Issuer: Household International
Amount: $4 billion
Launched: May 9 1996
Arranger: Morgan Stanley
Paper traditionally symbolizes a first wedding anniversary. On May 9 it was a year since the signing of the Household International Euro-MTN programme. Paper is an apt symbol given the number of tickets that MTN dealers have been writing with the Household name on the top.
In a recent mtn Week poll, dealers voted Household the most exciting issuer of the last 12 months. “We didn’t know quite what it meant,” says Bruce Foster, vice-president of money and capital markets at Household in Chicago.
Foster has no reason for concern. Household has been generating excitement without issuing a string of exotic and risky structured trades. Rather, it has been the sheer frequency and consistency of its borrowing that has impressed the dealers. “Their policy of continuous posting shows a strong commitment to the market,” says Phil Whitehurst of ABN-Amro’s investor products group. “They show a very flexible and responsive approach to investor demand.”
The figures back up the point. So far Household has raised nearly $2 billion from its programme in 57 separate tranches. For a new borrower that is impressive volume by any standards. But for a single-A US credit, little known in the Euromarkets before last year, it is a particularly notable performance.
“We did think that it would be harder to get people to look at the new name and credit,” admits Edgar Ancona, Household’s treasurer. “We would have thought that our outstandings would have been smaller today. Perhaps $750 million or $1 billion.”
If the success of Household can be held up as proof that you don’t have to be a weighty supranational, or, ironically, a household name to succeed in the Euro-MTN market, then this hasn’t always been the case. Household has signed MTN programmes on two previous occasions, only to retreat from the market without making much of an impact. Its first foray came in 1988, but the still-nascent Euro-MTN market was no place for a single-A credit. As Foster puts it: “If you weren’t a sovereign or a triple-A credit it was virtually impossible to issue.” Household returned in 1993 but, in a market that was being driven by high-risk structures, it was only looking for some opportunistic funding.
This time the approach has been markedly different. Household has brought a US-style issuing strategy to the Euro-MTN market, something that remains quite rare. “If you look at the market, there still aren’t that many companies that are consistently posting levels,” says Foster. For most, opportunistic borrowing remains the main motivation.
This approach was in evidence at Euromoney’s recent MTN conference. Chairing an issuers’ panel, Louis de Montpelier, general adviser of the treasury of the Kingdom of Belgium, conducted a straw poll of the audience. “How many of the issuers in the audience run strategic programmes?” he asked. Arms remained resolutely by sides. The general sentiment was captured by EBRD treasurer Mark Cutis: “We have the strategic objective of being an opportunistic borrower,” he said, raising a laugh from the floor.
Household has come to Europe with a different approach. “What we have tried to do is design and maintain a programme that investors will be interested in, providing them with paper that they will want,” says Ancona. “We didn’t go over to Europe until we knew we could provide paper on a continuous basis. We wouldn’t have put in the effort we did in setting up the programme if we weren’t then going to use it to provide core funding.”
“Household has been able to meet both core funding needs and raise opportunistic financing through its programme,” agrees Olivier Jalouneix, head of Euro-MTNs at Morgan Stanley, the arranger of Household’s programme. “Not all borrowers in the market have this dual objective, but for those who do, the market is now heading to a level of efficiency whereby it recognizes and responds to their needs. Borrowers who post realistic levels can expect to see greater market opportunities,” he adds.
Departing from common practice, Household decided not to announce its presence in the market by issuing a debut Eurobond. It was six months, and over 30 deals after signing, that it finally issued a large dollar FRN.
Before establishing the programme, the treasury team set out to meet potential investors. One question they would pose was: “Where do you think Household should be priced?” They found that most investors were comparing them with credits that, in the US, Household would not regard as in its peer group. The message was that European investors needed educating about the Household name and credit before they would accept what Household felt were accurate pricing levels.
“We didn’t want to go out and set a public benchmark that we wouldn’t be happy with in the future, that wasn’t accurate because of market ignorance,” says Ancona. “So we set out to increase the market’s awareness and credit knowledge of Household. We laid out a curve of levels which were appropriate for our credit. In the selection of the dealer group we looked to firms with strong fixed-income research. We also wanted to have enough paper trading in the market so that, when we came to do the dollar FRN, someone could see where Household should be trading.”
In the past month, Household has executed two more public deals, in French francs and Deutschmarks. “One of the ideas behind the trade is to diversify their investor base and prepare for 1999,” says Sean Park, head of Paris syndicate at Banque Paribas, the bookrunner on the franc deal. “The name was not at all known in France before this deal, so Household came to Paris and did a very good roadshow. Rather then showing up on January 4 1999 along with 200 other new issuers, getting the name out there now means that there will be less work to do in the future.”
Household stands at the forefront of a pack of single-A credits who are finding the Euro-MTN market increasingly receptive to their paper. “As investors get more comfortable with credit, it is natural that they will gravitate towards single-As, as that’s where they are going to pick up yield,” points out Ancona.
“Household has been highly effective in turning this development to its advantage,” adds Morgan Stanley’s Jalouneix. “It is clearly possible for a single-A type name to penetrate the Euro-MTN market successfully, as long as it is priced properly, the marketing spin is good and the programme is well managed.”
Also working to Household”s advantage is the fact that its programme offers investors four different issuers, two of which are licensed banks and enjoy a 20% risk-weighting. “If you look at our issuance then probably half of it is 20% risk-weighted,” says Foster. “Having that option has a lot of initial appeal to investors. It’s another positive for the programme.”
The manner in which Household has developed its relationships with its dealer group shows an acute understanding of what endears an issuer to an MTN trader. Initially the programme was not open to reverse enquiry, a reward to the dealers who had spent time and effort helping to establish the programme. Household also keeps its dealers up to date with their performance relative to their peers. “Monitoring the work of your dealers with a decent lead time is important,” says Jalouneix. “Being a good issuer for dealers may also mean being tough with them.”
“I don’t know if we’re tough,” says Household’s Foster. “But I would like to think that we’re fair. We accept that dealers want fees to distribute our paper, but in return we have expectations: that they market the name, that they support the paper in the secondary market. If being tough means having a regular discourse and communicating when you’re unhappy, then I guess we’re tough.”
Tough with their dealers; fair with their pricing; and the market’s favourite.
