Issuer: City of Stockholm
Amount: $1 billion
Launched: April 7 1997
Arranger: Lehman Brothers
The long, midnight-sun hours of the Scandinavian summer lend themselves to thoughtful reflection. In the summer of 1996, treasury officials from the City of Stockholm were spending their evenings mulling over the idea of a Euro-MTN programme. By the time autumn began to close in, the idea had become concrete. On April 7, in the boardroom of Lehman Brothers’ London offices, representatives of Sweden’s capital city were putting their signatures to a $1 billion programme. Just over six months had passed since the idea was given the go-ahead.
Peter Antonsson, Stockholm’s chief treasury officer, says the genesis of the programme was trouble-free, but adds: “It inevitably takes a week longer than you think.” Martin Goldberg, executive director of fixed income at Lehman Brothers, the programme arranger, agrees Stockholm proved very responsive. “It was one of the smoother arrangerships,” he says. “They were demanding but flexible, and we were able to use many provisions from their previous Eurobonds’ documents.”
Lehman Brothers first visited the city in November, as one of 20 or so banks pitching for the mandate to arrange the programme. Antonsson explains that the number was so high because municipal regulations require the city to extend a broad official invitation to potential arrangers and dealers.
From the large group, a short list of three banks was drawn up as possible arrangers of the programme. The city was looking for a bank that could offer good placement of its paper, but, more important, one that had experience of arranging MTN programmes. Lehman’s Goldberg suggests this should be the main concern for any borrower new to the market. “We would generally advise using an experienced arranger,” he says. “It minimizes the risk of oversights and ensures a state-of-the-art programme.”
Returning to Stockholm in January for a final presentation, the bank was officially awarded the mandate on January 23, just two and a half months before the programme was eventually signed. “Three months tends to be the average,” says Goldberg. “It can certainly be done quicker if the issuer is focused on the programme. It can also be delayed if the issuer’s interest is diverted to other matters, or constrained by lack of internal resources.”
As soon as it was selected, Lehman Brothers brought in law firm Allen & Overy and began to draft the programme documents. “Right at the outset you try to go through every thing with the issuer, setting out the alternatives available and having the issuer focus on what it wants,” says Goldberg.
Decisions need to be made over listing the programme on a stock exchange; appointing an issuing and paying agent to deal with the day-to-day practicalities of running the programme; deciding which currencies to be included on the programme; what provisions will be in the event of a default – the list of permutations goes on. Each of these decisions can influence both the time it takes to establish the programme and the cost involved. Stockholm’s Antonsson says that the cost of the programme “was quite acceptable”, although he declines to put a figure on it.
Once an arranger is selected and the structure of the programme agreed, the issuer selects a dealer group. Antonsson says although the arranger was consulted, ultimately the decision was the city’s alone. “We wanted a group that covered different jurisdictions and parts of the world,” he says. This desire resulted in a group comprising Credit Suisse First Boston, Daiwa Europe, Deutsche Morgan Grenfell, Enskilda Debt Capital Markets, Lehman Brothers, Merrill Lynch, Nomura International and SBC Warburg.
Dealers don’t become involved in the programme until a fairly late stage. Around three weeks before the programme is expected to sign they will receive the programme documents, and be invited to offer any comments or objections. Although they may notice minor oversights, if the arranger has done its job the documents should be drafted to meet dealers’ requirements.
One obstacle that can arise in arranging an MTN programme for any type of government body is adapting its decision-making process to give individuals the responsibility to make trades. It is not in the nature of municipal bodies to give individuals excessive power over finances. Anyone who has ever tried to gain funding from a local authority will know it can be a laborious process, needing a rubber stamp from countless sub-committees.
But the very point of an MTN programme is speed and flexibility. The people running the programme need to be able to respond to a deal idea within a matter of hours, and not spend days or weeks getting approval from the appropriate committees.
Stockholm was eager to bypass the bureaucracy and set up provision for an MTN trader with back-office support. Lehman Brothers then shepherded the city through the processes of issuing debt off an MTN programme, making sure that it had the necessary resources and know-how.
Stockholm may provide a model of cooperation. But for some potential borrowers delegating responsibility to individuals proves an insurmountable problem and can prevent them from setting up a programme.
This is, perhaps, one reason why the market in municipal Euro-MTNs remains a very small niche. Despite the exponential growth in the number of Euro-MTN borrowers, the market is virtually bare of municipal names. The Dutch cities of Arnhem and Haarlem signed small programmes in 1994 and 1993 respectively, but it was not until March of this year that a debut issue arrived: a Fls10 million ($5.07 million) issue for Arnhem.
Before this year, the only active municipal programme was for the City of Buenos Aires. But in common with many Latin American issuers, the Argentine capital had used its programme only as a means to issue large Eurobonds and not to fund regularly through small-size, single-dealer MTNs.
Lehman’s Goldberg thinks that the Scandinavian countries may provide this sector of the market with a little more weight, largely because the region’s cities are not provided for by any centralized form of debt issuance. Stockholm’s Antonsson agrees. “I get the impression that municipalities in other countries are more closely linked to the state than we are. They don’t have as much flexibility as we do.”
Stockholm was narrowly beaten into the market by Sweden’s second city, Gothenberg. A $1 billion programme was signed on February 13. Just over a month later it made its first issue – a Dm22 million ($12.53 million) floating-rate note, with the programme arranger, Merrill Lynch, as the sole dealer.
Few dealers are in any doubt that the Swedish cities will prove popular names with Japanese investors. Scandinavian borrowers have enjoyed a long and fruitful relationship with Japanese fund managers, and with a 0% risk weighting the cities may be considered as effective sovereign names. It’s a fact that hasn’t passed Antonsson by. “I’ve noticed good prices available in Japan,” he says, adding that Stockholm is planning a marketing trip to Tokyo in November.
One factor that may continue to hold back the development of a sizeable municipal MTN market is the nature of cities’ borrowing requirements. The majority of MTN borrowers will say that they aim to access the market opportunistically, obtaining funding when, and where, pricing is most attractive. This isn’t a strategy open to Stockholm. “We can’t be that opportunistic,” says Antonsson. “We are not allowed to make advance funding, but must meet the needs of the municipal corporations. We work almost as an internal bank [for the city].” That means that Stockholm will only be in the market when one of its affiliates requests funding. Says Antonsson: “If we don’t get a call, we can’t go to the market.”
That the programme has yet to be used suggests the call is still to come.
