Borrowers’ special: Debt handlers and risk jugglers
THE WORLD’S BEST BORROWER
Kingdom of Sweden
If amount borrowed per member of staff were the only criterion, Sweden’s National Debt Office would walk away with the award for best borrower every year. Last year (excluding its short-term borrowing programmes) Sweden raised Skr120 billion ($17.6 billion) in the international markets. The funding was handled by just one person: Christina Clausen. “When Christina goes on holiday,” says one of Sweden’s lead managers, “funding shuts down.”
Clausen may be overworked, but Euromarket bankers have nothing but praisefor the way she handles Sweden’s international borrowing. She is widely viewed as one of the sharpest and most professional – but also one of the hardest-bargaining – users of the markets. “Her knowledge of the various markets is unsurpassed,” says Justin May, a manager in debt capitalmarkets at Yamaichi who covers Sweden. Another banker comments: “She’svery tough on price – a tough cookie altogether. But I mean that in a positive manner. You can’t fault her professionalism.”
At the start of last year, Clausen faced a formidable task. Sweden’s credit-ratingwas under pressure: in January Moody’s downgraded the country from Aa2 toAa3, and Standard & Poor’s (which gave it a AA+ rating) switched itsoutlook to negative. The ministry of finance gave the debt office a target of a minimum of Skr30 billion in net new debt to raise overseas. Including maturing debt to be refinanced, Clausen needed to find Skr100 billion throughout the year.
Opportunistic approach
Sweden’s saviour was the Japanese market. Last year, 43% of the country’sinternational issuance was in yen. If you include Japan-targeted deals inother currencies, then as much as 70% of Sweden’s funds last year came fromJapan, according to Christine Holm, a director of the debt office and Clausen’sboss.
The most significant Japan-targeted transaction was a $2 billion three-yeardeal in November, led by Yamaichi. The deal was attacked by many in themarket because of its tight pricing – the all-in cost to Sweden was as lowas 40 basis points (bp) below US treasuries – and the fact that Yamaichidispensed with a syndicate. But the deal hasn’t performed as badly in thesecondary market as many predicted. Yamaichi claims it sold all the paper.That is difficult to prove, but the fact that the issue has not been publiclyre-offered in Japan suggests it might be true.
In many ways, this deal typifies Sweden’s borrowing style: opportunistic,aggressive, willing to try new ideas and loyal to the bank that broughtthe idea in the first place. “Our underlying philosophy in all governmentactivities is to borrow at the lowest possible cost,” says Thomas Franzén,director general of the debt office, who joined from the central bank lastSeptember.
The range of Sweden’s deals since the beginning of 1996 gives a good indicationof this opportunistic approach. In minor currencies it has done, among otherdeals, 30-year peseta bonds, a step-up Ecu bond, a capped escudo floating-ratenote, a step-up dollar bond with a call option, reverse dual-currency yenbonds, and successful issues in Canadian and Australian dollars. And allthese issues were in the public Euromarket. It has done far more in theprivate placement market (details of which are hard to obtain).
Sweden’s big mainstream currency deals this year also emphasize its aggressivecost-of-funds target. A five-year Dm1 billion issue in January was thoughtby the market to be a little too tight at 35bp over Bunds, but it sold well.Its Ffr3 billion deal in late January came at only 12bp over French governmentOATs, when equivalent credits were trading at 18bp to 20bp over. The clevertiming of the issue, however, allowed it to perform fairly well. A five-year$250 million issue (with a two-year call), also in January, was thoughttough at 45bp over US treasuries when equivalent US agency paper was tradingat 48bp to 50bp over.
Indeed, Sweden’s borrowing has become noticeably more aggressive this year.With lower funding needs, it can afford to pick off the best arbitrage opportunities.Its target for net new foreign borrowing is down to Skr20 billion. In thefirst four months of the year, it had already done 60% of that. The growingstrength of the economy is continually forcing the government’s borrowingtargets down: last month the central government borrowing requirement forthe 1996 calendar year was revised downwards by Skr15 billion to betweenSkr50 billion and Skr60 billion.
The debt office has also partly shifted the focus of its borrowing to thedomestic market. A reorganization that took place on April 1 merged theinternational and domestic borrowing teams. Holm, previously in charge onlyof international operations, has added domestic borrowing to her responsibilities.”I’m still learning about the domestic market, but I hope that my experiencein the international area will come to some use,” says Holm.
Strong demand for government bonds in the domestic market will make hertask easier. Index-linked bonds, introduced in 1994, have become highlypopular. On June 3 the debt office will introduce the first 24-year index-linkedbonds. Sweden has even started to fill its foreign-currency borrowing requirementby issuing krona bonds domestically and swapping the proceeds into foreigncurrencies. With attractive swap rates between krona and dollars, this producesfar cheaper funds than raising the money directly in foreign currencies.Few other sovereign borrowers do this.
Sweden will no doubt continue to demonstrate this ability to move wherethe money is cheapest: last year, Japan; this year, domestic market. “Theadvantage of this organization is that we can react fast,” says Holm.”The decision process doesn’t take much time.”
Garry Evans
BEST NEW BORROWERS
The Baltic Republics
“When you’re bringing countries to the capital markets for the firsttime, an enormous amount of trust is required,” says Dan Jackson, directorof emerging markets in the corporate finance department of Nomura.
Jackson must certainly have built a good relationship with the Baltic states.Latvia and Lithuania have both borrowed in the international markets forthe first time in the past 12 months. And Estonia’s capital city, Tallinn,issued a bond in April. The books of all three issues were wholly run byNomura – no paper was syndicated outside the Japanese house.
This award acknowledges not only the issuers themselves but also the influentialrole Nomura has played in helping the Baltic states become the first sovereignsof the former Soviet bloc to issue Eurobonds. “The first issue, a ¥4billion ($45 million) deal by Latvia, was privately placed mainly with Japaneseinstitutional investors,” says Jackson.
The $60 million Lithuanian deal, announced last December, widened slightlyafter launch – it coincided with a domestic banking crisis – but has sincetightened. Jackson expects the Tallinn deal to perform similarly and togo primarily to German institutional investors. But at the moment, Tallinn’spaper is trading at a slightly higher yield than at launch.
Gateway to Russia
The strength of these Baltic issuers and their initial international appealderives from their unique position in eastern Europe – located between Scandinavia,western Europe and Russia. Estonia, the most northern state, enjoys significanttrade links with Scandinavia. But although the Baltics are keen to emphasizetheir culture’s western leanings, many outside reasonably regard them asa gateway to Russia.
“They present a low-risk platform for business and trade opportunityin Russia because of their geographic position and historic trading pattern,”reckons Jackson. These natural economic stepping stones eastward certainlyattract investors. Lithuania, in particular, with a significant Russianpopulation, understands Russian culture and business practice. Conversely,Latvia’s recent election highlighted the area’s ethnic-based fears of Russiandomination, when the nationalist party, “Latvia’s Way”, made significantgains.
A common experience of Russian invasion binds these comparatively smallneighbours of the Russian bear. With this threat uppermost in Baltic minds,these international bond issues highlight the Baltics’ commitment to reformand economic stability after communism. Natalija Guseva at Lithuania’s financeministry believes that Lithuania’s reputation “has risen as a borrowerin the eyes of international investors” because of the bond issue.
In all three instances it was Nomura that made the initial approach andproposed the issue. Jackson had realized that the development of each countrymimicked that of eastern European states such as Poland and the Czech Republic.These former communist countries gained their independence in 1989. Latvia,Lithuania and Estonia, on the other hand, all ceded from the Soviet Uniononly in 1991. “The degree of macroeconomic progress mirrors that ofcertain eastern European states two years ago,” says Jackson.
Since they were previously fully integrated into the Soviet Union and necessarilyassociated with its problems, in many ways, their progress has been moreimpressive. It helped that none of them took on any of the former SovietUnion’s debt. Investors beyond the Baltics are attracted by the lack ofoverhanging liabilities. Inflation, which reached more than 1000% in eachstate, has now been brought under control. “It was a tougher macroeconomicstabilization challenge than most eastern European states, due to theirstarting in the rouble zone,” says Jackson.
None of the Baltic states is heavily industrialized. All three economieshave a high level of service-sector activity, such as banking, so to restructurethem along open market lines requires correspondingly low investments.
After the success of Poland’s international bond issuance, the opportunityseemed ripe for the debut of these rapidly-developing states in the samecapital market. Although sharing similar characteristics, each issue cameto the international market under different circumstances.
Latvia, the first to issue last August, was in the midst of a banking crisisprecipitated by the collapse last May of Baltja Bank, the largest Latvianbank. Inguna Sadraba, Latvia’s deputy finance minister, recalls that theEurobond was “a good solution, considering our position, to an immediatecrisis of funding”. As such, this costly transaction was very much”an emergency one-off issue”. Sadraba hopes “not to use theinternational markets for funding again” – although the possibilityis there if required.
The Eurobond covered just over 20% of Latvia’s total annual deficit of Lats90million. Now that the economic situation is more stable, most funding iscovered by the domestic government bond markets. The treasury principallyissues T-bills of six-month maturity. “Last year 35% to 40% of ourfunding came from abroad,” says Sudraba. “This is now down to12%.” For one big amount, though, the deal was “very costly”.But the coupon is confidential.
International awareness
Towards the end of 1995, Lithuania also experienced a banking crisis. Neverthelessits own domestic government securities were already attracting internationalinvestors, and the Eurobond capitalized on this. “The Nomura issuewas a way of expanding the awareness of international investors of Lithuaniaas an interesting market and also of attracting them to the domestic market,”says Natalija Guseva of the Lithuanian ministry of finance. The issue diversifiedfunding sources and improved Lithuania’s credit rating and risk-awareness.The ministry is not clear at this stage whether its funding policy for thecoming year will incorporate further international borrowing.
Estonia has the most developed economy of the three Baltic republics. Whenit gained independence, a significant amount of gold was repatriated fromthe UK – where it had been lying in a London vault since Russia’s invasionof Estonia in 1940. Thus, with adequate foreign exchange reserves and legalrequirements that the state’s budget be balanced, the state has not borrowedinternationally. This situation will probably remain unchanged, since thegovernment’s freedom to determine monetary policy is constrained by a currencyboard.
Tallinn, Estonia’s capital city, is run by an autonomous authority. To financeinfrastructure projects, it issued a Deutschmark-denominated Eurobond inApril. The issue represents a “little less than 20% of our annual budget”,according to Kaarel Mati Halla, councillor of economics to the city of Tallinn.”We were very satisfied with Nomura’s performance and the bond issue.A 6% coupon is a good price for our money, considering our eastern blocstatus.” Strict fiscal regulation prevents much long-term internationalissuance in Estonia, but other companies in this rapidly-developing statemight well follow Tallinn to the market.
As each republic has a relatively small population, international investmentis a necessity for development. If this year’s policies are continued, theBaltics might yet become a new Hong Kong for eastern Europe.
Christopher Spink
BEST EMERGING MARKET BORROWER
Mexico
Mexico’s swift and effective return to the capital markets following thepeso crash is set to become a textbook example of how a developing countryshould recover from a financial crisis.
While the $52 billion aid package was clearly critical to success, the Mexicangovernment could still have thrown this opportunity away with a poor borrowingstrategy. If a post-crisis issue had flopped by being placed in a marketprematurely and at the wrong price, it would have set recovery back months.
In fact, Mexico did the opposite. By approaching the markets gingerly, bystepping up from floating-rate notes to fixed-rate bonds of lengtheningmaturities, by gradually re-establishing benchmarks in the major currencies,and by using innovative structures such as a dual-currency note and a 30-yearglobal bond exchanged for outstanding Brady debt, Mexico has shown its skillin attracting nervous investors back to its bonds.
“They have been extremely creative in terms of their funding,”says Tulio Vera, who studies sovereign debt for Bear Stearns. “Thatan issuer, which less than a year and a half ago could conceivably default,can now go out and raise a 30-year bond is incredible.”
To be sure, in early 1995, few observers of the Mexican economy could haveexpected such an outcome, when Mexican trade bank Bancomext’s 10-year globalwas being offered at spreads of 940 basis points (bp) over US treasuries,the peso had dropped by 35% against the dollar, and some $10 billion ofshort-term debt would be falling due in the first quarter.
To achieve this result the Mexican government subscribed to the simple philosophyof keeping issue sizes well below perceived demand and of not pricing tootightly. “We never try to issue the last dollar or last yen. We tryto leave some unsatisfied demand, especially after the peso crisis, becausewe couldn’t afford an unsuccessful deal,” says a spokesman for theMexican ministry of finance.
In fact, the first Mexican public issuer to try out this approach afterthe crisis was not the Mexican government, but Bancomext. Last June, afterweeks of market-priming with small commercial paper offerings, Bancomextlaunched a $300 million two-year floating-rate note at 500bp over six-monthLibor. This issue, which was increased from $200 million, paved the wayfor the United Mexican States (UMS) – the name under which the governmentborrows – to issue a $1 billion two-year floating-rate note a month later.Launched at 537.5bp over two-year US treasuries, the UMS offer tightenedto 487bp – breaking the crucial 500bp barrier – and attracted commitmentsof $1.835 billion.
Whether or not it was planned that Bancomext should act as “stalkinghorse” in the markets for UMS is unclear, but analysts agree it hada positive effect. “During the crisis the only thing that could givea borrower any backing was an export base, and Bancomext [as the foreigntrade bank] had that,” says Hector Chavez, chief economist for SantanderInvestment in Mexico. “While everyone was suffering, exporters at leastcould benefit from the devaluation. With its export-based finance, Bancomexthad manoeuvring space.”
Re-establishing confidence
Bancomext’s successful use of this space provided the guides for UMS tomake its initial foray into the market. The strategy then was to get re-establishedin the three major Euromarket currencies – dollars, yen and Deutschmarks- and, with US investors the most cautious on Mexican debt, the governmentlooked for support in coupon-hungry Europe and Japan. Between July and OctoberMexico issued fixed-rate in yen and Deutschmarks, pushing the maturity outto five years in the latter.
The big breakthough came in November, however, when a $1.5 billion one-yearfloating-rate note was issued giving investors the choice of redemptionin whichever was the greater of either a Mexican cetes redemption optionor US dollar Libor redemption option. With the implicit message from thegovernment that the exchange rate would be held firm, investors greetedthis issue warmly. “The size started off at $500 million and we increasedit to $1.5 billion. We could have increased it to $2 billion, but did not,because we were trying to be as professional as we could on behalf of theUMS,” commented the bookrunner, Chemical Investment Bank (now ChaseManhattan), at the time.
“After this issue, the whole perception of the market started changing,”says José de Aguinaga, director of fixed income at Latinvest Securitiesin London. “Spreads began to narrow and banks had access to liquidity.”
This lift in confidence meant that by January of this year, Mexico was atlast able to plug into the decisive fixed-rate dollar sector. The ensuing$1 billion five-year global did the most of any deal to encourage back thoseUS investors who had sworn never to return to Latin America after theirpeso hammering. Investors were heartened that the bond was sold to over300 institutions worldwide and that average ticket size was low, creatinggood liquidity. As critically for Mexico, the deal was launched at 445bpover US treasuries and tightened to 425bp, giving a clear indication thatborrowing costs were heading in the right direction.
But of all Mexico’s post-peso crisis deals, the one financial analysts aregoing to pore over the most is last month’s swap of $1.75 billion in outstandingBrady bonds for a new 30-year dollar global. The global yielded 552bp overUS long bonds at issue, some 164bp higher than Mexico’s par Bradys because,unlike Bradys, the new bonds are not collateralized with US treasuries.The deal frees up this collateral which, like the proceeds from much ofMexico’s issuance over the past year, is being used to pay down Mexico’sdebt. Value recovery rights attached to the Bradys – payments to investorsbased on oil prices and other criteria – were also discarded in the swap,igniting a debate among investors as to their true worth. The deal structure,which has been widely praised, is expected to be copied by other developingcountries with Brady bonds.
Yet, for all its cleverness, Mexico is not out of the woods yet. Analystspoint out that $22.8 billion of IMF and US Exchange Stabilization Fund debtwill be falling due in the 1998 to 2000 period and will mostly have to berefinanced in the global capital markets.
“The challenge posed by the heavy refinancing calendar for Mexico duringthe 1998 to 1999 period is substantial, and investors are likely to preventMexico from running large capital account deficits before and during thisperiod,” says a Bear Stearns report.
To succeed, Mexico will have to continue borrowing as astutely over thenext couple of years as it has over the last one. But Bancomext’s 10-year$250 million offering late last month – suggesting that Mexico could soonplug into the key 10-year dollar market – provides the latest evidence thatthings are on track.
Brian Caplen
BEST EMERGING MARKET CORPORATE BORROWER
Empresa la Moderna
At the outset the decision by Empresa La Moderna (ELM), Mexico’s largestmanufacturer and distributor of cigarettes, to move into new businessessuch as packing, fresh produce and seeds, may have seemed crazy. But threeyears later, following acquisitions such as Agricola Batiz, US Asgrow SeedCo, Petoseed Co and Netherlands-based Royal Sluis, most analysts believethat what it’s done makes a lot of sense: the 60-year-old company has beentransformed into a diversified conglomerate with operations in over 100countries around the world.
“There’s a method in the madness,” argues Scott Wilkins, assistantdirector for Latin America at ING Barings in Mexico City. “More thanthe possible synergies between the different businesses, what makes it aninteresting story is that they are getting into businesses which are potentiallyprofitable in industries which have been underexploited.”
To finance its acquisitions, in late 1994, Moderna obtained a bridge loanfrom a number of Mexican and European banks for $325 million. Unfortunately,the devaluation of 1994 delayed the refinancing of the debt but things areback on track. “There was a question mark over the company but it hasbeen resolved,” says Robert Hulme, analyst at Serfin Securities inNew York.
Last November, ELM obtained a three-year unsecured syndicated loan for $130million, the first of its kind given to a Mexican company since 1982 and,in January, it successfully sold $125 million of three-year Eurobonds torefinance short-term debt, which has enabled the company to reach its goalof having a 80% to 20% long-term to short-term debt ratio.
“It helps that after these acquisitions roughly 45% of ELM’s salesare in dollars, so it has a nice natural hedge,” says Wilkins. There’salso another advantage to having foreign subsidiaries, argues FranciscoChevez, analyst at Smith Barney. “They have access to cheaper formsof financing.”
Going forward, however, the task is daunting, cautions Wilkins. Not onlyhave they expanded into new businesses but also outside their geographicalrealms. “What does remain to be seen is if they have the managerialwherewithal to cover and to grow these businesses,” he says.
Sarah Lavers, director of research for Latinvest Securities in New Yorkbelieves ELM will be up to the task. “They seem to have a very goodmanagement and it’s a nice business mix to have,” she says. “Youhave the cash generative angle of the cigarette business, which helped themfinance the acquisitions, with the good growth prospects of a hard currencybusiness like seeds.” Recent results are encouraging: revenues for1995 were $1.21 billion, an increase of 59% from $761 million in 1994.
In the meantime, for Moderna’s management, there’s no time to rest. In thethird quarter of 1996, the company is expected to close its purchase ofUS DNA Plant Technology Corporation, which has a leading position in theagro-biotechnology sector, and also to acquire a majority stake in Royalvan Namen, a Dutch exporter of fresh produce, which will give the companyaccess to the European fresh produce market.
Mariana Crespo
BEST NORTH AMERICAN BORROWER
Tennessee Valley Authority
Achieving spreads below the World Bank and the US treasury, and tighterthan other US agencies – all in the space of a year – is quite an impressivefeat; especially since Tennessee Valley Authority (TVA) only entered theinternational markets (where two of these benchmarks were notched up) forthe first time in its 63-year history, last June.
“We are interested in cost-effective finance and increasing our investorbase,” says John Hoskins, treasurer of America’s largest public powerutility. In doing so, TVA has quickly pushed itself to the front rank ofinternational credits through market innovation and the solid and easily-understoodnature of its business. “As a utility with real assets, such as damsand power plants, investors can relate to us better than some of the otherUS agencies,” says Hoskins.
But having a good story to tell is one thing: exploiting it to the fullwith the right structures – as TVA has done – is quite another. To achievethis, TVA took a fairly determined attitude in its discussions with investmentbanks.
The 30-year $650 million global bond issue last October, priced to yield38 basis points (bp) over US treasuries and coming below an existing WorldBank bond, is a case in point. “We were intrigued by the idea of a30-year bullet [an issue repaid at maturity] that could be sold internationally,but some banks told us that it would have to be a domestic issue,”says Hoskins. “We chose Lehman Brothers [as bookrunner] because theysaid it could be done.”
At the same time, a $1 billion five-year global was placed at spreads tighterthan other US agencies at the five-year mark. Of this offering, 70% wassold outside the US, as was 50% of the 30-year bond. These issues, togetherwith TVA’s debut global – a $2 billion with a 10-year tenor launched inJune 1995 – produced an international yield curve for TVA in the space ofa few months.
But TVA’s growing reputation as a creative borrower hasn’t been confinedto the international markets. It issued $600 million of 40-year bonds inthe US market, in April, priced at par to yield 12bp below two-year treasuries,making it the first US agency to raise funds at a lower cost than treasuries.Puttable at par at two and 10 years, sole manager Morgan Stanley claimedthe bond would reduce TVA’s borrowing costs by between 20bp and 25bp.
More recently, TVA again showed its borrowing power in the US market byissuing a $500 million bond with a 50-year maturity, priced at 62bp overthe US long bond and with a par call after five years. The issuewas sold in $25 denominations and was aimed at retail investors. Internationally,TVA expects to return to the market before the end of 1996.
Brian Caplen
BEST ASIAN BORROWER EX-JAPAN
KDB
The pre-eminence of Korea Development Bank (KDB) among Korean issuers haslong been a fact. With its paper, worth a combined $4 billion, accountingfor more than half of all Korean transactions in the US capital markets,the bank has blazed a trail that others have been content merely to follow.Now, with four global issues to its name, a recently upgraded AA- creditrating and a record $3.1 billion of funds raised in 1995, KDB has establisheditself as one of the world’s premier credits in international capital markets.
Last year was hectic. A five-year $500 million global offering via CS FirstBoston and Salomon in January was followed in May and August by KDB’s 15thand 16th series of samurai bonds, both for ¥50 billion ($565 million),and by a second $500 million global in November led by Lehman Brothers andSalomon Brothers. There was also a Dm500 million ($330 million) bond throughDeutsche Bank in October, while KDB tapped its Euro MTN programme throughoutthe year with eight issues worth a total of $650 million.
Cross-border financing
If anything, the pace has quickened this year. There have been two moresamurai issues worth a total of ¥40 billion, a Swfr200 million ($160million) bond via Credit Suisse in March, and a HK$1 billion ($130 million)transaction led by HSBC Markets and Fuji International Finance in April.The fourth global overall – led by CS First Boston and Lehman Brothers inlate May – was expected to be worth up to $1 billion with a possible 10-yearmaturity. KDB had also raised a further $230 million through the Euro MTNprogramme by the end of March.
“We expect to raise in the region of $3.5 billion in internationalcapital markets in 1996,” says Kim Duck Soo, general manager of theinternational finance department, and the man bankers say is largely responsiblefor KDB’s heightened profile. “The bank has been increasing the volumeof loan growth by between 13% and 15% annually since 1992, while our clients’growing foreign capital requirements, in both Korea and abroad, have generatedextra funding demand. We are seeing especially strong growth in cross-borderfinancing, for both Korean and non-Korean clients, in south-east Asia andother emerging markets.”
Kim says the emphasis will be on further diversifying into new currencies,markets and maturities. “Although we were upgraded from A+ by Standard& Poor’s in May 1995, it is only now that I feel investors are treatingus as a genuine double A-rated issuer. Our strong growth in net profits(from $130 million to $157 million last year) has combined with increaseddomestic political stability following the general election and an easingof tensions with North Korea to give us the best investor reception we haveknown. Given the right conditions in price competition and cost-effectiveness,we are considering issuing in both the French franc and sterling markets.”
With this in mind the bank, which has been upgraded from AA to AA+ by theJapan Bond Research Institute, has applied to IBCA for a rating, which isexpected in late June.
“DS Kim has elevated KDB into a new class of Asian borrower,”says the director of debt capital markets at one US investment bank in HongKong. “Its Hong Kong dollar issue, for instance, quickly became thebenchmark for the market, and the name is now recognized as top-tier inall of the world’s major capital markets.”
Tony Shale
BEST ASIAN CORPORATE ISSUER
Ayala Corporation
In two years, Ayala Corporation has built a reputation for innovative financingunrivalled even by companies in Asia’s more mature markets. Having overcomeinvestor concerns about political and economic stability in the Philippines- it is the only Asian country with a Brady bond programme – Ayala has consistentlyprovided institutions with above-average returns at a time when rivals inIndonesia and Thailand have left little on the table.
The country’s oldest and largest property company has carefully cultivatedforeign investors with a number of overseas roadshows. Its June 1994 debutin international capital markets was a $50 million note exchangeable intothe B shares of wholly-owned subsidiary Ayala Land, via JP Morgan. (Thetwo-year issue has been fully converted.)
This was followed by a $100 million convertible note led by Jardine Fleming,in June 1995. “It was a 3% note with a conversion premium, at Ps28.46,set at 10% over closing price,” says deputy treasurer Ramon Opulencia.”With the underlying shares now trading at Ps42 to Ps44, we have seena lot of happy investors.” In November its issue of a zero-coupon note,again exchangeable into Ayala Land B shares, met with similar success. Issuedat 70.38%, the bonds are now trading at 84% to 85% and, although the conversionpremium rose to 18% at Ps35, the underlying share price has since risento Ps42.5.
“Each issue was an improvement on its predecessor,” says Opulencia.”We managed to get the coupon down from 3% to zero during these deals,but timed all the deals so that they appeared in favourable markets. Investorswere rewarded by our refusal to be pressured into forcing paper on to themarket.”
Ayala’s debut Eurobond, issued in May, has benefited from the earlier groundwork.The five-and-a-half-year $100 million issue, led by JP Morgan, was pricedat 99.417 with an 8.125% coupon to yield 170 basis points (bp) over thecomparable five-year US treasury. It achieved the twin distinctions of beingthe tightest-ever spread for a Filipino Eurobond (beating the 190bp recordedby San Miguel in 1994) and arousing strong enough investor demand to beincreased in size to $110 million.
“It was an unrated issue targeted mostly at Asian and European investors,”says Opulencia. “Given that the pricing was inside the sovereign spread,we were delighted by the response for an issue that was roadshowed in HongKong, Seoul, Taipei and Singapore.”
Bankers were quick to add their plaudits. “Since its launch, spreadshave tightened further on most Filipino issues, and it is good to see thearrival of another top-quality corporate name in the international market,”says a syndicate manager close to the deal.
Tony Shale
BEST EUROPEAN CORPORATE AND BEST BRITISH BORROWER
Glaxo Wellcome
John Coombe has enjoyed a successful first year as head of funding at therecently merged pharmaceuticals group, Glaxo Wellcome. Investors welcomedthe merger with open arms, and banks were also happy to help out the Europeancorporate.
The new company’s refinancing of the debt incurred by Glaxo’s takeover bidwas deftly managed through a series of three international issues. GlaxoWellcome made clear that these were the only issues it intended for theforeseeable future. Coombe confirmed that short-term requirements wouldcome from a US$5 billion US CP programme.
The rarity of the issues helped to market the new name to investors. Coombeemployed “a deliberate policy” of using banks from the group whichhad provided funds for the takeover. A number of the banks, which raised£8.1 billion through a syndicated loan for Glaxo, were retained. Thishelped engender a feeling of warmth towards the new borrower – Glaxo wasa cash-rich company which had no need to borrow long-term for its operations.CS First Boston, which ran the book for Glaxo Wellcome’s first transaction,a $500 million five-year maturity Eurobond, praised this “rarely seen”approach, as “mature and well thought-out; this could only help theirname when they came to the market”.
The largest Eurosterling offering ever by a corporate followed two daysafter this hot debut last May. This £500 million ($800 million) issuehad a 10-year maturity. Glaxo Wellcome waited until the market was receptivebefore their third transaction, a 10-year maturity yankee or Eurobond. Ayankee is traditionally the method most corporates employ in raising long-maturitydollar funds. Morgan Stanley offered this, but eventually Coombe settledon a $500 million 10-year Eurobond, lead-managed by Lehman Brothers andJP Morgan, this January. Michael Burrow, executive director and head ofcorporate funding at Lehman, confirmed that it was “extremely rarefor a corporate to be able to issue $500 million of 10-year Eurobonds onterms that are better than those available in the US”. Consequently,the price has come in from 48bp over treasuries at launch to 45bp over currently.The five-year deal has performed even better – coming in from 37bp overtreasuries to less than 20 over.
Now 50% of Glaxo Wellcome’s funding comes from long-term fixed-rate borrowingand the rest from a short-term $5 billion US commercial paper programme,which has more than $2 billion outstanding. Once Moody’s follows Standard& Poor’s by upgrading its credit to double-A status, Glaxo Wellcomecan be regarded as a model of post-merger refinancing.
Christopher Spink
BEST EUROPEAN STATE FINANCIAL BORROWER
KfW
This year began with some welcome news for the borrowing team at Kreditanstaltfür Wiederaufbau (KfW). In January, the government announced that itwould revise the law on KfW, making explicit the government’s obligationto keep the bank solvent.
The bank was set up after the war as a special type of legal entity whosefounder – in KfW’s case, the federal government – is obliged by law to keepit solvent. That gives KfW greater credit-worthiness than if it had a governmentguarantee: with a guarantee there is always a risk of a delay in debt servicingin the event of default. But this legal obligation on the federal governmentwas not explicitly spelled out in the law which set up KfW. As a result,the German banking supervisory authorities have always imposed a 20% capitalweighting on KfW’s debt, rather than the 0% weighting applicable to sovereignpaper. That made it cheaper for KfW to issue Deutschmarks in the Euromarketrather than in the domestic market.
Germany’s banking supervisors reacted to the government’s announcement bycutting the debt weighting to 0%. KfW paper suddenly became more attractivefor domestic banks which buy bonds. “Risk-wise this paper is equalto Bunds, but it pays a spread over Bunds,” says Christian Murach,head of international capital markets at KfW. “It’s a great alternativefor investors who don’t need top liquidity.”
The effect of this rule change is that KfW will shift much of its borrowingfrom the Euromarket to the domestic market. In 1995 it borrowed Dm11.7 billionat home, a further Dm4.7 billion in Euro-Deutschmarks and just over Dm6billion equivalent in other currencies. The split between Euro and domesticmarkets, in other words, was about 50:50. This year Murach expects it tobe more like 2:1 in favour of the domestic market, and already the bankhas borrowed some Dm8 billion at home and Dm4 billion in the internationalmarket.
Product development
KfW’s first deal after the rule change was therefore a vitally importantone. The bank needed to set a new benchmark, ideally 10 basis points (bp)or more tighter than it had issued at before domestically – and below thepsychologically important spread on Schuldschein bonds. The 10-year deal,for Dm2.5 billion, came on February 1 and was led by Dresdner Bank and WestLB.Cleverly, KfW’s borrowing team was generous with the spread: it was launchedat 23bp over Bunds, when equivalent credits in the market (the Republicof Austria, for instance) were trading at 17bp or 18bp over. As a resultthe bonds were tremendously popular with investors: the paper has sincetightened to 15bp over Bunds. “We knew we shouldn’t try to squeezethe market,” says Murach. “We discussed [issuing at a spread in]the high teens. Some banks were prepared to do it. Our follow-up transactionswill, step by step, be tighter.”
The February jumbo was placed almost entirely within Germany. Internationalinvestors are usually reluctant to buy domestic paper, mainly for tax reasons.Murach’s eventual aim, therefore, is to develop a product that is equallyattractive to domestic and international investors.
A part of that strategy is to generate as much liquidity as possible inKfW’s bonds. In the jumbo issue, KfW made a firm (oral) agreement with itslead-managers that they must maintain a tight bid/offer spread in the bondsand that they must make at-market prices in a good size. Unlike other Germanissuers recently, however, KfW did not bind its banks in writing to a fixed(6bp) bid/offer spread. Murach regards that as “window-dressing”.You have to recognize, he says, that “in some market conditions, bid/offerspreads will widen”. He also points out that spread agreements areimpossible to police: you just cannot force traders to answer their telephones.
Spread sensitivity
If KfW was generous for good reasons on its jumbo benchmark, on deals inmore peripheral markets, it is as aggressive as any other borrower. “Inour strategic currencies – Deutschmarks, dollars, French francs, sterling- we do transactions at the consensus level,” says Murach. “But[markets such as] Swiss francs and lira are another matter.” In thesecurrencies, KfW’s paper is bought by retail investors who are “notspread sensitive”. One typical such deal, a Swfr150 million six-and-a-half-yearissue in March picked up the following comment from a co-manager: “Yes,this is aggressive, but it is an extremely good quality borrower and everyoneknows that they come at aggressive levels.”
KfW brings a lot of small aggressive deals in such non-mainstream currencies.Since the start of this year alone, it has issued in pesetas (twice), Swedishkronor, Canadian dollars and Luxembourg francs.
But KfW will need to borrow at least Dm21 billion this year – and maybemuch more if the Germany economy picks up. “You can’t do that muchwith just opportunistic transactions,” says Murach. And, even thoughthe German domestic market will become disproportionately important, KfWwill continue doing Euro-Deutschmark issues – even possibly a jumbo Euro-Deutschmarklater this year. “We want to keep a presence in both markets. Eventhough the domestic market is good, we need to keep our name in the internationalmarket,” argues Murach.
Garry Evans
BEST FINANCIAL BORROWER
Abbey National
It may be better known as the home of Sherlock Holmes, but London’s BakerStreet also houses Abbey National, which so far in 1996 has raised $4.4billion in 19 tightly-priced issues. These have included deals in all themajor currencies as well as a large programme mainly in European currencies,such as the Swiss franc and – a traditional favourite – the Italian lira.The latter is a particularly important source of arbitrage for Abbey which,among Italian investors, is one of the most favoured borrowers after theEuropean Investment Bank and the World Bank.
What impresses investors about Abbey is the care it takes to market itsname. In France this year it spent considerable time talking to local investors.Director of funding, Alex Braun, says it is a very easy credit story totell. “The bank does not have a plethora of businesses,” he explains.In fact, there are four separate businesses: mortgages, consumer lending,treasury and life insurance. A source of comfort to investors is also Abbey’sstable rating in recent years: Moody’s awards it an AA2 and Standard andPoor’s a AA.
France has been Abbey’s key market this year: it has raised almost a fifthof its funds there. Its best deal in 1996 so far was a Ffr3 billion ($593million) 10-year issue in March which achieved very tight sub-Libor funds.Abbey was taking advantage of one of the year’s only genuine arbitrage opportunities,in which a pool of French insurance company money was pouring into the 10-yearbond curve and was desperate to diversify out of French institutions, particularlyafter the Crédit Foncier downgrade. Abbey attracted funds becauseit was the only alternative to the German Landesbanks, which were heavyissuers and had begun to bore the French investors.
The future strategy involves consolidating recent gains and improving relativespreads against other comparable borrowers, particularly German Landesbanks.Braun estimates Abbey is raising sub-Libor funds only two or three basispoints off Landesbanks, in spite of its lesser credit rating.
Steven Irvine
BEST SUPRANATIONAL BORROWER
EBRD
Ask treasury officials of large international borrowers which other capitalmarkets issuers they most admire and chances are that the European Bankfor Reconstruction and Development (EBRD) will be high on every list. “Theyare very smart, particularly on the derivatives side and they are very creativeon designing loans for their own customers,” judges the head of borrowingfor one European sovereign.
The bank enjoys several advantages. Its systems are new and up-to-date.Most of its staff were trained at leading private sector banks. And it isnot slave to a huge annual borrowing requirement. It needs to take justEcu1.5 billion ($2 billion) of medium- and long-term funding from the marketseach year. “That’s what makes us different,” agrees treasurerMark Cutis. “We have a modest programme and we maximize it to the nthdegree.”
Tailored loans
The bank’s funding targets are widely-known to lead managers as being around40bp below Libor, as are the rates at which it will buy back its own debtin a programme designed to make its paper more expensive, so enabling itto issue at better levels.
The bank borrows in 17 different currencies, including most European currenciesand some Asian ones. It swaps these borrowings into pools of liquidity, predominantly denominated in just four currencies: dollars, yen, Deutschmarksand Ecu. It scours the landscape for new primary markets to tap. EBRD hasbeen invited to issue debt in Taiwan and is also examining the Korean capitalmarkets.
It entirely pre-funds its lending commitments and borrows wherever ratesare attractive. So, more than 40% of its liability book is denominated indollars, even though it raises little more than 5% of its initial fundingin dollars.
“The idea is to pass on market rates to our borrowers,” says Cutis.The bank also wants to tailor loans to match the needs of its borrowing customers exactly. If a project sponsor wants to borrow fixed-rate Finnishmarkka from the EBRD, it will create that loan from its floating funding.
