This year’s best borrowers have excelled in what has been a rollercoaster ride in the international capital markets. Debt and equity issuance continued to break records. The asset-backed market is booming. A true high-yield market has begun to develop in Europe. Leveraged loans are now – according to Standard & Poor’s – a true asset class. And the syndicated loan market has seen jumbo euro issuance, the introduction of soft pricing, raging arguments over fees and new types of loan/bond hybrid.
All this activity and innovation has occurred in arguably the most difficult environment since the tequila crisis in Latin America. The meltdowns in Korea, Thailand and Indonesia highlighted these countries’ high levels of foreign borrowing and their reliance on short-term debt. The continued stagnation in Japan has unsettled the markets, and investors there – particularly the life companies and corporate pension fund managers – need a new paradigm if they are to survive.
On a more positive note, Europe can look forward for the first time to a large, liquid, unified bond and equity market denominated in its new currency the euro. A number of those winning awards this year did so for their foresight and courage in opening this new market.
As our awards show, the world’s best borrowers have turned adversity to their advantage. Korea’s $4 billion sovereign debut, brought to life by Steve Irvine’s behind the scenes exposé on page 55, was a triumph for the country and its advisers, Goldman Sachs and Salomon Brothers. Our winners broke new ground: GEC’s euro6 billion syndicated loan and Cariplo’s tributary bond created new investors for their debt as well as establishing their credentials early in the new Europe. And jumbo issuers such as Fannie Mae and Depfa proved that big is beautiful when in the past they would have paid a premium. Large or small, Euromoney congratulates them all.
BEST BORROWER
Republic of Italy
At 33 basis points over the benchmark US treasury, the deal was flat to US agency Fannie Mae’s $3 billion benchmark note three weeks earlier. True, spreads had tightened in since Fannie Mae’s deal, but one banker in the syndicate thought Italy’s paper was still priced two or three basis points too cheap.
In the mid-1990s, such an outcome would have been rejected as ludicrous, and the ability to fund at such tight levels is a success largely attributable to the team at the Italian treasury, led by director-general and head of funding Vincenzo La Via. When La Via started at the treasury in 1994, Italian interest rates were 14% and domestic government bonds, BTPs, were trading at 650bp over Bunds. The treasury team he joined – many of whose relatively youthful members had experience of working abroad – had already started to restructure the domestic market to make it more transparent and more liquid. What La Via could add was his experience as an investor. He had spent seven years at the World Bank, the last three in the treasury, working on the gilts, yen, Australian dollar and ERM desks. In 1991 he left to become a fund manager at Akros Finanziaria in Milan, an asset management firm with roughly $2.5 billion under management.
Many observers feel this experience has been one of the main factors contributing to Italy’s funding success in recent years. “His understanding of the markets and the rationale driving investors’ decisions has been invaluable in helping the treasury determine their borrowing strategy,” says Riccardo Pavoncelli, managing director and head of debt capital markets (Europe) at Morgan Stanley Dean Witter.
It has been no easy task. Italy’s government bond market is easily the largest in the world and much of it is funded with short-term paper. According to Fabrizio Ghisellini, head of foreign funding and liability management at the Italian treasury, roughly L30 trillion ($17.2 billion) in three-, six- and 12-month domestic government debt is rolled over every month. “We have a significantly larger amount of short-term debt than other countries, but we are now starting to try and reduce that by 10% a month,” says Ghisellini.
Luring investors in
La Via decided to turn the huge borrowing needs to his advantage. First, the strategy was to increase the profile of Italy abroad by raising debt on the international capital markets in currencies non-Italian investors would prefer to hold. “Initially the strategy was to get investors interested in Italy’s credit without having to take on the (additional) currency risk,” says Pavoncelli. “Once they became comfortable with the credit, Italy’s primary objective was to get foreign investors involved in the domestic bond market.”
It began to work. With Italian T-bills and longer-term domestic debt trading at three-figure spreads over the French OATs and the German Bund, international investors that had taken on Italy’s international debt issues started taking positions. The next concern was how to keep them there. As the likelihood of Italy joining Emu increased, so did the convergence trades on Italian debt, and spreads began to tighten. “The Italians had the example of what had happened to the French domestic government bond market,” says Sean Park, head of European syndicate at Paribas in London. “Once the French paper started to trade at or near flat to Bunds, international investors started to liquidate their positions and look elsewhere.”
Dealing with this has taken up much of the past two years, and has been a big juggling act: to keep international investors interested; to refinance the debt and keep down the cost of funds; and to continue with the restructuring of the domestic market. “What the treasury team is doing is not an exercise in pricing just one deal,” says Park. “La Via and his team are repricing all of their debt, most of which is domestic and is being constantly refinanced at their monthly auctions.”
This could explain why the main criticism of Italian deals has been that they are sometimes priced too cheaply. On a deal-by-deal basis, that might be true – witness the comments about the $2 billion 10-year last month. But La Via has been determined progressively to reduce the cost of financing his debt and, says Park: “This would be very difficult to do were he to allow his deals to be priced at the tightest level possible on the day. If he did that the risk would be that the spread would be unlikely to tighten, and could widen, so the next deal launched would be priced against that, rather than the tighter trading levels of a deal which has traded in since launch. In effect, each deal needs to set a spread ceiling to be ratcheted in over time.”
Leaving a bit on the table
This is what Italy’s international issues in 1997 set out to achieve. Italy issued several large-size European currency bonds last year: a Fls1.25 billion ($660 million) deal in May, and a Sfr1 billion ($700 million) and a Ffr5 billion ($860 million) issue the following month. Then, in July, came the largest sovereign Deutschmark bond for five years, for Dm3 billion ($1.3 billion). “The whole idea of last year’s international issuance was to broaden our investor base in Europe by offering the right size and price for each currency we chose,” says La Via. “And we followed a very precise strategy of not offering the very tightest deal we could, but leaving a little bit, and just a little bit, for the investors.”
As European sovereigns were issuing less and less debt, Italy was offering investors in each of the countries large, relatively liquid deals to grab their attention. But there was another reason for doing the deals. “The $1.5 billion issue in September 1996 reconfirmed that Italy had become a popular name internationally, and one which investors felt confident with,” says Manfred Schepers, managing director and global head of debt capital markets at SBC Warburg Dillon Read. “Every deal they have done since then has re-emphasized this, such as their first euro deal at the start of 1997, which came at 18 basis points over French OATs. A few months earlier, this would have been inconceivable, but the franc, guilder and Deutschmark deals last year reinforced that, and, combined, have redefined Italy’s credit spread.”
This year La Via has taken this a step further, and in doing so has proved that his reputation for understanding what investors want is well founded, as well as getting an excellent cost of funds. The euro4 billion ($4.4 billion) bond issued in February at 17bp over OATs is the largest euro-denominated bond, and the largest single-tranche Eurobond ever, so satisfying investors’ demands for more liquidity. It is likely to be the 10-year benchmark euro deal. “What the Italians did with this deal is turn liquidity to their advantage,” says Pavoncelli. “They might not have quite as good a credit rating as some of the other Emu sovereigns, but with their larger funding requirement they can satisfy investors’ demand for liquidity instead. Eventually this will enable Italy to become one of the reference benchmarks by offering investors a complete range of highly liquid instruments across the yield curve.”
Size was definitely an advantage. “The bigger the deal got as we premarketed it, the more the momentum built up,” says Park at Paribas, joint bookrunners with SBC Warburg Dillon Read and JP Morgan. “We discovered that there was a latent demand building up for euro paper, but that there was not enough liquidity or quality in the available paper outstanding at the time.”
But as the $2 billion deal in May shows, La Via has achieved more than this; he has managed to persuade investors to ignore the rating. Italy is now regarded, at least by European and Asian investors, as a de facto triple-A borrower. US investors would want to price it as a double-A off Fannie Mae, so a spread of at least 40bp over treasuries would have been demanded. This explains why the $2 billion deal was structured as a pure Eurobond with no 144A exemption.
What comes next?
Italy has not issued much dollar paper recently and some bankers feel that this deal was just a means of flagging the Italian name with dollar investors. But the spread of 33bp over treasuries gives the Italians a better cost of funds than they can achieve at home, assuming the swap market is favourable. So while the market remains bullish, could more such deals be forthcoming? Not according to La Via: “We got an excellent deal there precisely because we had not come in 10-year dollars since 1993, so there was a rarity value there. If we were to overexploit that, the spreads would almost certainly widen, and defeat the object.”
Second-guessing La Via is not easy. “He and his team keep their cards very close to their chests,” says Noel Dunn at Goldman Sachs. “They are very thoughtful and prepare for deals well. And they will only do them when they are ready. We’ve been talking to them about doing a 10-year dollar deal since time immemorial.”
Other bankers expect there to be a lot more euro issuance before the end of the year. “They already have one benchmark [the euro4 billion],” says one banker. “And I get the impression that they would like to establish a full curve from six months out to 30 years.” Although Italy has more than enough funding needs to be able to do so, euros cannot offer a better cost of funds than the domestic market. “We certainly want to do such deals,” says Ghisellini. We want to take part in the competition for benchmark status in the euro, and we have the scope to provide the liquidity to do so. But we’ll only do them if the deals make sense and if the cost of funds meet our requirements.”
Ghisellini also hints at new ways for Italy to finance its debt. “Size and liquidity, and reducing our borrowing costs, have been our prime concern. But we also care about diversification, and we have been looking at how to complement our liquid benchmark strategy with a commitment to provide specific market sectors with products structured to suit their needs.” Index-linked bonds is one option the team has considered, as is a variation of a debt issuance programme.
The beneficial effect of this method has not been limited to Italy’s international issues. “Italy’s international borrowing strategy has had a dramatic influence on the valuation of the domestic bond market,” says Schepers. BTP spreads, which just 18 months ago were in triple figures, are now trading at around 25bp over Bunds. Transparency and liquidity are also improving. Benchmark BTPs are now being issued in larger denominations, a repo market was introduced at the end of last year, and as from July 1 there will be a BTP strips market.
If just one aspect of future issuance from Italy can be predicted, it’s size. “We believe liquidity is a plus for us,” says La Via. “We can provide large, liquid benchmark deals more quickly than most of the other sovereign borrowers. It’s a different ball game to two years ago. We’re now competing for funds with the best credits around the world.” Antony Currie
BEST EMERGING-MARKET BORROWER
Republic of Argentina
“The Italians and the Argentines have had a very good relationship historically,” says Luc Cardyn at Paribas, bookrunner of five of Argentina’s deals since last September. “So much so that Italian investors don’t really regard Argentina as an emerging-market credit.”
Five issues in the last half of 1997, raising the equivalent of $1.7 billion of a total of $9.6 billion in international issuance since June last year, emphasize the point. As does the country’s strategy after the crisis: its first deal then was a L300 billion ($175 million) issue. As the first emerging-market borrower back to the markets, it was closely watched. It soon sold out, even after an increase from the initial L250 billion. And there was a certain amount of good timing, as Argentina had just one month before redeemed a big lira issue. Although this had been anticipated with a L750 billion and a L375 billion at the end of September and the start of October, there was still enough demand for more of the same, especially from investors who were parched after a six-week drought of paper. Good spreads, such as 269 basis points over the three-year lira swap rate in this deal, reinforced the attraction.
It is a moot point, but many think that at that stage of the market a lira deal was the only real option for Argentina. Likewise bankers feel that the republic’s most recent lira deal could only have been executed in that currency. The L750 billion in February had a slightly unusual maturity of 11 years and eight months, and prompted one syndicate member to comment that it “once again confirms Argentina’s status as Italy’s favourite LatAm issuer. I don’t think that Argentina could have achieved a deal of this size and at this maturity in any other currency market”.
Other, non-lira, deals have also been popular with Italian investors, such as the Dm1.5 billion ($882 million) in January. As with all but one of its lira deals since June last year, the Deutschmark issue carried a step-down structure, paying a high coupon (just below 9% before the crisis, 10% or more thereafter) until 2000 or 2001, when it steps down to between 7% and 8%. “It’s a structure which was used to help make the paper appeal to Italian investors,” explains Cardyn at Paribas.
Argentina isn’t just targeting Italy. Even with the best will in the world, it is highly unlikely that a bank could place all of a Dm1.5 billion issue with investors there. Nor would it explain the simultaneous launch at the end of February of a Fls500 million ($250 million) and a Ffr1.5 billion ($250 million), both of which also used the step-down structure. But it is a distinct advantage for any borrower, especially an emerging-market borrower, to be able to rely on a core set of investors.
It also allows for a steady stream of successful deals at a time when the Argentines are setting up the domestic bond market. “We’ve already issued $2 billion in domestic securities, and expect to issue a further $3 billion this year when we decide which structure to use,” says Federico Molina, director-general of Argentina’s National Public Credit Office. “And we want to increase the amount of domestic issuance so that we no longer have to rely so much on raising debt internationally.”
Why the poor rating?
This year, roughly $8 billion will be raised abroad, and one of the main reasons for trying to reduce this – aside from seeing the crisis caused in Asia by too much foreign debt – is to improve their standing in the eyes of the rating agencies. Latin American countries regularly compare themselves with east European issuers, and ask – as Argentina’s under-secretary of finance Miguel Kiguel did in a speech at last year’s Euromoney Borrowers’ conference – why their countries are rated lower, even though most kept and repaid their debts, whereas many of the east Europeans had to reschedule their payments, and even had some forgiven.
It is a situation which the Argentines expect to change in the next few years. “We have been somewhat penalized by our history,” says Molina. “But matters are improving all the time. Since 1991 our economy has performed well, and the fiscal accounts are under control. And we are in the process of establishing a liability management team.”
Overall, international issuance has been diverse enough to attract the wider audience of Swiss, UK, German, French and Dutch accounts especially. So while they have relied on the backbone of Italian investors, the Argentines stand out as “one of the emerging market countries trying to build up their investor base,” says Roman Schmidt, global head of syndicate at Barclays Capital. “They have a very good investor relations policy, and have financial representatives in the major centres [in London, it is Augustin Villar]. And they listen well to the strategic advice the banks offer them.”
Shift to euros
Over the past 18 months the Argentines have been positioning themselves as the emerging-market borrower most prepared for the single currency in Europe. They have made four of their deals – two of the lira, a Sch1 billion ($84 million) and the February Dm1.5 billion – fungible at seven years, which will create a sizeable $1.7 billion equivalent benchmark in 1999; and three others, the franc-guilder two-tranche issue and the January 1998 Dm1.5 billion, are fungible at 10 years, as from 2001.
This they have combined with three euro deals – a five-year euro400 million ($432 million), a 10-year euro750 million, and another euro750 million which goes all the way out to 30 years.
“This has been a very impressive development,” says Cardyn at Paribas. “The Argentines were very quick to spot the shift from lira to euros. They’ll probably do more of these, as well as some Eurodollar transactions. But it is impressive that they can still issue in size when, bar some reopenings and floaters, the dollar market has effectively been closed to them since the Asian crisis.”
Antony Currie
BEST PUBLIC BANK BORROWER
KfW
It has had successes outside the market too. Important coups in recent months have included concessions from the German banking supervisor and the finance ministry. Last year KfW was granted a zero risk weighting, just like the Bund. Then, on April 1, just in time for the sale of the global issue, the bank was awarded a direct guarantee from the federal republic of Germany for the first time.
After roadshows in the US and Asia, the global sold around 20% by volume to US investors, 20% to Asia and 55% to Europe. But that wasn’t enough to satisfy Gerhard Lewark, head of treasury and issuance.
KfW’s official line is that the only difference between its debt and Bunds is that KfW paper is not deliverable into the Bund futures contact. However, there is a more fundamental difference between the two types of paper: the Bund has far greater outstanding volume and liquidity to match.
Beyond the Bund investor
Lewark isn’t coy about this. His team is making urgent efforts to improve the liquidity of KfW’s outstanding debt, with the long-term aim of coming as close as possible to German sovereign debt. There’s some way to go: the 10-year nine-month global was trading at 12 basis points over its 10-year Bund benchmark in mid-May.
Initially, the job involves talking to traders at more European banks, particularly those operating outside Frankfurt. Also – potential bookrunners take note – KfW is looking for new investors in German securities who have not yet ventured beyond Bunds. “We urgently need to place higher volumes with international investors, particularly in the euro countries,” Lewark says.
Early 1998 has been particularly busy. Out of projected borrowing of Dm40 billion this year, no less than Dm27 billion had been raised by the end of April. This frantic early pace means KfW now has time to consider its next move at leisure. “I don’t think we’re obliged to do anything new,” says Lewark. “It’s a case of consolidating what we have already done.”
In this hiatus, banks have a chance to offer KfW new ideas. Even though KfW’s issuing record is well known and its status as an important triple-A issuer self-evident, some intermediaries still don’t make the right approach. “We want banks to give us properly thought-out ideas,” Lewark says. “But we reserve the right to make our own assessment of whether the idea is realistic or not.”
Banks which call on spec are particularly irritating. “It’s murder here just before a deal. We get nothing but aggressive banks on the phone.”
On past form, conservative ideas still have the best chance of success. On principle, the borrowing team avoids equity-linked constructions, as well as “anything I don’t understand after reading it through twice”, says Lewark.
Resisting one latest fashion, KfW will not be coaxed into offering euro-denominated debt. Rival borrowers such as the European Investment Bank have used French government OATs as the benchmark for their euro-denominated issues this spring.
KfW, however, is wedded to the Bund as its permanent benchmark, and the borrowing team believes the Bund will become the market’s main benchmark for euro issues. It’s simply a matter of waiting until that becomes clear to everyone, argues Lewark. If necessary, that means waiting until next January.Laura Covill
BEST PRIVATE BANK BORROWER
Cariplo
The bank is a huge issuer of domestic medium-term bonds sold straight through its own network and that of Mediocredito Lombardo, a subsidiary. Last July, though, it made a strategic decision to develop an international following. The resulting three-tranche Euro-fungible tributary bond was a blow-out and was praised for its structure and timing.
The issue totalled Dm1.3 billion, split across a Dm300 million tranche and two others of Ffr1 billion and L600 billion. It was priced at Libor + 10bp with the lira tranche paying 6.25% fixed but exchangeable into an FRN at the issuer’s option. This was an Emu play: if convergence continued to reduce Italian interest rates as was expected then Cariplo would benefit. Deutsche Bank ran the books on the Deutschmark and French franc tranches, while JP Morgan was joint lead with the issuer on the lira tranche.
It was a deal of firsts: it was Cariplo’s first foray into the Deutschmark and French franc markets. It was the first French franc FRN by an Italian issuer. And it was the first parallel/tributary issue by an Italian entity. It is also the most liquid FRN issued by a European private bank in any other currency than dollars.
Renato Tarantola, CFO at Cariplo explains why the bank chose the structure. “Last year, it was time to show our name in Europe. We already had three programmes set up outside Italy: a $2 billion CP programme in New York, a $2 billion Euro-CD programme in London and a $2 billion MTN programme in London. But, since Italy was downgraded from triple-A, we hadn’t used the short-term facilities outside Italy. With the single currency coming, it was time to sharpen the pencil on the Cariplo name. The parallel or tributary bond was a success. We should have been able to save at least half a basis point on the pricing. Libor + 9bp was the best offer we had and we could have done it at that, but since it was the first deal for a long time, it had to be a success.”
The timing was interesting. The deal was launched shortly after the announcement of the merger with Ambroveneto. The bank could easily have just targeted the Italian market, but instead chose to create a European investor base ahead of its competitors, before the 3rd stage of Emu was finalized. In this way the bank and its leads believe the Cariplo name is differentiated from other European banks.
Bankers are keen to compliment the issuer. Michele Cogoi, senior associate director in Deutsche Bank’s London-based financial institutions group believes the deal gives Cariplo a head start in creating pan-European investor interest in its paper. This is important as the advent of the euro makes reliance on any domestic market more dangerous. “The deal came to the market at a time when it wasn’t yet certain that Italy would make the grade,” says Cogoi. “The deal brought Cariplo to the forefront of Emu and showed a strong vote of confidence in it. It was a blow-out transaction! The deal was very well received because it accessed not only core currencies within the Euro, but also major institutional investors in Europe. Cariplo could easily have increased the deal and is now placed well ahead of its Italian competitors in Europe, because it has established a truly European investor base for when it wants to re-access the bond markets. It established a link between Cariplo’s strong domestic franchise and international investor base.”
Tarantola is keen to return the compliment: “We are extremely happy with Deutsche Bank. Deutsche were transparent and professional. Their capability to assist us in Germany and France was extremely good.”
The deal also gave Cariplo the chance to spread a little ancillary business around its favourite underwriters. It has talked to Deutsche, JP Morgan, Goldman Sachs, Merrill Lynch and Credit Suisse about future borrowing requirements and foreign exchange.
The bank believes it makes sense to maintain a presence in the international markets. In its home region of Lombardy investors will always snap up its issues and the merger gives it three strong brands to exploit across Italy. No final decision has yet been made on centralizing borrowing under the Banca Intesa name. However given the recent Ecu/euro issue from Istituto San Paolo di Torino the bet is that whatever name is used the currency will be in euros directly.
As Tarantola explains: “Will we target the market outside Italy again? Yes. But the panorama is changing [within our group] and there are no details about sizeable transactions. We want to maintain our brand names, which are well known, and we’ll continue to issue under our own names domestically. But it’s not yet been decided in the euro market whether to issue under the new name of Banca Intesa or not.” Rebecca Dobson
BEST AGENCY BORROWER
Fannie Mae
But then, Knight can hardly afford to do otherwise. She expects to raise between $90 billion and $100 billion in the debt markets this year, so paying one basis point more than necessary is a costly affair. Done too often it could alienate investors, especially those outside the US who have been the primary focus of Knight’s marketing drive in recent years. Bankers have learnt not to expect that mistake from Fannie Mae.
“They never push anything into the marketplace,” says Roman Schmidt, head of syndicate at Barclays Capital. “They want to get the largest cost savings they can, but also do a great deal of due diligence to establish investor demand. To win a mandate from them you have to convince them that you are confident the book will be sold very quickly.”
Judging by Fannie Mae’s record of the past 12 months, if a banker can manage to do that there is every chance that the deal will be a high-profile or ground-breaking one. In that short period the mortgage agency has reinvented its funding strategy, reduced costs but kept investors interested and bankers on their toes.
Kiwis and Aussie dollars
The first stage in the new strategy was a £1 billion (later reopened to £1.25 billion – US$2 billion) global back at the start of 1997 – the first sterling global deal. From June on, the focus was on other less well used currencies. After a blow-out five-year NZ$500 million (US$345 million) – the first Kiwi global since 1993 – came a five-year A$1 billion (US$750 million) global and, one week after the handover of Hong Kong to China, a five-year HK$1.5 billion (US$200 million). This latter was of note not just because of its timing, but also because it was the first bond issued in Hong Kong dollars in registered rather than bearer form (the only format which Fannie Mae’s charter allows).
In the rest of the year Fannie Mae consolidated on this, establishing three- and 10-year benchmarks in the Australian dollar (both A$1 billion), and New Zealand dollar (NZ$500 million and $450 million). Add to this two yen deals (a two-year ¥10 billion and a 10-year ¥100 billion), and none of the public deals in the last six months of last year were in the borrower’s domestic currency (all notes issued off the domestic MTN programme are, of course, in dollars).
“What that proved was that we have a flexible approach to the financial markets,” says Knight. “If deals are well priced and can be well distributed, we are ready to go, as long as the market opportunity suits our needs.” These needs are very specific: to hit a target of Libor less 15bp to 18bp. If that can’t be reached, the deal won’t get done.
That is one of the reasons why, apart from a small HK$300 million in early January, and two yen deals, all the public issuance this year has been in US dollars – the swap markets have not favoured anything else. But when they do, the agency will consider most currencies for which there is enough investor demand. No euro issuance is planned because the swap market is undeveloped. Banks who can come up with a swap in size may well find Fannie Mae a ready client.
Foreign currency issuance has also slowed as Knight and her team have concentrated their efforts on their super-liquid benchmark note programme. The first deal was in early January, a $4 billion five-year with Credit Suisse First Boston, Goldman Sachs and Merrill Lynch as joint bookrunners.
A gap for triple-A
Bankers and issuers had been looking at creating jumbo benchmarks for the last few months of 1997. “We first started thinking about our programme for 1998 in the middle of last year,” says Knight. “We looked at the situation with US treasuries, and what might happen with them if the economic environment shifted to a balanced budget. At that stage last year, balance was an optimistic estimate.”
Fannie Mae reasoned correctly that falling issuance of US treasuries, with fewer maturities offered, would create a gap in investors’ portfolios that a triple-A-rated agency with huge borrowing requirements could fill.
But there was one problem. “The vast majority of Fannie Mae’s funding traditionally came from its domestic programmes,” says Noel Dunn, head of European syndicate at Goldman Sachs (83% of last year’s borrowing was raised this way). “They were filling up the market with paper of small size and coupon, which traded at a wider spreads to other triple-A paper.”
This pushed up their cost of funds and kept them out of the big domestic institutional funds. The benchmark note programme was designed to change all that. So far, $19.75 billion has been issued in five deals. Only one, in May, was for $3 billion, the rest each raised $4 billion. But one of these, the February 2 deal, was tapped for a further $750 million a month later, somewhat unusually not by the original lead-managers. “We used the three banks [Lehman, Merrill and Salomon] which were running the books on the $4 billion that same day [2 March], because they came to us with the extra demand,” says Knight. “It is somewhat unusual not to use the original leads, but we want any reopenings to be driven by investor demand, and have told the bankers that, so it didn’t come as a surprise.”
Fannie Mae has now raised at least one-fifth of its requirements this year from its benchmark note programme, and Knight expects to raise close to $40 billion overall in this manner this year. It should save it a tidy sum in interest payments. “They’re getting a cost of funds which is between four and five basis points better than their globals, and up to seven basis points better than their MTN issuance,” says Dunn. “They’ve managed to penetrate the institutional accounts, and are beginning to perform as off-the-run treasuries.”
It has also increased the amount of paper placed abroad. Between 30% and 40% was placed abroad in the first quarter of this year, and 29% last year. This is a rapid increase: in 1996, just 18% of overall issuance went to non-US-based accounts, although this was double the figure of the previous year. Of the benchmark notes, roughly 40% has gone abroad, in addition to the improved profile in various markets from their opportunistic forays into other currencies.
Paying benchmark fees
Some have commented on the borrower’s $3 billion 10-year in May, claiming that it came too wide at 33bp by 4bp, so eliminating some of the savings, but, says Knight: “We focus on existing 10-year trading levels on the secondary market, and use those as our indicative pricing level. Admittedly spreads came in a week later, but our borrowing is driven by our mortgage portfolio requirements.”
The change in strategy has also pleased the bankers. “No-one was making money on placing the MTNs,” says one banker. “But on the benchmark notes they have been paying benchmark fees to make sure that they clear at the reoffer.”
This is unlikely to last, however. Fees are beginning to tighten, and much of the talk is now focusing on when, not if, Fannie Mae is going to take the next step towards being an issuer of surrogate US treasuries by dispensing with the bookrunners in favour of an auction process.
For now, they should be content with their success of the past 12 months. As Dunn asks: “How often can a borrower completely change its strategy and still manage to get cheaper funding to the tune of five basis points or more?” Antony Currie
BEST MUNICIPAL BORROWER
City of Moscow
How? According to Caster Stoehr, vice-president of debt capital markets at Credit Suisse First Boston, it is because: “They are very proficient, more so than some of the investment grades we have dealt with. They are a very professional borrower. This is particularly unusual for a borrower coming out of a truly emerging market. They have really excelled.”
The city is currently developing a domestic bond market with help from western advisers. It expects the market to total Rb6 trillion in six- and 12-month notes. Alongside this it runs a successful international borrowing programme. Last May the municipality launched its first Eurobond, primarily to fund structural projects for its 850th anniversary. It is now embarking on its fourth international issue.
Created in June 1996, Moscow’s municipal debt committee prides itself on its closeness to the markets. “I know everyone,” says Sergey Pakhomov, the committee’s first deputy chairman. “On average I meet maybe two investment bankers a day.”
All deals were off
But the committee was tested when the Asia crisis set in. “Everyone in Russia who had intended to come to the market had to look for an alternative source of funds,” says Stoehr. All borrowing had to be put on hold.
“In early September we awarded our second mandate,” says Pakhomov. “We planned it for early November but our bright future changed rather abruptly. We were going to build our dollar curve in a steady and conservative fashion and then go to Deutschmarks. When the situation changed we found that the dollar market reacted in the most nervous way. So we had to change our strategy very fast and had to look at other opportunities.” Credit Suisse First Boston was awarded the Dm500 million ($282 million) mandate as it identified pockets of Deutschmark demand that kept the price down.
The bond was finally launched in April after legal hold-ups. “We couldn’t get the tax exemption letter until the federation itself did its deal,” explains Stoehr. One month later the city launched a successful L400 billion ($227 million) Eurobond with Chase Manhattan.
The city’s success has been achieved despite competition with the Russian federation. The April Deutschmark deal was launched only a week after Russia’s seven-year deal in the same currency. “We were stuck. We couldn’t move further away” says Pakhomov. “Potentially a lot of our demand was taken by the federation bond. One month later would have been better. We decided to proceed but we were perfectly well aware of the consequences.” Moscow’s lira Eurobond in May came soon after Russia’s, and both borrowers are set to issue again in June.
John Fleming, head of syndicate at Credit Suisse First Boston points out that, properly managed, these dual deals can be turned to Moscow’s advantage: “We worked off the [federation’s] benchmark which helped price the deal tighter than it might have been. And because the federation was well received, investors were very receptive to the city.”
Moscow is a uniquely commercial municipality. It is forbidden from running a budget deficit and it supplies a large portion of its budget to the federation.
Mechislav Klimovich, chairman of the debt committee, explains how the funds are spent: “Proceeds from the bonds are used for investment purposes to finance serious projects. We are interested in business, projects that can pay back.” One investment for Moscow has been Manezh Square, a large underground shopping mall, which has already begun to produce returns.
Eyes on the euro
The city is now considering the impact the euro will have on its funding strategy. The committee is eager to develop a relationship between the euro and the rouble so financings will not have to be swapped into dollars which will make long-term borrowing possible.
The committee is not allowed to discuss future issuance. However, the next deal is rumoured to be a $500 million five-year Eurodollar deal to be led by Credit Suisse First Boston and ING Barings.
Diana Gindin, vice-president at Credit Suisse First Boston in Moscow believes the issue should be a success. “They understand the concept of positive long-term relationships with the investors,” she says. “They viewed their debut offering not as a one-time thing, but rather as a foundation for a successful future borrowing programme.”
Alex Mathias
BEST CORPORATE BORROWER
ICI
The reason for this spate of deals was simple. In May, ICI had taken out an $8.5 billion loan from a syndicate of banks, led by Goldman Sachs, SBC Warburg and HSBC, to finance the acquisition of several speciality chemical businesses from Unilever.
It was a crucial moment in the company’s history, a decisive step moving away from cyclical commodity chemicals towards the more dependable earnings of speciality chemicals. It was a change designed ultimately to benefit ICI shareholders by winning a higher multiple rating for less volatile earnings. But in order to complete the acquisition, the company had to stretch its finances as never before.
By spring 1997, negotiations with Unilever had been dragging on for a year and Unilever was working on an auction of its speciality businesses. To persuade Unilever to halt the auction and sell to ICI, the buyer had to demonstrate certainty of funds. Hence the huge loan. ICI, traditionally modestly geared, was borrowing an amount equivalent to its own market capitalization.
The stress for a company of ICI’s conservatism was considerable. The loan was split into a $4 billion revolving credit and a $4.5 billion amortizing loan, each carrying a margin of 55 basis points over Libor. Contrast that with the mere 12.5bp over Libor ICI had negotiated for the first five years of a $2.1 billion club loan signed just a few months earlier, in January 1997. That earlier loan had been designed with ICI’s coming financing binge in mind. It made no sense for the company’s treasury team to tie up resources over-seeing separate bilateral lines with its core banks. Also ICI wanted to clean up its loan documentation with these core lenders and to remove as many restrictive covenants as possible. “Part of my job is to make sure the ICI board has complete freedom of action,” says Vallance. “You cannot afford the stumbling block of obstructive loan documentation.” Especially not in a restructuring global industry sector like chemicals.
Downgrade
But now in May, with the huge acquisition loan, those restrictive covenants were back. Coming into the loan at all had been a brave move by those lenders. For a period, ICI’s interest cover would fall to below two times from a more normal five times. The rating agencies quickly downgraded the company by two notches to a split A minus/Baa1. In recompense, the banks demanded both a high margin and other elements of protection. ICI’s ability to make other acquisitions was curtailed. All proceeds from disposals had to be used to pay down debt. “For a short while, ICI was running itself for the banks, not ICI shareholders,” recalls Vallance.
The pressure was on Vallance and his team to refinance the acquisition loan as quickly as possible. Help was at hand. ICI had been planning substantial disposals as well as acquisitions, most notably the sale for $3 billion of its polyester and titanium dioxide businesses to Du Pont of the US. This was announced soon after the Unilever acquisition. ICI’s treasury team now had to pre-fund those disposal proceeds, which it did in large part with short-dated MTNs, and to refinance the remainder of the loan, which it did through the yankee, Eurobond and FRN markets.
The acquisition loan had a maturity of five years, partly designed so that ICI would never be a forced seller, required to take a poor price for its businesses so as to meet loan repayments. In the event, the refinancing programme proceeded so swiftly and smoothly that ICI was out from under the onerous covenants and pricing of its huge acquisition loan in 108 days. It’s a matter of some pride to Vallance. “The only thing that stopped us from refinancing even quicker was our own voluntary repayment schedule.”
ICI only ever drew down $3.4 billion of the revolving credit and refinanced that with commercial paper in 10 working days. It briefly accounted for 5% of outstandings in the A2/P2 rated sector of the US commercial paper market. It then set about refinancing the commercial paper, using the proceeds from a $1.25 billion yankee.
The company’s financials improved quickly with the announcement of sales to Du Pont, proceeds from which went to pay down the amortizing loan. These proceeds were pre-funded off the $4 billion Euro-MTN programme. Progress was amazingly swift. “We opened for business on the Monday morning and were inundated with calls,” says Vallance. “We had issued $600 million by the Wednesday night.” Then came the $500 million and £300 million Eurobonds and finally a three-tranche $1.5 billion floating-rate note. Finally, ICI was able to refinance its remaining CP outstandings with a 364-day revolving credit, this time paying just a 6bp facility fee.
Military operation
To an extent, ICI was lucky that the markets were generally welcoming. Just as it was preparing the FRN, bond markets went through one of their periodic fits of nervousness about US interest rates and the market became very receptive. While working on its dollar eurobond, led by Deutsche Morgan Grenfell and UBS, ICI had told BZW and NatWest Markets it would do a sterling Eurobond as long as they could deliver a specified after-swap cost in dollars. Suddenly swap rates came into line and the sterling deal was on. But ICI wasn’t just lucky. Careful planning and preparation had put it in the position of being able to seize every opportunity in the capital markets that came along. “ICI planned this like a military operation,” says one banker.
Even in 1996, the company was evaluating the strengths of its core banks, mindful that it might soon have to draw on them as never before. It tested their commitment with the $2.1 billion loan in January 1997 and drew up a matrix of which banks it could approach to do which prospective deals. So, come the most intense period of activity last summer, ICI was able to work on many transactions at once, working up in parallel its US shelf registration and its Euro-MTN documentation and executing the dollar and sterling bonds almost simultaneously.
What made this all the more impressive was that Vallance and his team came into this extraordinary sequence of deals as virtual novices. ICI had come out of the demerger of Zeneca in 1993 with £1.5 billion of cash on its balance sheet to deposit and no need to put debt programmes in place. The $2.1 billion loan in January was Vallance’s first major public deal. While banks like to advise borrowers to maintain regular contact with the market and investors so as to keep them up to date on the credit story, ICI had not been doing this. Vallance says simply: “One of ICI’s massive off-balance-sheet assets is its name. It is well known and well regarded around the world. On the first dollar bond, the lead-managers had feedback from investors in the Far East, who wanted to know more about the deal perhaps because their father had worked for ICI or had business dealings with ICI.”
Next on the list
What’s next for ICI and its treasury team is hard to say. It is a company in a restructuring industry. “We have set up our debt platforms, established a name for ourselves and we are ready for whatever next,” says Vallance. The only investor groups it did not attack last year were retail buyers of short-dated Eurobonds – who were probably next on the list – and convertible bond buyers. The share price has improved sharply in recent months, but the company claims to have a healthy dislike for the dilution that comes with convertible financing.
Certainly the treasury team is running internal exercises for future deals. Meanwhile, it is adjusting its CP outstandings to cope with the ebbs and flows of incoming proceeds from disposals and is considering whether or not to retire the $1.5 million FRN later this year when the first $550 million tranche matures. It wants to reduce net debt to about £3 billion by the end of this year and eventually achieve a solid single-A rating by raising interest cover to between 5.5 and 6.5 times. It is now running once more against the documentation of the core $2.1 bank facility signed last January.
The story of ICI’s excellent adventure in the capital markets last year is one of a coalescence between the financial restructuring activity of its treasury and the corporate restructuring conducted by the chief executive and the board. It’s a lesson for how banks in Europe might have to wait patiently while big corporates sit out of the capital markets but always be ready to swoop for business when those companies finally act. Few big corporates need to go to the public debt markets to fund working capital or capital expenditure. But they do need the capital markets to fund mergers and acquisitions. Peter Lee
BEST SPANISH BORROWER
Instituto de Credito Oficial
Spain’s best borrower is changing tack. Instituto de Credito Oficial (ICO) is best known for its small opportunistic deals in minor European currencies and for its programme of MTNs and private deals. But from now on it will be doing a lot more big deals in core currencies.
Ignacio Lagartos, managing director and chief financial officer for the government-backed borrower, explains the reasons for the new approach: “ICO, acting as a development bank, expects in the near future to finance long-term infrastructure funding. When this happens we will be looking for funds with maturities of 30 to 50 years. Our average asset maturity at present is 5.8 years.”
Benchmarks in core markets
The need for longer-term funding has persuaded ICO to dip its toe into the US domestic market. Lagartos has just returned from his first US roadshow for ICO’s $1 billion 10-year global, lead-managed by JP Morgan and Goldman Sachs.
Lagartos wants to raise ICO’s profile in the big currency sectors. “We need a constant presence in each of our three main markets: the US, Europe and Japan,” he says. “We want to have an active presence in each of these sectors every year, doing benchmark deals where necessary.”
But the smaller deals will continue. “That’s a constant,” says Lagartos. In the past year ICO has done public issues in escudos, Swiss francs and drachmas – all the proceeds are swapped back into pesetas – in addition to a number of private placements and a big local borrowing programme. Last year some 58% of its $5.5 billion borrowing requirement was met in the domestic peseta market, but the proportion of international funding is growing. Lagartos expects to raise some 60% of ICO’s funding internationally this year.
ICO is well liked by bankers and investors, especially in Spain and Portugal. Lagartos, who has been with ICO for two years, is credited with bringing a new sense of energy to the institution. Carlos Stilianopolus, head of origination and syndication at Santander in Spain believes Lagartos does a very good job. “They are one of the best Spanish issuers to work with and they always stick to their targets.”
The borrower has proved itself quick to take advantage of opportunities. Its Dr5 billion ($16 million) five-year issue in April came about after another issuer dropped out of its slot in the queuing system operated by the Greek authorities. “It was a good chance for us to reach a certain group of investors, especially in Italy, who were looking for a yield pick-up over other European currencies,” says Lagartos.
But many underwriters will be most interested in ICO’s planned benchmark deals. As well as big dollar issues, the institution is considering a euro-denominated bond. That might involve working with some different arrangers from those it has used in the past. Lagartos is diplomatic about his likely choice of lead-managers, but picks out Paribas, Société Générale and ABN Amro as firms he likes the look of.Michael Peterson
BEST DUTCH BORROWER
Rabobank
Diversity, frequency and innovation characterize Rabobank’s borrowing activities over the past year. There have been 21 public deals since June last year (there were 30 in the first six months of 1997), issued in 10 different currencies. Apart from dollars and the usual European currencies there have been deals in Canadian dollars, rand, Portuguese escudos and Greek drachma. So unlike other European borrowers, the bank won’t be stuck for other currencies after European monetary union.
But the Dutch cooperative bank, which lists its core business as agriculture and healthcare, is no large borrower. Added together, the 21 deals amount to an equivalent of just $2.6 billion. For a bank which is fast building its international and investment banking businesses, that does not seem to be a huge amount. What it does prove is that Rabobank does not allow itself to be put under the same pressure as some of its rivals, whether in the Netherlands or elsewhere. “They’re generally not concerned with paying up to set up a yield curve” says Joe Azzam, vice-president at TD Securities in London. “They look for solid performance on their retail deals at a good cost of funds. That’s what drove the four rand deals we lead managed for them in the last year, as well as earlier Australian and New Zealand issues.” On the rand and lira deals, for example, Rabobank was getting 10 to 15 basis points cheaper funding than it would have got in dollars.
Left standing
Compared with its domestic competition, Rabobank’s strategy can either be a breath of fresh air, or extremely frustrating. “If you look at its peer group, Rabobank is an anomaly,” says a market commentator. “ABN Amro and ING have left it standing, and the two triple-A rated financial institutions, Bank Nederlandse Gemeenten and Nederlandse Waterschapsbank, are issuing fairly big deals, and pricing them well. But Rabo, puzzlingly, relies on retail investors, and has started to price its deals a bit too tight.”
Reliance on retail can work to Rabobank’s advantage, however. First, it can always fall back on its branch network to provide most of the funds it needs, so obviating the need to issue regular, investor-driven benchmarks. And second, its name has traditionally been strong enough to ensure successful deals – it has a reputation with bankers and investors as one of the best retail names in the market. Combine the two and, the issuer, if sensible, should be able to take advantage of the rush in the good times, and not worry about unfavourable market conditions in the bad.
This is what Rabobank appears to have done, if with some reservations. “A number of frequent borrowers have tapped the bond markets at cheaper levels than they did last year,” says Azzam. “Rabobank has not seen the need to follow suit, and as a result has been less active this year in the public market. Fewer issues does mean, however, scarcity and a rarity value for the name.”
Aggressive pricing
The reservations of some bankers have revolved around the aggressive cost of funds that Rabobank demands. In some parts of the curve it has priced at least as aggressively as KfW. Admittedly this, too, is a triple-A, but it does carry a German government guarantee. “Rabo’s done well to place those deals, even though it shouldn’t be getting such a tight level,” says a syndicate official. “There are some in Utrecht [Rabobank’s Dutch headquarters] who might think they should be at the same level as KfW, but frankly they’re smoking something.”
Patrick Mitchell at Rabobank’s funding desk in Utrecht rejects the argument that his bank prices itself purely to Kfw. “We do use them as a benchmark, but not just them. We see ourselves as a prime triple-A borrower, so we take a look at every similarly rated institution before we issue. We have heard some criticisms about some of our deals being tight, but only in the highly transparent dollar sector. And those criticisms seem to be about our short-term deals, coming from those with an institutional bias, whereas our short-term deals are retail-targeted and can be priced somewhat tighter.”
Where bankers agree is on Rabobank’s limited-recourse debt-issuance programme. This was set up in March last year as a small, $250 million MTN-style debt programme, before being increased to a ceiling of $2.5 billion towards the end of the year. “We first set it up as something of a pilot scheme, but it turned out to be successful very quickly,” says Mitchell. The basic idea is to pass the country risk of its Latin American operations on to investors. All paper issued under the programme is done so by the parent bank, which then on-lends the principal to its Latin American operations. The bonds’ principal is repaid in local currency in the event of non-convertibility in the currency. This protects Rabo’s cashflows better than credit derivatives that pay out only if reference securities default.
Expecting just emerging market investors to take an interest is one reason why the programme ceiling had to be increased. “Mainstream fund managers and banks have been very active with us, as well as the emerging market funds, and that was something which we did not expect,” says Mitchell. “But in their hunt for yield these investors have been analyzing more credits, and are more prepared to invest in emerging markets paper than they used to be.”
Unlike the more usual MTN programmes, there is little, if any, reverse-enquiry dealing. “It’s a programme driven entirely by asset requirements,” says Mitchell. “If one of our subsidiaries in Latin America wants to take an asset onto its books, but doesn’t want the country risk, then it asks us how best to sell down that risk. If we think a deal makes sense, we’ll usually take the deal to the programme’s panel members and work out a structure and price with them.” Deals off the limited-recourse note programme vary between $8 million and $100 million in size
The programme allows the subsidiaries to cover all or a certain amount of their exposures in one deal rather than in separate transactions, which would cost more. And investors get a significant pick-up on Rabobank paper because of its limited recourse nature. On the deals for the Brazilian subsidiary, the spread was in the region of 300bp to 400bp over treasuries.
For those bankers looking to try their luck leading Rabo deals in the public markets, there is ample room to pitch. “So long as we can get cheap funding, be sure that the paper can be properly placed, and are happy with the lead managers, we’ll consider most currencies,” says Mitchell. While smaller, retail-driven deals are the norm, larger dollar and euro deals based on institutional demand are not ruled out.Antony Currie
BEST AUSTRALIAN BORROWER
Puma
In an economy disturbed by market instability in close and important neighbours, the ability to finance domestic-currency assets with foreign-currency liabilities, eliminate foreign-exchange risk, overcome the sovereign ceiling and attract demanding international investors marks out the best borrowers.
That is exactly what Macquarie Securitisation – known until late last year as Puma – has done with its US$900 million Eurobond backed by residential mortgages. The Australian dollar cash flows from the mortgages are swapped into US dollars to achieve a triple-A foreign-currency rating – above Australia’s foreign-currency rating of AA/Aa2. The structure incorporates a call option and a coupon step-up at six years which give the bond some of the characteristics of a bullet security, something which, according to JP Morgan’s analysis, investors in Europe prefer.
A second bond issue for Puma in November 1997 under this structure, with the swap provided by Morgan Guaranty Trust, raised US$200 million more than planned and provided funding until the end of that year. It was the second such transaction last year from a borrower which reached this landmark with a US$700 million bond in March 1997. Macquarie divisional director Tony Gill describes the November placement as coming “in the middle of the Asian meltdown”, a time when domestic markets were “unsettled”.
Puma sells bonds in two markets: domestically and in Europe. Since March 1998 it has also sold commercial paper at home under a separate structure dubbed Polar. A client of JP Morgan since 1995, its funding strategy is to ensure that one market will be open and willing to buy bonds at times when the other is not available or just too expensive. Its long-serving domestic adviser is Deutsche Morgan Grenfell, co-manager with JP Morgan and SBC Warburg Dillon Read on the Eurobond deals. They can expect Macquarie’s repeat business.
Right now there is little to choose between markets. Asked about his preferred market in mid-May, as Indonesia was undergoing political turmoil, Gill judged the domestic market as source of the best pricing. But his professional advisers believed there was a slight pricing benefit the other way.
Roadshows at short notice
Bankers commend the borrower for its willingness to adopt a pricing mentality which clears the market and for its attention to investors’ needs. Executives are ready to roadshow to investors at short notice and pay attention to market developments. Bankers contrast this attitude to that of other Australian borrowers that have not been as attentive to the development of a long-term franchise.
Macquarie Securitisation funds home loans, marketed and jointly managed by Aussie Home Loans, an innovator in the domestic mortgage market. As growth in that market has slowed, issuance in 1998 will stay at the same level as for 1997, around A$3 billion. However, some foresee Macquarie and Aussie Home Loans pursuing a more aggressive business strategy in future. This would boost issuance and give European investors another chance to buy top quality Australian paper.
Ian Rogers
BEST SWISS BORROWER
Ciba Specialty Chemicals
Got a great idea for an unusual deal? Want to pitch it to a European corporate? Well don’t call Michael Jacobi. The chief financial officer at Ciba Specialty Chemicals knows what deals make sense for his company, and he has a good idea who he will be doing them with. “We have a group of about 10 banks we use,” he says. “Mostly between them we run competitions.” He is reluctant to divulge his borrowing plans – he doesn’t want to get inundated with calls from other firms wanting to work with Ciba.
If you are one of Ciba’s core relationship banks, working with Jacobi can be rewarding. The company was born last year after neighbouring Basel pharmaceuticals companies Ciba-Geigy and Sandoz put an end to decades of rivalry by merging. The new company, Novartis, ditched its less-fashionable chemicals businesses. Ciba Specialty Chemicals was spun off, floating on the Swiss stock exchange in March. It took advantage of a healthy balance sheet by embarking on a series of acquisitions, notably a white-knight bid for the UK’s Allied Colloids in January.
Measuring up the alternatives
Methodical is the word most often used to describe Jacobi, a 45-year-old German who has worked for Ciba and predecessor Ciba-Geigy for 20 years. Forward planning is the mark of Ciba’s approach to acquisitions and borrowing. “Rarely do you see a borrower that plans its financing strategy so thoroughly,” says Marco Illy, managing director at Credit Suisse First Boston. “This enables them to capitalize on market opportunities as they occur.” Jacobi explains that when his team put together the financing for the Allied Colloids deal, they made detailed projections on 25 alternative strategies, measuring different products, maturities and currencies against the company’s exposure, its financing needs and the tax implications.
In the end the acquisition was financed with a Sfr4 billion ($2.7 billion) facility syndicated by Credit Suisse. The loan is being refinanced through an MTN programme run by SBC Warburg and by a series of big one-off bond issues. Jacobi is particularly proud of Ciba’s Sfr1 billion domestic bond issued in February. The deal, arranged by CSFB, was the biggest corporate bond on the domestic Swiss market. The market was chosen because of Ciba’s name recognition in Switzerland and the sector’s appetite at that time for 10-year debt. “We came to the market on the very day that yields were lowest,” recalls Jacobi. “We were lucky the timing was so perfect. And the deal was oversubscribed within 24 hours.”
Jacobi believes that planning is the key to flexibility. “We analyze alternatives well in advance, structure early and execute the best choices speedily when the need comes. I don’t want to let people know in advance what deals I’m thinking of and get telephone calls from 100 different investment bankers. It’s like a juggler in a circus. If he tries to juggle 20 balls at the same time he will drop the lot.”
Michael Peterson
BEST JAPANESE BORROWER
Sony
“It’s not often you get a Japanese treasurer who can really sell a deal to western investors,” says one arranger of Sony’s $1.5 billion global in February. The company’s corporate senior vice-president, Masayoshi Morimoto, put in an impressive performance at the roadshow. “He was exceptional,” says the banker. “He was really enthusiastic – jumping up and down showing off Sony’s products. His English is good and he really managed to get across the fact that Sony is not dependent on Japan for its sales and profitability.”
Japanese issuers have been thin on the ground recently. The few who have stuck their heads above the parapet this year haven’t found it easy to get their deals away. NTT’s smaller than expected $1 billion global received a lukewarm reception in March. Its 49 basis point spread was much more generous than many would have expected from a triple-A rated borrower, even given the current uncertainty about the Japanese economy.
Successful Japanese issuers this year have distanced themselves from their country of origin. Toyota Motor Credit Corporation, whose income is entirely from the US, is one of the few other big Japanese borrowers this year. It has also kept its spreads down by working hard to convince investors that it is far removed from the problems in the domestic Japanese market.
Hi-tech toys
Sony, a rare Eurobond issuer, pulled off a good deal in a difficult market. Its five-year deal was priced at 57bp over treasuries, a good 15bp less than originally planned. “The tighter spread is entirely down to the work Sony did,” says Paul Hearn managing director and head of European capital markets at JP Morgan, co-lead manager on the deal with Goldman Sachs and Merrill Lynch.
He agrees that the company did a great job on its roadshow: “They brought along all their latest hi-tech toys. It cemented the point that they are a high-quality consumer-products company. And we’re all kids at heart aren’t we?”
In the secondary market, spreads on the bond have tightened to around 50bp, reflecting strong demand for the paper. The company, which remains a rare borrower on the international markets, is rated Aa3 by Moody’s and A by Standard & Poor’s.
Kenichiro Yoshida, manager of Sony’s capital-markets department, says the company is very happy with the funding it achieved. “It sets us a benchmark,” he says. So what international issues can we expect from Sony in future? “Well, we don’t have any concrete plans at present. Speaking hypothetically, our next deal could be another big dollar issue. But Europe is a big market for us as well. Maybe we could do something in euros.” Yoshida has an open mind about Sony’s choice of lead-manager for such a deal. “We chose three strong US banks for our last deal because we wanted American investors to buy the paper,” he says. “But if we did a euro deal we might look at a European firm.”
Michael Peterson
BEST USER OF EXOTIC CURRENCIES
IFC
Like most other multilateral agencies, the International Finance Corporation (IFC) combines its search for low-cost funding with a mission to develop local capital markets. One of its latest forays, at the end of April, was to open the Euro-shekel market. “It’s no coincidence,” says Farida Khambata, the IFC’s director of treasury operations, “that this happened hours after Euroclear announced it would accept the shekel as a Euroclear currency.” The IFC had been talking about a shekel issue for about a year. As a matter of courtesy, and because of its charter, the IFC tends to talk to the government responsible for the currency, even if, as in this case, its borrowing is strictly offshore.
In Russia, where the IFC has issued in roubles and in dollars linked to the rouble/dollar exchange rate, its efforts to support the creation of a pure, risk-free yield curve – “I realize it’s a microscopic toe-in,” says Khambata – complement its work to develop an efficient and well-regulated securities environment. “We’re trying to set up a central depositary there,” she says.
Wherever it borrows, the IFC swaps the proceeds into six-month dollar Libor, and this year it has achieved average funding of Libor minus 37 to 38 basis points. Only in South African rand has it successfully on-lent in local currency. “The Rand has a very deep and well-developed swap market, so we can manage our balance-sheet exposure,” says Khambata. “It’s also a regional currency. We’re looking at doing the same in other currencies.” The IFC tried opening a medium-term note programme in Hungarian forint for on-lending to local borrowers “but it wasn’t successful,” she says. The Hungarians wanted forints only at dollar interest rates.
Given the IFC’s interest in developing equity markets it might be expected to go for equity-linked deals. It has linked bond issues to the Eurotop and Latin American indexes. It has also issued warrants on an Asian Tiger index. But there have been no convertibles so far.
With the advent of the euro there may be more pressure on the IFC to lend in non-dollar currencies as it has in Deutschmarks and French francs. That might tempt it to keep some of its euro proceeds unswapped for on-lending, and to manage the currency exposure on a portfolio basis rather than by swapping the euros automatically into dollars. “Managing our swaps on a portfolio basis is something we’re looking at,” says Khambata, who has headed treasury operations since April 1997, “but we’re very conservative.” David Shirreff
BEST USER OF SYNDICATED LOANS
General Electric
This year’s syndicated loan from the UK’s General Electric’s (GEC) is record-breaking: it was the first syndicated loan to be denominated in euros, the largest ever financing in euros and one of the largest corporate financings ever in the Euroloans market. And it was a first time borrower as well. The loan, for euro6 billion ($6.7 billion), split between a one-year euro1.5 billion revolver and a five-year euro4.5 billion revolver, was signed this March with joint arrangers SBC and Barclays.
“It was relatively difficult to get done,” says Simon Hood, head of loan syndication at SBC Warburg Dillon Read. The large amount made the loan potentially unwieldy, and the revolving credit structure is “intrinsically not particularly attractive” to banks in the tougher loan market. Relatively few banks were involved in the syndication and GEC was relying on a great commitment from them. The commitment amount at the lowest level of participation was euro125 million.
But, according to Hood, the company’s high credit standing, profile and other business opportunities afforded by the company’s recent strategic readjustments made the loan appealing. “General Electric is an extremely prestigious borrower and on its debut visit to the syndication market was largely immune to the vagaries of what was at the time an uncertain and difficult market,” says Peter Fleming, director of syndication and loan distribution at Barclays Capital.
Euro milestone
David Loosley, director of treasury and risk management at GEC, says this new entry into the loan market “marks a watershed in the company’s progress. It is quite a milestone in GEC’s history”. The borrowing vision can be partly attributed to John Mayo, who joined GEC as finance director last October. “Mayo was very professional,” says Hood. “He knew what he wanted.”
GEC insists that being the first to issue a euro-denominated loan was unintentional. The choice of currency was to signify its commitment to remaining active in Europe. “Europe is our domestic market,” says Loosely.
GEC had two intentions for its loan. It may serve to fund organic growth or future acquisitions. “Acquisition is made more simple if we have funds readily available rather than needing to make a conditional offer” says Loosely. For a new borrower, the loan was also important to “establish major banking relationships” says Loosely. Transferability provisions were relatively restricted as a result.
The company remains silent on future borrowing intentions, except for commenting: “We’ll review all options when the time comes. In due course we’ll access the bond market, but we’re not quite ready for that yet.”
Alex Mathias
BEST USER OF ASSET-BACKED ISSUES
Southland
After 70 years of operations Southland cannot be accused of being staid. The US-based company, which pioneered the convenience-store industry with its 7-Eleven chain, has launched innovative product after innovative product. In mid-1997, it introduced the Burger Big Bite to the US – a hamburger shaped like a hot dog designed to be easier to eat on the run. In early 1998 it was the even more popular Bacon Cheeseburger Big Bite. Their latest? A particularly clever asset-backed issue.
The 7-Eleven chain boasts 17,104 stores worldwide. Southland owns the convenience stores in the US and Canada and licenses the trademark to companies elsewhere that pay a portion of their sales to them. The April transaction was a ¥12.5 billion ($94.2 million) non-recourse private loan transaction that monetizes eight years of future yen-denominated royalty income streams generated by an area licence agreement with 7-Eleven Japan as licensee. The investors were a consortium of five banks: Citibank, Sakura Bank, CIBC Wood Gundy, Asahi Bank and Fuji Bank. Proceeds from the loan are for even greater expansion of Southland’s convenience-store empire.
Locking in yen rates
“We were trying to access historically low interest rates [2.325%] … to get the lowest cost of borrowing” says Ezra Shashoua, treasurer at Southland. The structure locked in a fixed yen interest rate at a time when yen interest rates were approaching historical lows. It also serves as a long-term foreign exchange hedge of Southland’s future yen revenue flows: although the annual $62.6 million of royalty payments’ value in dollars would fluctuate with exchange rates, by using the yen streams to pay interest and principal on the bond the company creates a hedge. And it was also good value for the investor. “You get very attractive financing and you have it backed,” says Frank Cavallo, managing director of Citicorp Securities in New York.
Citicorp Securities designed its monetization product 10 years ago and Southland was one of the first customers to use it then. Its 1988 ¥41 billion monetization also securitized royalties from 7-Eleven Japan. The new loan will begin to be repaid in 2001 when the existing yen securitized loan expires. This second loan was more successful. This time Southland paid a spread to Libor rather than to the prime rate.
Active management of net interest expense and its debt portfolio is a Southland strength. This year they have also refinanced outstanding debt stock by issuing an $80 million quarterly interest debenture (Quid). This complex subordinated convertible hybrid resulted in a gain of almost $30 million from the retirement of future undiscounted interest payments.
Southland’s strategy for the upcoming year? “We are currently putting together a longer-term capitalization plan to facilitate aggressive growth,” says Shashoua. “You will probably see some further financing activity later this year or next year.”
If it decides to do another bank financing, its choice of underwriter will certainly lean towards Citicorp. “We have a long-standing relationship. We traditionally look at them first to see how they’d approach it.”
James Rutter
BEST MTN BORROWER
Abbey National
Abbey National is the most flexible and frequent issuer in the MTN market. It also responds quickest to suggestions, which makes it a favourite with dealers and investors.
“As long as the swap cashflows match, Abbey will do it,” says Ian Annand, director of capital markets at Nomura in London. “They are willing to look at any structure” agrees Carolyn Coombs, head of MTNs at Goldman Sachs in London. Goldman has lead-managed a range of MTN structures including equity-linked, commodity-linked, callable, and forex range trades. Not only is Abbey flexible in what it will issue, Coombs says, it’s also flexible in restructuring and buying back.
Abbey National started its MTN programme seven years ago. In March 1997, Euromoney reported that it broke the millennium barrier by being the first to execute 1,000 MTN deals. The record breaker was led by Goldman Sachs for an investor that wanted to buy a DM100 million ($56.5 million) convergence structure betting on future Italian and German spreads. To date, Abbey has issued 1,132 Euro-MTNs, the slowdown being an effect of the volume of the overall market. It has increased the size of its US-MTN programme to $15 billion and has already completed 250 deals this year.
What makes Abbey popular with investors? “They are a quick and easy issuer to use,” says Coombs. Understanding perhaps better than anyone that the MTN market is led by investor demand, Abbey strives to be speedy. “We think it’s very important [to have a quick response]. We think it’s difficult to differentiate yourself so our quick response is a deliberate strategy” says Gareth Jones, chief executive at Abbey National Treasury Services.
Abbey’s future MTN strategy hopes to be just as limber to investors’ needs as it has been this year. Euromoney looks forward to the 2,000th issue. Alex Mathias
BEST USER OF CP PROGRAMMES
Royal Dutch/ Shell
Sightings of Royal Dutch/Shell in the fixed-income market have been about as frequent as an appearance of Halley’s comet in the night sky. Until now. The $2 billion commercial-paper programme signed in December last year for Shell’s Dutch and UK-based finance arms is the first step of what Joris Kniep at Shell calls “developing the treasury toolkit”.
As first steps go it’s been pretty significant. Outstandings are already near the prog-ramme’s initial ceiling and in April it was joined by a matching $2 billion programme in the domestic US market. In addition to dollars, Shell has used five other currencies (Canadian dollars, Swiss francs, lire, yen, guilders and Ecus) and according to Ian Chisholm, who heads the corporate dealing room, will consider issuing in any currency that offers attractive levels when swapped into dollars. “If the swap works, we do it,” he says.
It may therefore seem rather odd that the programme doesn’t allow for issuance in the core European currencies of Deutschmarks, French francs and sterling. According to Jenny Pace, who is responsible for the strategy behind the group’s funding, including provisions for those currencies “would have slowed the whole programme down” owing to the more onerous documentation requirements. Given the dollar focus of the group’s funding, it therefore decided it could do without them.
The new Euro-CP programme was an overhaul of an existing $1 billion programme in the name of Shell Finance Netherlands. The new programme also includes the UK-based financing arm as an issuer. “We wanted the flexibility of having issuers in different jurisdictions,” explains Pace.
Flexibility also rules its approach to issuing and Pace says that the company welcomes any ideas from intermediaries or investors. The company is now looking at whether it needs to raise the $2 billion ceiling on the programme, although Kniep admits that venturing into the Eurobond market remains, for the moment, a step too far.James Rutter
BEST USER OF STRUCTURED BONDS
SEK
Per Akerlind, treasurer at Svensk Eksportkredit (SEK), reckons that putting a structure into a bond usually nets him between 10 and 15 basis points over borrowing at a straightforward floating rate.
It’s a considerable saving, but he would argue it’s deserved. If you’re going to structure a bond, you’re going to want to lay off the extra risk. That means hedging the issue and taking on counterparty risk. At each stage you have to be able to simulate the exposure if you’re going to price the deal right.
“If we’ve got a geared equity-linked deal with a cross-currency swap we want to get the right price for the extra risk we’re taking,” says Akerlind. Four people in SEK’s capital markets team use their own models to price the risk, and sometimes need to turn round a deal within half and hour. At 10bp to 15bp you could say that SEK seems good value.
Akerlind’s favourite deal of the year to date is an Ecu300 million ($331 million) deal issued in mid-March. It carries a 29.5-year tenor, and is linked to Argentine sovereign risk. A call is thrown in for good measure.
“We were discussing that for about a week and a half,” recalls Akerlind. “We had to assess a number of hedging options, and then there was the call to take into account. If it’s exercised it makes a big difference to our funding cost under different scenarios.”
Akerlind is a big supporter of the nascent credit-linked market, and hopes that such deals become more commonplace. If SEK takes on some unwanted country credit risk, he wants to be able to lay it off with the minimum of fuss.
Equity-linked deals have been a stock trade for SEK for the past couple of years, especially in Scandinavia. Bonds are linked to various stock baskets, indices, or individual shares, and will include caps, floors and ratchets as optional extras.
One might expect retail investors to be the obvious buyers but Akerlind says that the notes are actually very popular with second- and third-tier institutional buyers. “We do between 40 and 50 of these deals every year, and it’s a good way to get our name recognition well spread,” he says.
This year, SEK has moved into a new product sector: notes that include the option for physical delivery of an underlying share or commodity. Akerlind says that they have proved particularly popular with southern European investors, who are used to receiving high coupons on bonds. Emu convergence has put an end to that, but having direct exposure to bullish stock markets through a fixed-income product lets them maintain their income stream without the more direct risk of equity.
“You always have to ask yourself where the risks are,” says Akerlind. “We don’t want to go into default because we can’t buy enough of a certain stock in the market. We only solve these problems by having everyone, legal, settlement whatever, focused on a certain deal.”James Rutter
BEST USER OF HIGH YIELD
ITT Promedia
The high-yield corporate market in Europe is now seen as a dynamic, rapidly maturing sector full of new opportunities. But back in September 1997 things were rather different. European high yield was seen as a risky, illiquid and obscure investment. The Dm575 million ($327 million) ITT Promedia deal on September 19 1997 changed all this and helped to bring high yield into the mainstream in Europe.
The size of the bond issue, the largest non-dollar high-yield deal of the year and the largest ever Deutschmark high-yield deal, made a real impact in the young market. At the time it was totally unprecedented, says Blake Mather, executive director at Goldman Sachs, the bookrunner for the deal.
Market opinion said that anything over $100 million or $150 million would really be testing the outer limits of demand. Initially the issue was to be closer to DM300 million, but the deal was four times oversubscribed and more capital was needed so the amount was increased.
ITT Promedia is a Belgian telephone-directory subsidiary of US company ITT Corp. The deal, along with a dollar tranche from another company in the group, ITT Publimedia, was intended to launch ITT Corp’s defence against a hostile $8.3 billion bid from Hilton Hotels Corp. But the takeover battle did not discourage buyers of the paper and it was one of the first high-yield deals to be bought mainly by European investors rather than just sold back to the US.
The company has gone through a radical restructuring since the pioneering high-yield deal. Hilton’s takeover bid failed, but soon afterwards ITT was bought by Starwood Lodging, another hotel chain. In December 1997 Starwood sold all its telephone directory publishing businesses for $2.1 billion as ITT World Directories to a Dutch publishing company, VNU.
The 10-year bonds have been called and are no longer on the market, but the bankers involved say that the paper constantly traded up from its opening spread of 375 basis points over Bunds.Rebecca Bream
BEST PFANDBRIEF BORROWER
Depfa
One sector of the capital markets has embraced the concept of added liquidity more enthusiastically than the rest – the Pfandbrief market. Issuers of these asset-backed bonds have discovered that tranches between Dm3 billion and Dm4 billion transform investors’ attitudes and give them leverage over underwriters in fee negotiations.
“We were finding that with Dm750 million issues, 40% went straight to end investors and trading became very difficult. With issues of Dm3-4 billion investors can get a price in size at any time and they start to trade it like government paper,” says Yann Gindre, global head of debt capital markets at Commerzbank in London. This pulls in new investors including hedge funds and semi-professional accounts and it also makes it easier for underwriters to place paper and ensure bonds perform in the secondary market. According to one underwriter this means he is willing to cut underwriting fees on larger issues.
Euromoney‘s choice for best borrower in this market goes to Depfa – Deutsche Pfandbrief-und Hypothekenbank. Depfa is one of the largest issuers of Pfandbriefe with around US$60 billion worth outstanding. It has established benchmark issues along the yield curve and in January set up a programme of Deutschmark denominated global Pfandbriefe – already dubbed the jumbissimo – which market participants believe will promote the instrument as an international asset class. Depfa is also arguably the most successful issuer to have placed paper with foreign investors and made it stick. According to the underwiters 40-50% of the global launched in January is still outside Germany
Christoph Schoernig, executive director, co-head of treasury, stresses the importance of liquidity in the decision to set up the programme: “The traditional Pfandbrief market is very illiquid – that’s why the jumbo market was created in 1995. But even the jumbo Dm1 billion issues become illiquid. Our programme is the logical next step. We are a spread product over the Bund and so, to get as close to the Bund as possible, we have to appeal to as many different kinds of investors as possible.”
The global has attracted domestic investors from the less liquid Pfandbriefe, new domestic and European accounts, including arbitrage funds, and also US and Asian buyers.
“This is really important,” says Schoernig. “Different types of investors means different people buying and selling at different times for different reasons. This gives all investors confidence that they will be able to sell. For example, in October some traditional investors sold because they believed the market was expensive. But Libor-based buyers saw triple-A paper at Libor flat or a little above and to them it was cheap.”
While trades in the jumbo market are between Dm25 million and Dm50 million, ticket sizes in the jumbissimo have reached Dm250 million. Part of this can be attributed to the inclusion in the programme of a repo facility run by the 10-bank panel of market-makers.
“The importance of repo is underestimated in Germany and we felt it was important to encourage use of this market and get people to focus on it,” says Schoernig. “This programme gives both clients and, importantly, the street access to repo. This gives dealers the ability to trade bigger tickets at finer spreads because they know they can find the bonds.” The introduction of a Pfandbrief future in July will further encourage the dealer community.
Depfa will continue to issue in size as it plans to expand its public sector activities further into Japan, Canada and the US and to concentrate more on infrastructure financings. This expansion should mean that the bank does not run short of assets with which to back its Pfandbrief issues.
The Pfandbrief market is still booming. From $64.8 billion in 1996 issuance jumped to $94.9 billion in 1997. By mid-May this year more than $40.1 billion had been issued. Depfa will need to borrow $20 billion this year and will rely on its almost continuous roadshowing, as well as just opened offices in New York and Tokyo to keep investors interested.Simon Brady
BEST USER OF FOREIGN MARKETS
Cable & Wireless
Graham Robertson, treasurer of Cable & Wireless Communications (CWC), has been in this game long enough to know how to get investment banks to act in his interests. Earlier this year his company raised a total of £1.6 billion ($2.6 billion) through a dual-market strategy. First it issued £500 million in the Eurosterling market in February. Then in March it tapped the yankee market, raising $1.8 billion, the largest-ever yankee deal by a UK corporate.
HSBC and Merrill Lynch were bookrunners on both deals. “We wanted to raise as much as possible in the UK before going to the US market,” explains Robertson. “So I wanted to make sure that it was in the bookrunners’ interests to help us do the sterling deal well and raise the most effective amount.”
Robertson didn’t think CWC would have trouble raising a large amount of money in the US domestic market. He sought approval from his board to raise £1.5 billion in the US and the UK markets combined. In the event, he could have raised a lot more. “It’s exactly the kind of deal US investors like,” says Dominic Franklin, managing director at Merrill Lynch. “The telecoms industry was particularly appealing to investors at the time and the roadshow was very well received. For CWC it was the best market to do the largest deal possible at the cheapest price. This is the deepest and most liquid market for corporate debt.”
CWC, which is rated A minus by Standard & Poor’s and Baa by Moody’s, is pleased with the bond’s reception. The five-year tranche of $750 million was launched at 77 basis points over US treasuries and is now trading in the high 60s. The seven-year and 10- year tranches – of $650 million and $400 million – have tightened from 87bp to the high 70s and from 100bp to the low mid-90s, respectively.
It helped that the company was already known to US investors in a different guise. CWC was formed in April 1997 from the merger of Mercury Communications – a subsidiary of Cable & Wireless – with the UK cable operations of two US telecoms companies, Nynex and Bell Cablemedia. Bell Cablemedia had itself acquired another company, Videotron, just before the merger. The new company is listed on the London Stock Exchange and the New York Stock Exchange, but 53% of its equity is owned by Cable & Wireless.
The company inherited $1.6 billion in high-yield bonds from Bell Cablemedia and Videotron. Robertson was brought in from Nynex with a brief to restructure the balance sheet. CWC refinanced its debts first with a £2.9 billion two-year syndicated loan, taken out at the time of the company’s flotation, before moving to the bond markets this year.
But although Robertson has now largely fulfilled his brief to refinance CWC’s high-yield debt he doesn’t expect to get much rest. “It’s been an exciting year and I feel like I’m now enjoying a brief peace. But this is a fast-moving industry and there will be lots of consolidation ahead. If we’re involved in that we would need to raise a lot more money.”
After this year’s success he would certainly go back to the US domestic market and would be happy to use the same lead-managers again. “There certainly seems to be the demand,” says Robertson. “The only thing I would do differently next time is go to the market with sufficient authority to accept what funds may be available.”Michael Peterson
MOST RESPONSIVE BORROWER
EBRD
“When you’re the most expensive borrower in the world,” says Ayesha Shah, head of funding at the European Bank for Reconstruction & Development (EBRD), with tongue firmly in cheek, “you have to offer banks some advantage to doing business with you. We offer experience of dealing in exotic markets and a willingness to work hard to overcome any obstacles to getting the deal done.”
Shah, suitably exotic herself as a teetotal reveller and impromptu dancer, has taken buyers of EBRD paper into strange currencies in the past 12 months, including Korean won, Philippine pesos, Taiwanese dollars, zlotys, roubles, rand and Turkish lira.
EBRD bond issues in these currencies are usually swapped. The EBRD’s policy, like that of most multilateral banks, is to take no currency risk. But the rationale for going into these markets is, first, to achieve a lower cost of funds, and, second, to help develop and deepen the local capital markets.
The EBRD’s all-in average cost of funds last year was 47 basis points below Libor (although that doesn’t include any charge for credit risk on its swaps). Its internal target is Libor minus 25bp. But it has also constructed a passive index to measure what “an automaton could do if it were programmed to issue one-twelfth of the annual borrowing requirement each month in US dollars, Deutschmarks or euros”, says Shah.
“An average of the two currencies which offer the best sub-Libor would have achieved Libor minus 12.5bp for the average maturity of debt raised in 1997. Including yen issues in the average would have made the passive index less competitive, so we have excluded them for now,” she explains.
The EBRD’s treasury prides itself on the contribution it is making to building up the bank’s reserves. As a profit centre it takes up only 3% of the cost base of the bank.
Because its annual borrowing is quite small – around $4 billion – and its outstandings are only $7 billion, the EBRD can’t concentrate on big, liquid benchmark issues. It must duck and weave, taking deals that are more complex, or more specialist, than the mainstream market. “We’ll consider any deal from three months to 50 years,” says Shah. “If you came to us with a very short term $5 million deal we’d put a price on it, probably including a hassle factor of 2bp.” The EBRD also undertakes to buy back any of its bonds that are tendered, although amounts of less than $1 million are bid for less aggressively because of the difficulty of unwinding the related swap.
To maintain its standing in the market Shah’s funding team is quick to respond to proposals. “We’re not snobbish, we take all phone calls but we try to discourage waffle,” she says. The EBRD might step in at short notice to salvage a deal rejected by another borrower – but at its own price. Or it could work for months on a complex structure. Shah is working on several at the moment, including one in a new Mediterranean currency.
David Shirreff
MOST PROFESSIONAL BORROWER
World Bank
The fallout from the Asian crash provided the supreme test of the World Bank’s professionalism. It faced the challenge of raising rapidly up to $10 billion additional money in the range of currencies needed by its borrowers while getting the cheapest possible rates from investors, who were understandably extremely nervous.
Bankers believe that the World Bank was able to achieve its target because of its knowledge of the market, its flexibility in looking at different ways to raise money and its ability to move quickly when opportunities arose. The treasury department has, they say, the nerve to stay out of the market for months if conditions are not appropriate. Riccardo Pavoncelli, managing director, head of debt capital markets, at Morgan Stanley Dean Witter, describes the World Bank as “one of the most professional borrowers. Over the past year they have restructured themselves to be more efficient and responsive to the changes in the market. Gumersindo Oliveros [the Bank’s director of treasury finance] has consolidated the strengths into a team with a clear, common objective which they all work towards”
The challenge during the Asian crisis was that, with no arbitrage opportunities in European currencies and global bonds no longer cost-effective, the Bank’s freedom to manoeuvre was restricted. It had to focus on large dollar borrowings and smaller issues and private placement in exotic currencies.
Demand from Asian borrowers meant that Oliveros was forced to increase his borrowing target from $17 billion to $20 billion in the financial year ending this June to a figure approaching $30 billion. “Our concern was to not overwhelm the markets while ensuring we raised money relatively quickly and as cost-effectively as possible,” says Oliveros. “The team turned around record volumes of funding and derivatives operations without letting the markets feel the pressure.”
Of the $26.3 billion that has so far been raised, by far the most significant borrowing was the $4 billion five-year benchmark bond, issued in March and lead-managed by Goldman Sachs. “When we decided to do the $4 billion benchmark issue in March we did not have to do a great deal of marketing because the bank has a strong track record with major institutional accounts,” says Oliveros. “A key performance criterion agreed with intermediaries was that the issue had to sell within 24 hours of launch – by the time of pricing the deal was well oversubscribed.”
Bankers were impressed with the issue. “They were a little unlucky in the timing and probably missed the ideal time by a couple of weeks. Even so the issue has been extremely successful as investors showed a readiness to move into liquid issues in safe-haven currencies”, said one banker.
More currencies, smaller amounts
Despite this benchmark issues, the World Bank – in the face of some criticism from bankers who say it is losing its focus – no longer relies on this type of funding as much as it did in the past. The treasury department has maintained its position as the most expensive of all triple-A borrowers while being been innovative and diversifying; it now borrows more in smaller amounts, using a range of currencies which include emerging market currencies such as the South African rand and the Czech koruna.
“There was considerable demand for large liquid dollar deals after the Asian crisis,” says Oliveros. “And, in some senses, one can say that the crisis created its own financing for issuers like ourselves. We did four large dollar deals in three months, using both the Euro and global formats. On the other hand, we continued to do smaller deals in a large variety of markets, including emerging markets when they reopened.” The result is that so far this fiscal year there have been 169 transactions in 21 currencies using 51 lead-managers – an increase in all three of these categories. However, a few banks which used to do a lot of business now do little or nothing with the World Bank. Oliveros says: “We take a global view of our banking relationships but in a few instances our business objectives do not overlap. It’s important to have a good understanding of the relative comparative advantage of different partners, whether it be distribution, trading, market niche or whatever. And we take that very much into account in transactions – it’s also quite a job these days since banks can change rapidly.”
Oliveros also believes in the importance of innovation – the World Bank did pioneer swaps and global bonds – but cares about how it is done. “When you offer structured finance, you want to be sure the investor knows what he is buying. We have turned down issues that were too highly leveraged or directed to an investor base that might not have understood it fully”, he says.
Bankers also point to the World Bank’s innovativeness. “What is interesting is that they have always been able to be very close to the markets and investors,” says Pavoncelli, “and hence structure transactions which have been on the leading edge, either because they exploited a particular arbitrage or took advantage of market trends. This ultimately has fulfilled their main objective of improving their cost of funding.”
The World Bank, which does not have a benchmark issuing calender so that it can maintain the maximum choice about when it taps the market, will keep to its strategy of “flexibility and diversification” in the next year. The volume is likely to be lower at nearer $20 billion than $30 billion and Oliveros says it “will look quite different because some important funding currencies for the bank will subside into the euro”.
With European markets offering no arbitrage opportunities, the Bank is under no pressure to change its present strategy towards the single currency. This involves placing itself strategically in the market by “making sure the potential euro-investor pools are well covered, using the best bid instruments”. Oliveros notes that a large part of the bank’s recent programme has been “placed with investors that are likely buyers of euros after 1999”.
Nigel Dudley
MOST INNOVATIVE BORROWER
Banque Générale du Luxembourg
From the biggest dealing room in the Grand Duchy, the Banque Générale du Luxembourg (BGL) makes markets in its own structured bond issues. BGL isn’t a great innovator itself but “we’ll take complex structures from the market as long as they satisfy our internal guidelines,” says Jacques Bofferding, the bank’s head of financial engineering. “In this case it’s more re-engineering than true engineering,” says Bofferding. “The London dealers show us ideas, we examine the structure and if possible adapt it for our clients.” BGL’s most exotic structures, issued mainly off its medium-term note programme, include US dollar notes linked to the volatility of the Italian MIB 30 equity index. Redemption has three different multipliers, depending on whether the volatility is 15.25% or below, up to 39.25%, or higher. Just to add a little spice the coupon is payable in sterling. The bookrunner and calculation agent is Lehman Brothers.
Self-effacing
The self-effacing BGL does construct its own deals too, such as a dollar MTN issue whose redemption depends on the performance of a basket of 20 pharmaceuticals stocks. “There is a move to sector investment,” says Bofferding, “we have a large product range on all those indices, and we’ll try to do more and more in sectors.” BGL usually hedges its deals over-the-counter with London-based investment banks. And on most of them it will make a 1% bid-offer spread, although when it has no inventory it puts only the bid side on the screen.
These are mostly tiny deals of between $5 million and $30 million of which at least a third is pre-sold to investors. With another issue of Ecu notes in March redemption is based on the closing level of the MIB 30 index on March 6 2003, but with a knockout feature if the index rises 180% or more. “A few investors had a strong view of where the MIB would go,” says Bofferding, who worked at UBS before joining BGL three years ago.
A lot of BGL’s issues are more conservative, offering investors an equity play with their capital guaranteed. “”These are not typical equity investors,” says Bofferding. “and they like to know their principal is protected.” Financial engineering is becoming more and more important, says Bofferding, as clients ask for instruments to be tailored for them. For BGL, a large private and commercial bank with a rating of AA minus, this activity helps to achieve a low cost of funding, typically some basis points below Libid.David Shirreff
