A SUPPLEMENT TO EUROMONEY – MARKETS 1997The World Bank The World Bank plans to borrow $11 billion of medium- and long-term funds in the fiscal year ending June 30 1997, subject to a review of its needs this month. The Bank had raised about $7.5 billion of the total by mid-January. In the process, its focus has shifted dramatically from reliance on global dollar bond issues to a heavy use of swap-driven transactions. “Our challenge is to balance our funding needs, which have changed considerably due to the wider choice of loan products that we offer our borrowers, with our objectives of maintaining a substantive presence among major investor groups, seeking out the most cost-effective transactions and diversifying across instruments and markets,” says Gumersindo Oliveros, senior manager of capital markets operations in the Bank’s treasury finance department. During calendar 1996, the World Bank raised $13 billion through more than 80 medium- and long-term transactions in 16 currencies with tenors ranging from two to 33 years. Globals contributed only 15% of funding in 1996 compared with about 70% in 1995, as the Bank increasingly used currency swaps to lower its borrowing costs and diversify its investor base. Demand from Japanese and Italian investors has been particularly strong lately, enabling it to place large plain-vanilla dollar bonds and dual-currency bonds in Japan on highly favourable terms and to issue large amounts of callable and long-dated zero-coupon bonds in Italy, making full use of the maturity spectrum there. The Bank has also been active in raising short-term funds through its discount note programme and a growing number of arbitrage-driven deals, both public and private. Other recent highlights include the World Bank’s first South African rand issue; its return to some old markets such as the kiwi and Hong Kong dollar sectors; its continuing effort to tap different investor pools, for example targeting a Czech koruna offering at US institutional investors and a Danish kroner offering at domestic retail investors; and changes in execution to strengthen the performance of its global bonds in the highly competitive US dollar market, such as shortening the interval between announcement and launch of a planned offering from as much as a week to one or two days. The Bank has turned down some attractive proposals, fearing that investors might not be able to fully understand the risks involved. But Oliveros says it will continue trying to respond quickly to changes in investor demand and, with the help of intermediaries, to bring products to market that are innovative and “put us ahead of the curve”. European Investment Bank The European Investment Bank (EIB) is set for a busy year. In the provisional programme for 1997, Ecu22 billion ($30 billion) to Ecu24 billion is to be raised, up some 20% on last year. “The bank had a successful 1996,” says Rene Karsenti, director general of finance. “Ecu18.5 billion was raised in 123 transactions in 22 currencies with a very satisfactory average funding cost.” The EIB will broadly continue with the same tripartite strategy that was used in 1996. First, large benchmark issues in the major European currencies that the bank disburses. Second, diversification into other currencies, notably benchmarks in US dollars and yen but also in other markets where the EIB does not have direct requirements but which offer the possibility of attractive funding costs after swapping. (Apart from such countries as Hong Kong and Canada where already there have been issues, emerging markets, particularly in eastern Europe and Asia, are under consideration.) Third, diversification by instrument which will be helped by the EIB’s new Euro-MTN programme. Other projects in domestic MTN programmes are likely to occur, especially in Greece and possibly in Hungary. An extra key element in the strategy, which started some time ago, is the preparation for the euro and post-1999 funding, including conversion of existing debt. “As we are not a retail bank,” explains Karsenti, “the move to the euro (which we regard as positive for the EIB) will be, from a logistical point of view, not expansive. From a planning point of view I hope that the bank, with a very large critical mass of euro issues (probably in the order of 15 to 20 billion euros per year) will be placed as a major issuer of AAA quality in this sector.” During 1996 the bank had noted continued spread compression, which in the view of Karsenti vindicates the strategy of offering large, liquid benchmarks. “Fundamentally, I think that the move towards Emu in continental Europe is driving more and more investors into a market which, like the US, is increasingly sensitive to credit spreads.” Mexico With local and congressional elections looming in July, Mexico will try to achieve much of its international borrowing requirement early in the year. It made an auspicious start last month, when a $2 billion 10-year global offering via Merrill Lynch and Salomon Brothers was heavily over-subscribed. The bonds were priced at 335 basis points over US treasuries, Mexico’s lowest launch spread since devaluation in December 1994 triggered a loss of investor confidence and a severe financial crisis. The government says that its maximum net new foreign borrowing this year will be $5 billion and it hopes to lengthen maturities and reduce borrowing costs. (The effective interest rate on Mexico’s foreign debt declined from 9.1% in 1993 to 8.8% in 1996). In addition, government agencies and development banks conspicuously absent from the market last year may return to the fore as economic recovery stimulates domestic loan demand. Debt repayments will fall to about $9 billion this year, much lower than in the past two years, of which $4 billion will need to be refinanced. Last year, Mexico raised over $12 billion through 10 international debt issues in four currencies. In the process, says Tulio Vera, an analyst at Bear Stearns, Mexico has led the way among Latin American borrowers in a “creative restructuring of its external balance sheet”. Highlights included a $6 billion five-year floating-rate note issue backed by oil export revenues which received an investment-grade credit rating; creation of a partial dollar yield curve with five-, 20- and 30-year global issues; three samurai issues and two jumbo Deutschmark issues. The programme also included a ground-breaking exchange of collateralized Brady bonds for pure Mexican 30-year risk and helped Mexico prepay $7 billion of an emergency US government loan. Mexico’s total foreign debt at the end of last year was $168 billion or 51% of GDP, compared with $136.5 billion and 36% two years earlier. Foreigners also held 10.8% of the government’s $20 billion domestic debt last July. In September, Standard & Poor’s raised its outlook for Mexico to stable from negative, although the credit rating is still below investment grade. The economy continues its robust recovery, but some analysts remain concerned about the country’s weak spots, including its potential for political and social instability, its shaky banking system (with perhaps 40% of total loans non-performing) and its heavy foreign-debt repayment schedule. This year’s elections may also weaken fiscal discipline, although a recent US government report says “it is unlikely that there will be large-scale financial shenanigans”, partly because a new agreement with the IMF will impose some restraint. Sallie Mae The Student Loan Association, Sallie Mae, expects to raise a similar sum in 1997 to the $24 billion of 1996. The agency has a long-established tradition of cherry-picking the best funding opportunities in the global capital markets and using the derivatives markets to convert these back into T-bill-based floating-rate debt, a policy which also looks set to continue this year. Asset-backed deals have become a significant part of Sallie Mae’s funding strategy and may play an even bigger part in 1997 according to chief financial officer Denise McGlone. “We raised about $6 billion in asset-backed deals last year, which places us as one of the largest issuers,” she says. “The most significant thing is that we developed the market for T-bill-based asset-backed securities which has worked out very well for us.” McGlone points out that Sallie Mae’s extensive use of the derivatives markets has done more than just allow the agency to take advantage of international pricing anomalies. “We pretty much match-fund our balance sheet so we have very little interest-rate risk and effectively a locked-in margin.” While Sallie Mae has no specific plans for issues in new currencies, if an opportunity arises where sufficient liquidity and a suitable counterparty are available in the derivatives market, it will not be ruled out. “We’re innovative but we’re also cognizant of liquidity and counterparty credit risk. Subject to that, if we can get back to T-bill floating rate, we wouldn’t rule it out.” With the extensive use of longer-dated asset-backed securities last year, the maturity of other issue types has been shortened to compensate. McGlone thinks that this trend to shorter non-asset-backed securities will continue and possibly increase in 1997. “By shortening the maturity of non-asset-backed securities in 1996 we came out overall where we wanted to be on a duration basis.” Abbey National The UK bank raised more than $7.5 billion in the international public markets in 1996 and has made a quick start to 1997 with issues of $500 million, £250 million, L300 billion and Ecu100 million in the first week. The $500-million bond demonstrated that it can use its position as a large and responsible borrower in the Euromarkets to bring together the three big Swiss houses to lead another retail targeted issue. Indeed, Abbey has devoted considerable time to increasing its retail following in the Swiss, Benelux and German regions, the success of which was shown in Swiss franc and Deutschmark issues in the later part of 1996. As the bank develops a greater retail following, expect to see more issues tailored to investor requirements in these regions. Of funding requirements in 1997, Alex Braun, director of funding and asset management, says: “We don’t set out at the start of the year with any funding target per se. Instead, the mix of funding we achieve depends on our ability to match our requirements to what the market expects in terms of currency and maturity. This flexible approach certainly worked in the first few days of the new year but it will probably be a little quieter for a while now.” Though several large borrowers are looking at the possibility of issues in the more exotic Asian currencies in 1997, Abbey is not among them. “That sort of issue tends to be targeted at certain investor groups,” says Braun. “They also tend to be much smaller in size and thus unlikely to be the mainstay of an institution’s funding. We have worked hard to develop funding bases in all the major currencies and with the exception of a few opportunistic issues in other currencies, these currencies will continue to provide the major proportion of our funding requirements for 1997.” DSL Bank “It’s a kind of sport,” says Ernst Seulen, DSL Bank’s head of capital markets, explaining why his bank tries to be the first borrower to issue a Deutschmark Eurobond every New Year. In 1996 DSL got there with a Dm1 billion ($629 million) issue on January 2. But this year Seulen’s team was pipped at the post by Deutsche Morgan Grenfell, which came to market on January 2 fractionally ahead of its rival with a Dm500 million issue for its own vehicle, Deutsche Finance. “They were on the screen five minutes before us and we had to follow on behind,” Seulen says. Did DMG make a lucky guess about the timing? Hardly. DMG was also the lead manager for DSL’s 10-year Dm1 billion issue on the same day. The following week Seulen met Rolf Breuer, head of capital markets at Deutsche, to talk about what happened. “I told him we obviously had to take that risk since we chose as underwriter a bank which was launching its own issue in the same week,” says Seulen, cryptically. “But we don’t regard it as a serious act of animosity.” This New Year DSL was particularly keen to tap the market at the first opportunity. It expected the bond market to rally quickly and was proved right. Now Seulen sees little prospect in the coming months of issuing any more 10-year debt. “As before we’re going to concentrate on five-year [issues] and may issue seven-year occasionally. Ten-year will be more difficult. The whole market is in flux because of the euro and no [investment banker] seems to be able to tell me what impact it will have. So everyone is going to try to issue as long as possible.” In 1997, DSL expects to repeat its total issue volume of Dm30 billion, with about half that placed with non-German investors. Unlike German issuers like the Landesbanks, which are scrambling to get known outside the Deutschmark zone by issuing in other currencies, DSL has been so well diversified for years that it can sit tight and watch. As for the banks clamouring to offer new ideas to DSL, Seulen identifies two groups. Besides the bank’s traditional lead managers like JP Morgan, Credit Suisse and DMG, Seulen says he is impressed by a second group of banks including, for example, BZW and ABN Amro, which are beginning to prove their expertise in Deutschmark Eurobonds. General Electric Capital Corporation General Electric Capital Corporation (GECC) hit the ground running at the start of this year, launching six Eurobond offerings in six currencies during the first two weeks of January. The AAA rated subsidiary of General Electric Company of the US (no relation of its UK namesake) is expected to remain an aggressive and opportunistic borrower all year, mounting swap-driven issues in a smorgasbord of currencies in order to achieve ambitious financing targets. With total assets of $173 billion at mid-1996, GECC is the US’s largest finance company. It operates in all sectors of the market, from consumer loans to aircraft leasing, and has recently been expanding overseas, partly through acquisitions. At the end of June 1996, the company’s total debt amounted to $112.5 billion while total equity including goodwill amounted to $14.5 billion, just below an internal debt ceiling of eight times equity. During the first half of last year, it earned $1.8 billion before tax on revenue of $11.7 billion. Last year, GECC raised about $6.5 billion through 39 international bond issues in 14 currencies, most of them short- and medium-term deals linked to arbitrage opportunities. Its top-notch credit rating depends in part on the support of its parent, one of the world’s largest and most profitable conglomerates, and enables it to achieve remarkably low borrowing costs. Last year, for instance, it obtained three-year Deutschmarks at just seven basis points over the German government’s cost of funds and three-year Eurodollars at 10bp below US treasury bonds. “It’s an absolutely premier credit, one of the premier names in the Eurobond market,” says a London trader, noting that a swap-driven New Zealand dollar issue last month gave GECC an all-in cost of funds of more than 20bp below Libor. “They’ve got a floating cost of funding target, and they’re achieving those targets,” he says. “It’s one of the most professional borrowers you can find, but also probably one that cares the least about the market or its own issues; they always go for the cheapest funds they can get,” adds a banker in Frankfurt. “Probably 80% of their funding is retail-driven; they have very little institutional following… (But) this serves them well and they still have an excellent reputation, especially with Swiss, Benelux and Italian retail investors who look at absolute yields rather than spreads, so they can always get the finest terms.” Sweden By recent standards, it looks like being a quiet year at the Swedish National Debt Office (SNDO). For the first time since 1992 Sweden does not have a net borrowing requirement in foreign currency; all the issues in 1997 will be replacement issues. The year’s financing requirement is Skr50 billion ($7 billion) compared with $13 billion in 1996, which in general was a satisfactory year for the SNDO. Allowing for changes of market sentiment, the substantially lower borrowing requirement for 1997 means that the pricing of issues will probably be more aggressive. Yet the SNDO has already been active in the markets this year, despite its lower borrowing requirement. While the rest of the markets were adjusting to the post-holiday blues in early January, Sweden’s national debt office was busy shifting bonds. By the end of the first week of the new year, multiple issues totalling some $2 billion were completed in Swiss francs, sterling and US dollars, including a $700-million three-year note targeted at Japanese retail investors. For this year, “it all depends on how we see demand”, says Christine Holm, director of debt-management in Stockholm. “We are doing as we have done before: we pick up the demand as we see it and we look at the cost component. The way that we operate is that we don’t really think out the structures we react to investor demand. We can accommodate various structures through our derivatives book, so that the final currency and interest-rate composition reflect the composition of the benchmark.” While the debt office does not have plans to change the overall length of the Swedish maturity profile in foreign currencies, certain dates inevitably stick out, so expect any issues at already saturated maturities to be aggressively priced to reflect this. As for the more exotic Asian currencies, if liquidity continues to improve in the associated derivatives markets, there is a chance that the first Swedish issues in such currencies might occur this year. “We certainly wouldn’t exclude that possibility,” says Holm. “If there is a liquid swap market and we can find an acceptable counterparty risk, we would certainly consider it.” Argentina After launching a flood of international bond issues in 1996, Argentina is expected to borrow similar volumes this year to cover its fiscal deficit and refinance maturing debt. But officials say they hope to arrange fewer and larger issues. In addition, with mid-term congressional elections scheduled in October, they have sought to achieve most of the cross-border borrowing requirement early in the year, partly to allay what one senior finance ministry official last month called “worries overseas about Argentina’s ability to obtain financing”. The Argentine government says it expects to borrow “at least” $8.5 billion abroad in 1997 and hopes to place $3 billion to $3.5 billion of bonds domestically. Some private analysts think the final borrowing requirement will be higher. Officials also maintain that $2 billion of last year’s proceeds from bond issues represented pre-financing of this year’s funding needs. To kick off this year’s programme, Argentina mounted a $2 billion 20-year global offering last month; priced at 462.5bp over 30-year US treasury bonds, the issue represents Argentina’s longest Eurobond maturity in dollars, setting an important benchmark. All told, the Republic of Argentina raised $10.2 billion last year in the international bond markets through 30 issues in nine currencies, including the first cross-border placement denominated in Argentine pesos, a $250-million issue of two-year, 8.75% notes fully underwritten by Goldman Sachs in December. Other highlights included the sovereign’s return to the fixed-rate US dollar sector for the first time in more than two years; maiden issues in Dutch florins and British pounds; its first samurai issue in 16 years and a torrent of Deutschmark issues with tenors of three, seven, eight, 10, 15, 20 and even 30 years (although all above 15 years have calls and puts attached). The average maturity of new issues doubled to eight years. Argentina’s total foreign debt probably now exceeds $100 billion for the first time, or around a third of GDP. Tulio Vera, an analyst at Bear Stearns, thinks the country’s credit rating may be modestly upgraded this year, although remaining below investment-grade. The Argentine economy is recovering from recession and international reserves are at record levels. But, with nearly $25 billion of foreign debt falling due and needing to be refinanced in the next four years, Argentina remains dependent on foreign investor confidence, which largely rests on continued improvements in its fiscal performance. Toyota Toyota Motor Credit Corp, the US-based auto finance subsidiary of the Toyota Motor Corp, estimates a requirement of around $6.5 billion for 1997 against the background of a gradually shifting funding strategy. Until 1995, when funding volume was around $2.5 billion to $3 billion per year, the company’s issues were very much retail-orientated. “Traditionally our funding sources were Benelux or Swiss retail investors,” says corporate treasury manager Jerome Lienhard. “As our requirements rose [over $7 billion in 1996], that created some difficulties. Individual transaction size has to be smaller on a retail issue as it takes longer to place the bonds and underwriters are reluctant to hold that inventory. In late 1995 we decided that we needed to access institutional markets and also spread geographically to take in some of the funds available for fixed-income investment in Asia.” Last year there was a combination of retail issues interspersed with larger institutionally targeted ones, in a format that Lienhard refers to as “Euro-Asian”. Typically these were in the range of $500 million to $1 billion, listed in Hong Kong, Singapore and London but launched in the Asian time zone: effectively a global bond but excluding the US. There were four of these releases in 1996. Three were dollar-denominated followed in November by a Dm1 billion issue. Though Toyota plans to continue this mixed format in 1997, Lienhard would like to blend the public perception of the two types of issue. “The ideal is to eliminate that differential so people can’t so easily say ‘that’s retail and that’s institutional’, and that we end up with a bond for everybody.” According to Lienhard, two other considerations are having a significant impact on Toyota’s borrowing strategy. “One is the prospect of monetary union, which clearly will have an impact on larger issuers in the Eurobond market. The investor base will be homogenous in terms of their asset allocation by currency, so we need to be mindful of the larger European institutional investor as a whole. France, which is very domestically and insurance-company orientated, springs to mind as one country which we have not accessed at all and would like to. On the other hand, currencies such as sterling that will remain outside the Emu become more important in their own right for us.” The other consideration is the possibility of asset securitization outside the US. Toyota took the first step in July last year with a global asset-backed issue that was well received, particularly in Asia. “I think that there is a lot of potential for asset-backed securities in the international markets,” says Lienhard. “The US has really developed and matured and I think that international markets are following suit. We will also try and expand our presence in these as well.” Kreditanstalt für Wiederaufbau Kreditanstalt für Wiederaufbau (KfW) was the first sovereign-backed German bank to issue debt on the Euromarkets. Others soon followed, but KfW stayed ahead of the pack by devising a clear issuance strategy, establishing its name with international investors and diversifying into different currencies. That, too, has been imitated. Almost every Landesbank in Germany is now borrowing in French francs or lire to gain an introduction to local investors in those markets. The AAA rating is scarcely unique in Germany either. But KfW believes it has now won an advantage that no other borrower will be able to match. The coveted status of zero weighting, obtained last year from the German banking regulator, gives KfW near-sovereign status. “KfW is in a class of its own… the best [German] credit after the Bund,” enthuses Christian Murach, head of capital markets. Zero weighting attracts banks that invest, because it means they no longer have to put up capital against their investments in KfWpaper. The only other German paper to enjoy the same privilege is Bunds, issues from the Länder and issues from less-frequent borrower Bayerische Landesanstalt für Aufbaufinanzierung. In order to take advantage of its new status, KfW has started issuing more debt in the German domestic market rather than the Euromarket. In practice, that means KfW uses domestic market documentation but still attracts international investors, according to Murach. “The demand from banks here in Germany as well as abroad has been very strong. We don’t believe there’s been any disadvantage in shifting to the domestic market.” In 1997, Murach intends to continue with this strategy, while remaining a regular issuer in KfW’s long-established core currencies: besides the Deutschmark, they are dollars, French francs, sterling and guilders. These are becoming crowded markets, however. Murach now sees a danger that the Euromarkets in these currencies may be swamped with AAA rated German paper, and that would lessen the scarcity value of all German issues. But he will not reveal whether KfW intends to issue debt in any new currencies. In 1997 KfW expects to issue approximately the same amount of debt as in 1996 Dm25 billion ($15.7 billion) although there is no budget. Borrowing levels depend on the volume of loans made to KfW customers and the export-financing business is particularly strong at the moment. The proportion of borrowing outside the Deutchmark sector is growing every year in 1996 KfW’s non-Deutschmark debt reached Dm7.5 billion. |
