MTN debate: Coping with the crunch in private

RS, SGCIB As dealers we wanted issuers to react as quickly as possible, because there was such a widening between secondary public market pricing and the targets for private placements. We’ve seen issuers who did adapt fairly quickly to the new situation: they realized that this is a new market environment but that they still need funding and they still need the structured MTN market to provide it. And we have seen that translating into their funding grids fairly quickly. At the other end of the spectrum we’ve seen issuers being a lot more opportunistic and waiting for a stabilization and a return to some sort of normality that never really happened. As a result we, as dealers, had to be a lot more choosy in terms of issuers, including issuers in the same rating categories, as some were still showing us pre-crisis levels while others had already shifted to much wider levels.

NJ, EuroWeek Jacques, at CBA you have changed your levels and you were fairly quick to do so.

JL, CBA Last year, yes. There was a slowdown in flow, but not particularly significant, probably not as much as other houses may have experienced, but nevertheless we’ve tried to stay ahead of the game and, to do that, we’ve felt it necessary to keep faith with our investors. Now they’re predominantly Asian – that’s probably why we’re still getting a flow – perhaps a little less sensitive to pricing, but nevertheless we were starting to see a fall-off in supply. There was an element of price discovery, particularly in November and December, because we didn’t really know what trades we were missing or, if we were missing them, why we were missing them. So there was a certain element of playing around with the numbers a bit, and then in December we changed our levels, and the reaction was very good, very positive, and that manifested itself in January with our busiest month ever in terms of number of trades.

NJ, EuroWeek And Andrea at UniCredit, was it a similar situation for you?

AL, UniCredit Yes. Being one of the largest banks in Europe, we have a large balance sheet to fund, so when we faced the new situation in August/September, we decided to move quickly, and we were one of the first Italian banks to adjust targets and to publish a grid which was substantially higher than the one for the previous six months. And the result was very good in terms of the volumes we were able to raise. We are continuing that strategy in 2008 and we have started putting a lot of focus on the MTN market because we cannot rely only on the expensive and extremely volatile public market. The effect of this change in strategy was that we attracted a lot of attention from new dealers and new investors and have established ourselves as a key MTN issuer whereas before we were more seen as an opportunistic player in the private placement and structured private placement business. We have made investments upgrading our front-office systems and we have recently reinforced our team.

NJ, EuroWeek How much are you raising now compared with before?

AL, UniCredit In the first two months of 2008 we have almost equalled our 2007 total in what overall is a shrinking market. So we have significantly increased our market share and so far we have done, I would say, more than a transaction per day, summing up to a total of €2 billion. The MTN market has really become a key instrument in ensuring effective diversification and a balanced funding mix for UniCredit

NJ, EuroWeek And Nathalie, how have things changed for you in terms of pricing, because you’re in a bit of a different position?

NM, CFF For us, there were three distinct phases of market development that we observed as a triple-A borrower. In the first semester of 2007, CFF issued a total volume of €12.5 billion, with €1.6 billion under private placement. If we compare this to the second semester after the beginning of the financial crisis, when CFF issued a volume of €11 billion with €2.6 billion under private placement, this demonstrates the strong quality and the recognition of our signature. The beginning of 2008 also looks to have similar trends for high demand on quality, with €2.4 billion during the first quarter.

As the leader in the French covered bond market, we can quickly adapt our funding strategy with more flexibility on our grid of funding and the capacity for investor restructuring. Liquidity has been there for us when we’ve accessed the market.

The €23.5 billion issued in 2007 and the total volume at the beginning of 2008 demonstrate the permanent flow of CFF issuance, especially in bad market conditions. Moreover, the new CFF German format offered to German investors met with very strong interest from insurance companies, with 22 trades and €548 million since last September.

NJ, EuroWeek And Wafi, Jacques talked about a process of price discovery, how have you gone about that process?

WS, Banesto For us there were two periods. The first period was the beginning of August until December. And the second period is January until now. We had executed a large portion of our funding in the first half of 2007 so, when the crisis started in late July and the beginning of August, and many issuers still needed large amounts of funding and thus had no choice but to adjust their levels to capture investors’ attention, we didn’t need to. We did not want to transmit the wrong message to the market that we were in need of cash. Investors were very credit-cautious and were examining issuers’ behaviour and we were well funded. We transmitted a message of calm to our investors and dealers. Nevertheless, towards the end of the year the spread difference between us and our peer group had become quite wide and we decided to enhance our levels slightly in order to be competitive, and to provide investors who demanded Banesto specifically with fair-value paper. This year, we’ve started extremely actively. Our January was nearly 60% up in comparison with last January. And as a double-A we are finding the market is pretty active for private placements and for structured products.