THE WORLD’S THREE best borrowers, according to a survey of more than 1,700 fixed-income investors worldwide, are among the biggest issuers in the market.
Deutsche Finanzagentur, the debt office of the German government, needs to raise almost €350 billion this year. The European Investment Bank expects to reach €80 billion in borrowing in 2010. KfW, the German development bank, will issue in excess of €70 billion for the third consecutive year.
Does the size of these issuers’ funding programmes equate with success? Not necessarily, as the performance of some other large sovereigns, supranationals and agencies in our survey (results of which can be found here) testifies.
But for the issuers that get it right, size does bring its advantages. First, the size of the programme means that the issuer’s senior management needs to have big, experienced funding teams in place that can keep an eye on multiple markets, engage with investors and manage relationships with banks that help them access the markets.
Second, funding programmes allow issuers to provide the liquidity that investors crave in benchmark issues, while at the same time offering tailor-made deals to smaller groups of fund managers in currencies or structures that secure competitive funding rates.
But perhaps the most important factor is this: for issuers with such enormous funding needs, the markets can never be shut, no matter how distorted, volatile, costly or difficult they become. For that reason above all else, the best borrowers have a professionalism that is hard to match.
For their part, these funding officials know the key qualities that they must exhibit: the ability to generate trust among investors; transparent and consistent funding programmes; assurance that they execute as well as they can on deals, even when the markets are against them; and the flexibility to spot opportunities when they arise.
Germany stays the course
Of course, a highest-quality credit rating does not go amiss – something that is not lost on Carl Heinz Daube, managing director of the Deutsche Finanzagentur. "We’ve had oversubscription on nearly all of our auctions this year," he says. "We’ve diversified our investor base, selling more bonds in countries such as Canada, Switzerland and the Netherlands, as well as to key accounts in Asia. If investors want euros, then they are buying a large share of German government bonds. We have shown we have the best credit, as well as the best liquidity."
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"Investors appreciate the fact that Germany has issued bonds the same way for more than 10 years now. We believe it was a good decision to stick to the auction system"
Carl Heinz Daube, Deutsche Finanzagentur |
Daube is perhaps most pleased, however, with the consistent performance of Bunds throughout the turmoil – first in the banking system, now on concerns about European sovereigns – over the past 18 months.
"The yields on our 10-year bonds have remained very steady," says Daube. "When there’s been generally positive economic news, yields have risen up to 3.3%; when economic news is bad, we get a flight to quality, and our yields have fallen to around or, in recent weeks, below 3%. This consistency of yield is a big plus for us, when we have to borrow in the region of €343 billion plus €12 billion to €16 billion of inflation-linked debt this year."
It has only been in recent weeks, as concerns about potential defaults in Greece and the possible break-up of the euro have risen, that German 10-year yields have breached the 3% to 3.3% range, falling to around 2.82% in the middle of May.
Consistency is one of the key buzzwords that Daube uses, and it’s the main reason that he has resisted pressure to use the syndication process to sell bonds.
"We think that investors appreciate the fact that Germany has issued bonds the same way for more than 10 years now," he says. "We believe it was a good decision to stick to the auction system."
The Finanzagentur has also been keen to keep stability in the maturity profile of its debt, although last year issuance of short-term Bubls rose to about 50% in total, in large part because of the introduction of the Financial Stability Fund. The aim usually is to issue around one-third in short-term debt, and the rest in medium to long term.
But Daube hasn’t been tempted to go further along the curve than 30 years, as some sovereign issuers such as the Agence France Trésor have. "Every time we look at a new maturity, we consider whether the exercise would either reduce the risk of our portfolio or the overall cost. So far, for 40- or 50-year issuance, we don’t see those benefits, even if there may be demand for such issues."
Daube hasn’t been able to be as consistent as he would have liked to be in an ideal world. Germany has had to adjust its issuance calendar, notably in March 2009 when the government brought in a supplementary budget to help shore up the banking system. Now, although the net borrowing requirement for the year has been reduced from €86 billion to €80 billion, Daube has no plans to change the calendar in 2010.
Judgement counts for EIB
Consistency, as well as good judgement, have been the key to the European Investment Bank’s funding programme over the past year, according to its deputy director general of finance, Barbara Bargagli-Petrucci. "We’ve made sure we issue at the right time, and investors see that," she says. "Our great success has been to judge the market correctly. We did not run into execution risk over the past year."
