrowers based within it, become as economically successful as the US.
Lohneiß: Siemens has a global focus and issues bonds (we don't use the syndicated loan markets) in Europe and the US so we have never placed any particular emphasis on Europe. That will continue as we do not believe that Europe offers any unique opportunities compared to those other markets. It does differ from some other markets at present in that it will probably continue to be dominated by banks, which particularly applies to the Mittelstand. However, European corporate bonds will become more important and the euro will take over from the Eurodollar market.
Lambertz: Yes, Europe offers increasingly better funding opportunities. With RWE's strategic focus on Europe we will be looking for funding primarily in euros. Nevertheless we are open to opportunities in any other currency as well. There is no unique opportunity attached to debt raising in Europe except from having a higher name recognition as an issuer.
The amount that can be raised through individual transactions in the syndicated bank finance market is expanding rapidly - if correctly structured and positioned within the context of a capital markets takeout. Is the availability of this scale of financing a welcome development from a corporate viewpoint?
García: Yes, since it affords access to greater volumes of financing in a simpler and more efficient manner.
Lambertz: Yes, it increases our flexibility in raising financing for bigger transactions.
Hodge: Well, we welcomed the entry of capital markets into the project financing world too in 1997 and 1998, and hope they return soon. The bank market is only important to us for project finance and very short-term acquisition-type finance. More important is to retain access to capital markets.
Lohneiß: In our opinion this type of transaction is an intermediate stage in the decline in importance of the syndicated loan market in Europe in the future. Bonds are generally a cheaper form of finance - one reason being that usually they are not subject to BIS capital requirements. (That said, a large percentage of all loans are now executed as 364-day transactions which also allows banks not to set regulatory capital against them).
Moreira: These kinds of hybrid loan-then-bond transaction are not part of our strategy. Our intention for the foreseeable future is to issue bonds to repay short-term debt, thereby lengthening our debt maturity profile. In this context, a bridge loan serves no purpose. Even should circumstances change, our NYSE listing and SEC registration should ensure that our disclosure will always be sufficiently current to quickly access the capital markets, without the need for a bridging facility.
Pinto: It is clearly reassuring to know that the loan markets can handle larger transactions since we are a highly acquisitive company and it is my job to ensure that funds are available!
A growing number of borrowers are adopting a pan-European approach to their bank borrowings. Is this a factor in your financing strategy or will you continue to rely on local lenders? How does this fit into your global financing activities?
Hodge: We are definitely adopting a pan-European approach. Pan-European treasury arrangements - whether financing or cash management or foreign exchange - have to become the norm for big companies
Buora: Since there is the potential for spread arbitrage between local lenders (bilateral agreements) in one country and similar transactions on the Euromarkets, corporates tend to move towards the most cost effective and so will continue to use local lenders. However I doubt that these windows will continue to exist in the same size and with the same differentials as today.
García: It is undoubtedly a factor we are considering in our approach to the markets due to the volume of financial deals that requires us to look towards international and pan-European markets. It is adequate as a way of obtaining resources, but it requires diversification in the range of banks we work with.
Moreira: Petrobras is in a somewhat different position to European corporations as local bank lenders represent a very small percentage of our total borrowing. First, few local banks can fund themselves on equal or better terms than Petrobras. Consequently most local banks cannot economically lend to Petrobras. Secondly, we borrow in dollars rather than in our local currency because of lower real rates and because, as an oil company, our revenues and assets are effectively dollarized.
Our global bank financing strategy could be described as "diversification". We have a healthy mix of European, Japanese and American banks that are active lenders to Petrobras. Diversification protects us against any loss of liquidity that might arise from adverse developments to a banking system in one part of the world.
Lambertz: Yes, RWE's focus may be primarily on Europe but we are also interested in speaking to potential lenders on a global basis. If a financing event comes up, we would be open to discussions in any direction.
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