Where Fannie Mae, our borrower of the year, has led, others, such as Ford, our best corporate borrower, and even smaller issuers such as Brazil, our best sovereign, and IADB, best supranational, have followed. Antony Currie, Anja Helk, Peter Lee, Charles Piggott and Christina White report on the best corporate, sovereign, financial and securitization borrowers from Europe, central and eastern Europe, Asia and Latin America.
Best borrower: Fannie Mae
Best sovereign borrower: Brazil
Best corporate borrower: Ford
Best supranational borrower: IADB
Best European sovereign borrower: Greece
Best central and eastern European sovereign: Poland
Best central Asian sovereign: Kazakhstan
Best European corporate: Vodafone AirTouch
Best Asian sovereign: Korea Development Bank
Best Asian corporate: Asia Pulp & Paper
Best Latin American corporate: CTC
Best Euromarket high-yield issuer: Level 3 Communications
Best US high-yield market issuer: Williams Communications
Best bank issuer: Barclays
Best Asian bank: Hanvit Bank
Best US financial issuer: House-hold Finance
Best covered bond issuer: Rheinische Hypothekenbank
Best central and eastern European corporate: TPSA
Best structured securitization issuer: Italy
Best emerging-markets securitization issuer: Garanti Leasing IFC Finance Limited
Best Latin American securitization issuer: Argentina
Best borrower: Fannie Mae
In an uncertain and volatile market, Fannie Mae ought to be an obvious choice for best borrower. Investors do not seem to be on the desperate hunt for yield that dominated their decisions two years ago. Now they hunt the right credit, and increasingly that means looking for a credit with liquidity. With annual funding needs in the hundreds of billions of dollars, Fannie Mae should be providing that.
And it is. The US mortgage agency now has a full yield curve stretching out from two years to 30 years, has started to see other borrowers price deals off its deals, and has even been touted as a replacement benchmark for US treasury bonds as fewer are issued and more redeemed. Fannie Mae is playing down this latter role people have ascribed to it. Partly out of diplomacy as legislators on Capitol Hill scrutinize the role the agencies play in the markets, and the role government sponsorship has on the agencies, and partly out of an institutional conservatism.
But investors want more than just liquidity from borrowers. They want the liquidity to be accompanied by increased transparency and predictability. Or to put it another way, says the head of debt capital markets at one of the major underwriters: "Keep it simple, stupid!"
Any issuers sticking to the method of the mid- to late-1990s of lots of public deals with bells and whistles, and a plethora of private placements through the MTN market, might have found the past 18 months rather tough.
Nor has this been the time for issuers to get tough with investors, and try to squeeze the last basis point out of each deal. For issuers of size that is a big temptation. But Fannie Mae has avoided that. "In bear markets issuers have to be more responsive and responsible," says Don Devine, co-head of US debt capital markets at CSFB. "Fannie Mae was the first to recognize this and to change its operating philosophy accordingly. It exercises its considerable market power with grace."
Fannie Mae is not alone in this. Ford, the winner of our award for best corporate issuer, follows a similar path, as does our supranational winner, the Inter-American Development Bank. And Freddie Mac has cottoned on too, helped considerably, say bankers, by the appointment last year of Jerome Lienhart as treasurer.
But Fannie has been, and remains, the leader. After months of work, it launched its benchmark bond programme in January 1998, a series of $3 billion or more deals that became known as superliquid jumbos. By 1999 these had become standard practice for larger issuers, and Fannie decided to take things a step further.
On the one hand, this meant extending the bond programme to its short-term requirements. "We decided that we should start applying our benchmark strategy to the discount note market," says Fannie Mae treasurer Linda Knight. "So in September last year we launched an internet-based Dutch auction for our three- to six-month discount notes which we called our benchmark bills." It was an immediate success, raising $6 billion to $7 billion in each weekly auction, and outstandings have now reached $160 billion.
Fannie has made it an easy-to-use internet-based system, so that investors can see the auction on their screens in real time, and input bids. "And we report back to them within five minutes of the auction closing with the results," says Knight. "It helps reduce uncertainty considerably."
The benchmark bond programme itself was also refined. "Investors were telling us in 1999 that the next thing for us to do was to improve the predictability of our borrowing strategy," says Knight. "So we introduced a calendar at the end of last year for our 2000 programme, with an issue timetable along with information on pricing, maturities and settlement. We're the only agency doing that." So, for example, following the agency's 30-year issue in May last year, it announced its intention to launch another in November, and then put its 2000 30-year deals on the calendar.
February's 30-year exchange offer stands as the best example of all that Fannie has achieved: it was done over the internet, soup-to-nuts. The documentation, all other relevant information, pricing, book-building and the back office, all was publicly and transparently done over the internet.
The effects of the move to benchmark bonds two-and-a-half years ago have stretched beyond the plain-vanilla paper Fannie issues. "When we sat down and thought about the benchmark programme three years ago," says Knight, "we entertained some stray thoughts that if it was successful, then the next developments would come in the form of the term repo market and futures contracts."
Both have happened this year. Fannie publishing a calendar this year has allowed for term repo markets to develop - the more information investors have on the agency's debt programme, the easier it is to conclude repo contracts, since you know when the next issue of a similar size and maturity is coming.
As for futures, any cash market needs to be of significant enough size and liquidity to warrant a futures market. For a spectacular failure you just have to look at the attempts to create a futures market for German Pfandbriefe in the late 1990s: domestic issues were small, and the so-called jumbo deals were bigger but still small (Dm1 billion - $463 million - at first), and issued by a multitude of different credits.
Fannie Mae offers consistent, large deals in one credit, and new issues that the markets can now predict. That makes the formation of a futures market all the easier. So earlier this year the Chicago Mercantile Exchange and the Chicago Board of Trade both launched agency futures contracts. "They were contracts developed by the exchanges, and they deserve all the credit for them," says Knight. "But they would not have been possible without the work we put into our benchmark programme."
The real proof of Fannie's success comes in the secondary market. The reason investors are demanding liquidity, transparency and predictability is so that they can more readily trade in and out of debt securities. Two examples serve to illustrate how Fannie Mae is meeting these needs. First, transaction sizes in the after market are becoming larger and more frequent. "Investors are telling us that they can without question get very tight bid-offer spreads for trades of $200 million to $300 million, and that it keeps getting higher," says Knight. "We see trades up to $500 million out there more, too, but not as frequent and not by all investors."
Second, half-a-dozen of the major underwriters and traders have in recent months set up US agency trading desks in London. In part this is a response to Fannie Mae listing its new issues on the Luxembourg Stock Exchange, allowing full participation from investors previously restricted by limits on buying over-the-counter products. But it's also a sign that investors want the ability to trade the agency bonds around the clock and around the world. There are few better endorsements for a borrower.
Antony Currie
