Issuer: Banque Générale du Luxembourg
Amount: $2 billion
Launched: November 28 1996
Lead manager: Merrill Lynch
“It’s not that they will look at quite anything,” says Henry Nevstad at Deutsche Morgan Grenfell, “but it’s pretty close to that.” He is talking about the $2 billion Euro-MTN programme run by Banque Générale du Luxembourg (BGL) which has been both busy and innovative since its launch 13 months ago.
“My phone has been exploding,” says Philip Inghelbrecht, who is in charge of the programme’s day-to-day running. He was speaking late last year as most of the financial community was winding down for Christmas. On that day, he had closed three yen trades, all bermuda callables notes carrying multiple step-up coupons that are callable each time the interest rate increases.
This is a standard structure in the MTN market, but since signing its programme in November 1996, BGL has gained a reputation as a borrower that is willing to look at more exotic trades. “We try to be opportunity-driven,” says Inghelbrecht. “Any structures that other people cannot take, for whatever reason, we will try to do. These are often the ones that translate to better levels. We are looking for deals that can add value.”
BGL has an advantage over some other issuers because the MTN programme was never intended as a funding vehicle. If the levels available in the market aren’t to its liking, then it doesn’t need to trade.
Prior to the MTN programme, BGL’s activities in the international debt markets had been restricted to issuing Luxembourg franc notes, mostly targeted at the domestic market. It saw an MTN programme as a flexible and cheap way to continue issuing these plain vanilla bonds, but with the added attraction of being a useful marketing tool for entering the international capital markets.
It was lagging some way behind two domestic rivals which had embarked on highly successful Euro-MTN programmes the previous year. Banque Internationale à Luxembourg and Banque et Caisse d’Epargne de l’Etat had already issued over $1 billion and $650 million respectively by the time BGL entered the market. But BGL has done its best to catch up. In just over a year since signing, it has lauched 51 trades worth $1.09 billion.
The most interesting element of the programme is its retail focus. In the summer prior to the programme’s signing, BGL had launched its first retail-targeted structured products. The Protected Index Notes were marketed as “investment products for conservative equity investors”. They were small bond issues offering a return linked to the performance of the major equity indices. The investors’ principal was 100% protected and the notes were sold through BGL’s branch network in denominations as small as $2,500 equivalent. Following the initial success of the notes, BGL saw an MTN programme as the perfect vehicle to issue these notes at regular intervals, and in increasingly more complex structures.
“The first structured product we did had 100% capital protection and was linked to a very familiar index, the S&P 500,” says Inghelbrecht. “But two months ago we issued a digital note linked to the Bel 20. If we had started out with that, people would have freaked out. You have to take them along with you, step by step.” There are now seven Protected Index Notes in the market and the bank has expanded its product range with two Protected Sector Notes, which link returns to the performance of a basket of stocks, one of pharmaceutical stocks the other of retail companies.
Although a number of investment banks have expanded their MTN product range to include notes structured to the needs of retail clients, BGL has broken the two unwritten rules of the structured MTN market: no transparency and definitely no liquidity. Each of its structured products is accompanied by a comprehensive and glossy marketing brochure spelling out the structure of the note and the risks involved. The bank also provides a liquid secondary market in the notes, something that very few issuers are prepared to offer. Access BGL’s home page on the internet and you can find quoted bid-offer prices for all its structured products.
BGL is rightly proud of its refreshing approach but it has no intention of sitting on its laurels in 1998. Inghelbrecht now has his eyes on two new products: credit-linked notes and longer-dated structures. “We want to try and do the same type of deals that we’ve issued in three- or four-year maturities, but try and get out to 10 or 20 years,” he says. Already the bank has issued some very complex notes, among them a Swiss franc deal that pays a redemption amount according to the volatility in the Swiss SMI futures index, and a fixed-rate coupon in sterling. But Inghelbrecht may have to be content with keeping those notes at the short end of the curve.
He sees expansion into the credit-linked market as a development that will have wide-reaching benefits for the bank. “At present we have no activity in emerging markets at all,” he says. “If we are in the credit-linked market we can see what structures are possible, learn a lot ourselves and perhaps pass on the ideas to our own portfolio managers.”
Credit-linked notes have been regarded as the next big thing in MTNs for some time. “I think that sector is definitely poised to expand in 1998,” says Mark Ames, director and head of MTNs at Lehman Brothers in London. To date, he suggests that the market has been held back by a lack of issuers willing to look at credit-linked structures. Ames suggests that the growth of the market has also been damaged by rating agency Moody’s decision to rate credit-linked notes separately from other MTNs. A borrower with a double-A rated programme may therefore have a credit-linked MTN rated triple-B or lower. “It’s not that the investors care,” points out Ames. “They’re all very sophisticated institutions who know exactly what they’re buying. But many issuers don’t want lower-rated paper with their name on.”
He suggests that while issuers are right to be concerned about their reputations, their worries are unwarranted as far as these trades are concerned. “The majority of these deals are really true private placements, and they definitely go to buy-and-hold investors.” There is no danger of the notes spilling over into the retail market.
BGL’s willingness to expand into the credit-linked sector is an encouraging sign. But Inghelbrecht stresses that the bank will be treading carefully in this direction. “If we feel that the investors might get screwed, we won’t do it,” he says. “We don’t want to risk our reputation and so we will attach great importance to the role of the dealer.”
Up to now, Inghelbrecht has been very impressed with his MTN dealers. Every name in the programme’s dealer group has done at least one trade for the bank, in addition to which, BGL has also completed 10 issues through reverse enquiries, the so-called dealers of the day. “I never thought so many people would effectively deal,” he says.
