Where Fannie Mae, our borrower of the year, has led, others, such as Ford, our best corporate borrower, and even smaller issuers such as Brazil, our best sovereign, and IADB, best supranational, have followed. Antony Currie, Anja Helk, Peter Lee, Charles Piggott and Christina White report on the best corporate, sovereign, financial and securitization borrowers from Europe, central and eastern Europe, Asia and Latin America.
Best borrower: Fannie Mae
Best sovereign borrower: Brazil
Best corporate borrower: Ford
Best supranational borrower: IADB
Best European sovereign borrower: Greece
Best central and eastern European sovereign: Poland
Best central Asian sovereign: Kazakhstan
Best European corporate: Vodafone AirTouch
Best Asian sovereign: Korea Development Bank
Best Asian corporate: Asia Pulp & Paper
Best Latin American corporate: CTC
Best Euromarket high-yield issuer: Level 3 Communications
Best US high-yield market issuer: Williams Communications
Best bank issuer: Barclays
Best Asian bank: Hanvit Bank
Best US financial issuer: House-hold Finance
Best covered bond issuer: Rheinische Hypothekenbank
Best central and eastern European corporate: TPSA
Best structured securitization issuer: Italy
Best emerging-markets securitization issuer: Garanti Leasing IFC Finance Limited
Best Latin American securitization issuer: Argentina
Best borrower: Fannie Mae
In an uncertain and volatile market, Fannie Mae ought to be an obvious choice for best borrower. Investors do not seem to be on the desperate hunt for yield that dominated their decisions two years ago. Now they hunt the right credit, and increasingly that means looking for a credit with liquidity. With annual funding needs in the hundreds of billions of dollars, Fannie Mae should be providing that.
And it is. The US mortgage agency now has a full yield curve stretching out from two years to 30 years, has started to see other borrowers price deals off its deals, and has even been touted as a replacement benchmark for US treasury bonds as fewer are issued and more redeemed. Fannie Mae is playing down this latter role people have ascribed to it. Partly out of diplomacy as legislators on Capitol Hill scrutinize the role the agencies play in the markets, and the role government sponsorship has on the agencies, and partly out of an institutional conservatism.
But investors want more than just liquidity from borrowers. They want the liquidity to be accompanied by increased transparency and predictability. Or to put it another way, says the head of debt capital markets at one of the major underwriters: “Keep it simple, stupid!”
Any issuers sticking to the method of the mid- to late-1990s of lots of public deals with bells and whistles, and a plethora of private placements through the MTN market, might have found the past 18 months rather tough.
Nor has this been the time for issuers to get tough with investors, and try to squeeze the last basis point out of each deal. For issuers of size that is a big temptation. But Fannie Mae has avoided that. “In bear markets issuers have to be more responsive and responsible,” says Don Devine, co-head of US debt capital markets at CSFB. “Fannie Mae was the first to recognize this and to change its operating philosophy accordingly. It exercises its considerable market power with grace.”
Fannie Mae is not alone in this. Ford, the winner of our award for best corporate issuer, follows a similar path, as does our supranational winner, the Inter-American Development Bank. And Freddie Mac has cottoned on too, helped considerably, say bankers, by the appointment last year of Jerome Lienhart as treasurer.
But Fannie has been, and remains, the leader. After months of work, it launched its benchmark bond programme in January 1998, a series of $3 billion or more deals that became known as superliquid jumbos. By 1999 these had become standard practice for larger issuers, and Fannie decided to take things a step further.
On the one hand, this meant extending the bond programme to its short-term requirements. “We decided that we should start applying our benchmark strategy to the discount note market,” says Fannie Mae treasurer Linda Knight. “So in September last year we launched an internet-based Dutch auction for our three- to six-month discount notes which we called our benchmark bills.” It was an immediate success, raising $6 billion to $7 billion in each weekly auction, and outstandings have now reached $160 billion.
Fannie has made it an easy-to-use internet-based system, so that investors can see the auction on their screens in real time, and input bids. “And we report back to them within five minutes of the auction closing with the results,” says Knight. “It helps reduce uncertainty considerably.”
The benchmark bond programme itself was also refined. “Investors were telling us in 1999 that the next thing for us to do was to improve the predictability of our borrowing strategy,” says Knight. “So we introduced a calendar at the end of last year for our 2000 programme, with an issue timetable along with information on pricing, maturities and settlement. We’re the only agency doing that.” So, for example, following the agency’s 30-year issue in May last year, it announced its intention to launch another in November, and then put its 2000 30-year deals on the calendar.
February’s 30-year exchange offer stands as the best example of all that Fannie has achieved: it was done over the internet, soup-to-nuts. The documentation, all other relevant information, pricing, book-building and the back office, all was publicly and transparently done over the internet.
The effects of the move to benchmark bonds two-and-a-half years ago have stretched beyond the plain-vanilla paper Fannie issues. “When we sat down and thought about the benchmark programme three years ago,” says Knight, “we entertained some stray thoughts that if it was successful, then the next developments would come in the form of the term repo market and futures contracts.”
Both have happened this year. Fannie publishing a calendar this year has allowed for term repo markets to develop – the more information investors have on the agency’s debt programme, the easier it is to conclude repo contracts, since you know when the next issue of a similar size and maturity is coming.
As for futures, any cash market needs to be of significant enough size and liquidity to warrant a futures market. For a spectacular failure you just have to look at the attempts to create a futures market for German Pfandbriefe in the late 1990s: domestic issues were small, and the so-called jumbo deals were bigger but still small (Dm1 billion – $463 million – at first), and issued by a multitude of different credits.
Fannie Mae offers consistent, large deals in one credit, and new issues that the markets can now predict. That makes the formation of a futures market all the easier. So earlier this year the Chicago Mercantile Exchange and the Chicago Board of Trade both launched agency futures contracts. “They were contracts developed by the exchanges, and they deserve all the credit for them,” says Knight. “But they would not have been possible without the work we put into our benchmark programme.”
The real proof of Fannie’s success comes in the secondary market. The reason investors are demanding liquidity, transparency and predictability is so that they can more readily trade in and out of debt securities. Two examples serve to illustrate how Fannie Mae is meeting these needs. First, transaction sizes in the after market are becoming larger and more frequent. “Investors are telling us that they can without question get very tight bid-offer spreads for trades of $200 million to $300 million, and that it keeps getting higher,” says Knight. “We see trades up to $500 million out there more, too, but not as frequent and not by all investors.”
Second, half-a-dozen of the major underwriters and traders have in recent months set up US agency trading desks in London. In part this is a response to Fannie Mae listing its new issues on the Luxembourg Stock Exchange, allowing full participation from investors previously restricted by limits on buying over-the-counter products. But it’s also a sign that investors want the ability to trade the agency bonds around the clock and around the world. There are few better endorsements for a borrower.
Antony Currie
Best sovereign borrower: Brazil
Brazil set out on a new course in 1999, both in the management of its economy and in its approach to the international capital markets. Concerns over the country’s deficits provoked huge capital flight and a currency devaluation last January. But Brazil did not tip over into crisis. President Fernando Enrique Cardoso, finance minister Pedro Malan and central bank governor Arminio Fraga have pushed through tough measures: cutting spending and increasing taxes so as to produce a primary (before debt service costs) public-sector surplus of 3% of GDP. This is the target for the next three years.
Meanwhile a new approach has also been evident among officials at the central bank under Daniel Gleizer, director of international affairs, charged with managing the country’s foreign liabilities. Gleizer, an economist, took up the position in March. He recalls: “Brazil had to rebuild credibility across the board last year. The challenge for us was to build credibility over our liability management at a time when many international investors still had doubts about the economic fundamentals.”
Gleizer saw the challenge as being to “lower borrowing cost over the medium term through an active liability management strategy, while allowing easy and fluid access to international markets and also help the private sector to tap the markets in an efficient way.” The new approach allowed for leaving a few basis points on the table now, to build well-supported liquid benchmark deals and goodwill among buyers, rather than pushing for the last basis point of cost saving on each transaction.
Very quickly bankers used to covering Brazil noticed a very different style. The country’s aggressive, bureaucratic and inflexible approach to new issues was abandoned. One banker recalls: “It used to be that when Brazil decided to come to the market, it would send out a request for proposals to the banks, then make a short-list of bidders and finally pick one bank and do the deal. That’s not a great approach. It telegraphs to the world what you intend to do and when, and that can hurt your spreads. Also the bidding process raises the risk of banks bidding too aggressively for mandates, deals not working, investors being hurt and being reluctant to support future deals.”
An important behind-the-scenes change last year at the Banco do Brasil was the consolidation into a single team of two distinct groups that had been separately responsible for new issues and for liability management. This made decision-making easier.
At the same time, the infamous requests for proposals stopped. These had been an understandable but irksome constraint, designed to show Brazilian politicians that there was price competition on the country’s international deals.
From last spring, Gleizer and his team made clear that the new strategy was to be less opportunistic and instead to build yield curves of issues with broadly distributed bond deals in the three main currencies – dollar, euro and yen. The euro was easiest, as Brazil was not encumbered with the associations of forced restructuring that haunt its dollar bonds, particularly the Brady bonds.
In the second half of last year, Brazil launched euro-denominated deals of three-, five- and seven-year maturities of between e500 million and e800 million. It launched a 10-year euro deal in January.
In the dollar markets, it organized a buy-back of Brady debt last year and an accompanying new issue. And this January and February, Brazil launched $1 billion 20-year and 30-year deals, later increasing the 30-year issue by another $600 million. Most recently, it entered the yen market with a ¥60 billion ($560 million) three-year deal.
While the Brazilian team now strives for transparency, by informing all their banks of its over-arching strategy, it is far from naive when it came to executing transactions. One banker says: “Now Gleizer and his team sit back and listen to the banks. But they don’t show their hand on individual transactions. Instead they may team up two banks that have been pushing a particular idea. And they can pull the trigger quickly.”
That nimbleness is evident in delaying the timing of deals as well as in launching them quickly. A banker at a US firm says: “I remember the whole Brazilian team was up in New York early in the new year working on the 20-year dollar deal when markets were very uncertain. Everyone thought they would go ahead but they didn’t. They waited and launched later in the month. And they didn’t push too hard, they kept it at $1 billion.”
The 20-year dollar deal was being closely watched as a signal for how borrowers from the region might fare in 2000. While the Brazilian team monitored the dollar market carefully in early January, they also took the opportunity to quickly push out a e750 million 10-year issue in the midst of the uncertainty. A banker at one of the lead managers says: “I had spoken to them on the Tuesday in New York urging ‘go now’. They got back to me on the Thursday evening and asked could we still do a deal. I said yes they could get e500 million. They put us together with the other lead and told us to do it the very next day. They got e750 million. Two years ago the Brazilian central bank would never have been flexible enough to do that.”
From time to time, Brazil still does opportunistic deals. When Dresdner Kleinwort Benson offered very fine terms on a two-year e600 million deal last November, it was too good to pass up. “The deal was not incompatible with our overall strategy. Not all goals can be achieved simultaneously in the same deal. The e600 million offer was done at a time when the market was still a little sceptical about our external accounts and whether we had enough reserves,” says Gleizer. “And the demand for the paper was there and the deal could help pave the way for the private sector.”
But the central bank is now at pains to take care of investors. Bankers understand Gleizer’s unwritten rule is never to reopen a popular new issue after payment date, no matter how great the demand, so that original investors are not deprived of spread performance. “Essentially the rule is that whoever bought our paper in the first place should not be harmed. In uncertain markets, that translated to not reopening after payment date.”
One banker sums up how far Brazil’s reputation as a borrower has improved in the past year: “What they’re doing is not exactly rocket science. And they may not be as experienced or sophisticated as the Argentines, who have a much greater foreign borrowing requirement every year. But what’s impressive is that they’ve set out their goals and their modus operandi clearly and actually stuck to them. In the process, they’ve built an aura of success around Brazil deals and I now sense among investors that lines are opening up to them.”
What’s more, while some bankers advised the Brazilians to wait out uncertain markets earlier this year and come at finer terms as the country’s economic fundamentals improved, having ploughing ahead Brazil can now sit out a far darker period of credit aversion among investors. “We met our borrowing requirement for this year in the first three months,” says Gleizer. “We have $3.9 billion maturing in 2000. We’ve already raised $3.4 billion and have drawn $600 million of an IADB loan and have a World Bank loan in the pipeline. I’ve said we’ll do $4 to $6 billion in 2000, so we’ll be prefinancing 2001.”
Big challenges remain for Brazil, especially in liability management. One is smoothing out the maturity profile of international issues before a lumpy repayment calendar in 2004. The tension here is between the wish to issue longer maturities and the goal of creating yield curves useful for private-sector Brazilian borrowers, which would only be able to issue at short maturities.
Also Gleizer wants, over time, to replace the heavily structured Brady bonds that came out of debt restructuring with new simpler global dollar bonds. The intention is to bring the Brady yield curve closer to the global dollar bond yield curve. Assuming greater capital account deregulation, this may then influence lower the yield curve on Brazil’s huge domestic debt. “We don’t want to retire Bradys for the sake of it, but only if there’s a net present value saving between the price and spread of old Bradys and new bonds,” says Gleizer.
Of course if the market perceives a credible threat that the central bank might buy up cheap Bradys, international investors might snap them up and do the job for him. But it remains to be seen whether international investors are quite so enamoured of Brazil as all that.
Peter Lee
Best corporate borrower: Ford
Just two years ago a corporate such as Ford Motor Credit would have needed to issue a plethora of different bonds across a variety of markets to meet its substantial financing needs. Now, though, less than a year after launching its global landmark securities programme, Ford has already raised $18.6 billion with just three issues.
The inspiration behind this move came from Fannie Mae, and to a lesser extent Freddie Mac, the two US agencies that since 1998 have been issuing large, super-liquid jumbo global bonds. And Ford has no problem acknowledging that: “Clearly we modelled the programme on what Fannie Mae and Freddie Mac had been doing with their benchmark programmes,” says Neil Schloss, director of financial strategy at Ford. “Although we stop short of publishing a formal schedule as that is rather too confining for an FRN borrower.”
Instead, Ford simply states that it will launch between two and four deals off the programme each year as the main means of hitting its borrowing targets, which last year were $10 billion, although $12 billion was raised in the end. That does not mean that Ford will simply launch an issue at will. “Communication is the key,” says Schloss. “Investors don’t like surprises. So although we don’t publish specific sizes, maturities, or launch dates, we will stick to the spirit of the programme. So we’re saying we’ll do up to four deals a year, but we wouldn’t launch one at the end of June and another at the start of July, for example. That could blow out spreads and leave us with some very unhappy investors, whereas our goal is to marry our aims of getting cost-effective, sizable funding with investors’ needs for a fair price.”
Not all investors were initially convinced that Ford, the first corporate with a super- liquid borrowing strategy, was going to follow the agencies’ lead. “We did a three-team roadshow covering Europe, Asia and the US to publicize our new programme in May last year,” says Schloss. “What we told investors was that we, too, were adopting a large, liquid issuance programme, and that we would wait for the right time to issue. Those investors we didn’t see were convinced that we would launch as soon as we got back.”
That confusion reigned throughout June, adding to the overall bond market jitters caused by the first of several interest rate hikes by the US Federal Reserve. But Ford shook off these concerns and in July started its new issuance programme with a bang: a four-tranche deal, mostly of five-year duration (there was a small two-year tranche), for $8.6 billion, making it the largest corporate bond deal ever.
“Ford goes to great lengths to inform institutional investors about its credit, and about what its funding philosophy is,” says Mark Devito, managing director in debt capital markets at Merrill Lynch, which along with Salomon Smith Barney and Bear Stearns developed the issuance programme with Ford. “And its treasury team listens to what investors tell them, which is consistency, transparency and liquidity. That’s why they followed the agencies’ lead in developing this programme.”
Three months later came a single-tranche deal of $5 billion, this time with a 10-year maturity. “This is really where we started seeing the benefits of the programme,” says Schloss. “The deal was increased from $3 billion to $5 billion, was sold within two days, and was priced at the tight end of the spread talk.” The deal came at 125 basis points over treasuries, whereas Schloss believes that a smaller deal might have been priced at 129bp or 130bp over.
Then in March came the third deal, a $5 billion two-tranche deal: a $2 billion three-year FRN and a $3 billion five-year fixed-rate portion. That means that in three big blow-out deals Ford has managed to reduce overall costs, keep investors sweet, and build a good curve in the two- to 10-year maturities.
“It’s tracked treasuries across the yield curve quite closely while other corporates have ballooned out on spreads,” says Devito. “Ford is now the corporate bond benchmark for secondary traders. Bid-offer spreads on the bonds can be as tight as two basis points.”
There is still some opportunistic funding going on – a e500 million FRN recently is one example, as well as issues in Canadian and Australian dollars, and yen.
Ford has also been one of the borrowers hot on getting deals done on the internet: it launched the first corporate commercial paper website last year, allowing direct buying and selling between issuer and investors, and launched a $1.2 billion domestic US deal in January through Lehman Brothers and Fidelity.
Curiously, the World Bank took that particular combination off its underwriting list as Fidelity was not yet fully internet- capable, but Ford was happy with their offering. “We were never going to get 100% sold completely over the web,” says Schloss. “Their model of the brokers talking to the clients and inputting the orders was fine for us.”
In the longer term, Schloss hopes that his company’s cachet will lure in retail buyers as much as or more successfully than others. “If retail does start to buy individual paper, then why not ours? It is a well-known global brand.” And if not, Ford can always fall back on its huge, oversubscribed jumbos to plug the gap.
AC
Best supranational borrower: IADB
It might not have the funding needs of the World Bank, the US agencies or large corporates such as Ford, but the Inter-American Development Bank has done a good job of keeping its name in investors’ minds by appealing to the leitmotivs of fixed-income investing: keep it big, and keep the investors informed.
The IADB has something else to its advantage. “Institutional investors are looking for diversification, and our credit can offer that,” says Stephen Abrahams, divisional chief, capital markets at the IADB. “We are a high-quality alternative to the US agencies, which investors are getting overweight in as a result of the decrease in supply in US treasuries.”
The problem is that there’s only so much the bank can offer. The IADB expects to raise only between $7 billion and $9 billion this year, “and that’ll probably end up being closer to the lower end of the range,” says Abrahams. So far this year the bank has raised $3.5 billion.
That is a good problem to be stuck with, as it keeps the investors ready to snap up the next deal. But only if the issuer responds to their exact needs.
And the IADB, with the agencies as its example, has done just that. “The feedback we were getting from the market in recent years is that we were coming to market too often, with small issues, and without any degree of predictability,” says Abrahams. “So last year we began to change that.” Of the $9 billion raised in 1999, more than half was accounted for by five issues of $1 billion in size or more.
Abrahams and his team carried that on into this year, launching a $2 billion global in January.
The IADB has also not been able to issue as much paper in smaller sizes as it would have liked because the precarious state of the markets has made it too difficult. “It’s stopped us from doing some of the smaller arbitrage-driven funding,” says Abrahams. “But we have been able to reopen a couple of our sterling issues a few times, and several of our small Hong Kong dollar deals. But we’ve been able to meet our targets using the larger deals without any problems.” In addition to the $2 billion global, the bank also launched its first benchmark deal in euros, a e1 billion 10-year deal.
Another matter that has hampered some of the IADB’s funding plans is the wrangling over the Federal Accounting Board’s proposals on how to account for derivatives transactions, known as FAS133, which are due to be put into force later this year. The idea is to get companies to account more fully for their hedging and derivatives strategies by marking them to market each quarter. As a way of making them more accountable for pure trading plays using derivatives, that’s fine. But it became clear to debt capital markets borrowers that for accounting purposes this could result in the derivatives being treated in a vacuum from the underlying cash instruments.
In short, if market conditions forced interest-rate and foreign-currency swaps out of a narrow valuation band to the underlying, then they would not count as a hedge, but as a pure trading position.
This has caused many US issuers to reconsider their funding strategies, and for the IADB, which Abrahams describes as a conservative issuer, this stopped it from “taking on structures which had the potential to add a lot of volatility to our portfolio.”
AC
Best European sovereign borrower: Greece
With its e2.5 billion 2010 benchmark international bond launched in February, Greece has, in capital market terms, established itself as a de facto member of the eurozone. The launch price of 53 basis points over Bunds was the lowest cost of borrowing for Greece ever on such a deal, and marked a substantial reduction from the spread levels on previous deals in the high 50s.
That the new bonds found eager buyers at 10bp over Euribor, the equivalent of 53bp over Bunds at launch time, was nothing short of impressive, says Amir Shariat, head of debt capital markets, Greece, at Deutsche Bank. “This was just 20 to 25 basis points above the largest Emu benchmarks provided by Italy.”
The issue, which was jointly arranged by Deutsche Bank, Credit Suisse First Boston, Morgan Stanley Dean Witter and the National Bank of Greece in February 2000, has also performed well in a generally volatile secondary market, trading at Euribor flat three months after launch. “Considering that most other European countries have widened over the last six months versus the German Bund, the fact that Greece tightened to Euribor flat is a great achievement, and underlines the credit strength of Greece,” says Shariat.
John Zafiriou, head of European coverage at CSFB, adds that this was probably the best-placed deal to come from the Hellenic Republic.
Not that it would have been a problem to sell Greek debt – spreads have been on a downward trend ever since its first e2 billion blow-out issue of March 1998. But the 2010 issue, being fungible with new drachma domestic debt, cleverly allows Greece to bring foreign investors into the domestic government bond market ahead of its entry into Emu and ahead of its own auctioning plans.
Greece has clearly drawn on the lessons learnt by other sovereign issuers. Fungibility is an extra trump card in the convergence game, as Austria, Italy and Spain have shown in the run-up to the launch of the euro. It means that, in the event of Greece joining the third stage of Emu, an identically structured drachma government bond line will be redenominated in euros, and add overall liquidity to the issue.
When the Eurobond and the domestic bond merge on January 1 2001, they will create an issue of a combined size of at least e5 billion – the minimum size for EuroMTS eligibility. The Greek Debt Management Agency auctioned the first Dr360 billion (e1.1 billion) tranche of the parallel issue on April 18 2000. Its general director, Christoforos Sardelis, says that more auctions are planned in June, August, October and December, and that the issue’s final size might be as high as e7 billion.
Once its bonds are traded on EuroMTS, the electronic trading platform for European government debt, Greece’s debt managers will be able to use the market feedback to tailor future borrowings and to access the 250 European institutions that use the system.
The potential boost in liquidity also attracted a large number of first-time buyers. The bond’s main attraction lay in the fact that Greece is the lowest-rated EU country, and was – at launch time – one of the few zero-risk weighted countries whose bonds still traded above Euribor. “The issue is offering good yield to investors and is their last chance to buy into Greece’s convergence story,” says Sardelis.
As well as adopting the pre-Emu borrowing tactics of other European sovereign debt management agencies, Greece showed itself right up to date with the latest fads in debt primary markets. By distributing the deal electronically, momentum was further improved. Deutsche received e-orders well in excess of e300 million out of its allotment of e565 million.
The total demand for the issue was so high that the planned e2 billion deal could have easily been enlarged to e5 billion. But borrowers that stretch too far in response to over-inflated order books can sometimes pay a heavy price if bonds lose support in the secondary markets. The deal was finally increased by only e500 million. “Greece has reacted very responsibly,” says CSFB’s Zafiriou. “And by not tightening the price too far, the issue kept its benchmark status and attracted investors that have not bought Greece before. There was particular demand from Scandinavian, Swiss and Dutch institutional investors.”
“The issue was after all a strategic deal,” explains Sardelis. “The driving force behind this issue was a repricing of the Greek curve, so that Greece would be established as an Emu country well in advance of a formal decision. We particularly targeted new accounts and aimed for a broadly distributed investor base, as we wanted to prevent a situation whereby domestic investors will move out of the market faster than outsiders come in.”
Anja Helk
Best central and eastern European sovereign: Poland
It was a case of near perfect timing. Credit Suisse First Boston and BNP Paribas, which have held the mandate for a debut Eurobond since June 1999, wisely decided to launch the e400 million 2010 issue on March 7 2000. Yields had dropped in the previous week, after the announcement of benign US employment data and a better performance from the euro on the currency markets. One of this year’s few market windows opened for Poland, offering low volatility in the primary market and exceptionally good demand.
Poland, in its turn, showed good sense by not trying to squeeze too much out of these favorable market conditions. The spread on the bonds was set at 82 basis points over Bunds, a level at which the leads could guarantee a successful placement and expect the deal to perform well in the secondary market. And so it did. The deal traded inside the Hungary 2009 issue, and converged to that of Slovenia’s 2010 issue. Only in the last weeks of May did the spread start to widen by nearly 10bp, when the Freedom Union, led by finance minister Leszek Balcerowicz, threatened to pull out of the government coalition on May 21 2000.
Edward Basinski, deputy director of the public debt department at the finance ministry is pleased that the deal fulfilled its main objectives. “We wanted to set a liquid benchmark for future issuance from sub-sovereigns and the corporate sector. Secondly, it was important for us to introduce our credit to new investors.”
Apart from the spot-on timing of the deal, Mary Pieterse-Bloem, co-head of central and eastern Europe debt capital markets at BNP Paribas, identifies two other elements that made the issue a blow-out success. “Poland does have a very good credit story to tell. It is the strongest growing country in central and eastern Europe. It has implemented reforms in a very co-ordinated manner, so that the process of transformation is, though less speedy, ultimately more successful than in other countries of the region.”
Poland’s economy is larger than the that of Hungary, Czech Republic and Slovenia combined, and its foreign currency rating was upgraded to Baa1 by Moody’s and BBB by Duff & Phelps in September 1999, and to BBB+ on May 15 2000 by Standard & Poor’s.
But it was probably the deal’s scarcity value that was the most significant attraction for investors. It is difficult to get exposure to Polish or central and eastern European debt in the secondary bond markets.
Investors who want to place their bets on economic and monetary convergence among the next wave of EU candidates can buy sovereign debt of Slovenia (A) and Hungary (BBB+) – the Czech Republic is not issuing – or a limited amount of sub-sovereign bonds such as those of Poland’s telecom TPSA and the Czech electricity supplier CEZ.
This 10-year benchmark was Poland’s first euro-denominated deal – a comeback for the borrower to the international markets after a yankee bond in June 1997, and a Deutschmark issue in July 1996. The Deutschmark-denominated bond matures on 31 July 2001, and no other issues will be offered this year. In fact, this year’s 2010 transaction had been planned for 1999, but was rescheduled because of sufficient inflows from privatization.
“With this deal Poland has met the annual target of their bond issuance in the international capital markets,” says Basinski. “Further funding will come from domestic offerings and from privatization.”
And though that flies in the face of the received wisdom that bond investors love regular, large, liquid issues, international buyers of this deal in the primary market should benefit.
In the absence of another issue this year, the scarcity of Polish paper is guaranteed to persist for some time. It made investors order up to e2 billion of the bond – among them many first-time buyers of central and eastern European debt. Banks, in particular, were drawn to the issue after the BIS’s decision in April to reduce Poland’s risk rating from 100% to zero.
The deal was finally increased from e400 million to e600 million, and the lead managers were able to build a book with a strong geographic distribution. “We have created a pan-European investor base, with many large institutions,” says Peter Malik, head of emerging Europe, Middle East and African debt origination at CSFB. “And due to the quality of the investors and the broad distribution, the deal has performed very well in the secondary markets.”
AH
Best central Asian sovereign: Kazakhstan
Kazakhstan launched its comeback deal in September 1999. A five-year $200 million issue demonstrated that Kazakhstan, despite being rated single-B and a neighbour to troublesome Russia, does have access to the international markets. The bond was, in fact, the first issue from the Commonwealth of Independent States following the Russian crisis of August 1998.
The sovereign achieved this even though 1999 was not a particularly good year for Kazakhstan’s economy. Its number one export market, Russia, had hit trouble and oil prices were then at their lowest levels for 12 years. Meanwhile it had proved impossible to proceed smoothly with restructuring of the domestic economy. Privatization of state assets had been delayed. And the country’s prospects for borrowing in the international markets had suffered when it was downgraded by Standard & Poor’s in September 1998 (from BB- to B+), and by Moody’s in February 1999 (from Ba3 to B).
Yet in September 1999 investors’ confidence in Kazakhstan’s economic fundamentals and in its ability to work through these problems had improved. ABN Amro, which lead-managed the bond with Deutsche Bank, highlighted Kazakhstan’s outstanding performance in meeting the IMF’s stated targets, reducing its economic links with Russia, attracting foreign direct investment, and proving its future commitment to reform, explains Reid Payne, head of emerging markets syndicate at ABN Amro.
“The country has also made great improvements in restructuring the banking system, created a private pension fund system, and implemented a comprehensive securities law,” adds Peter Schikaneder, director of debt origination at Deutsche Bank.
Kazakhstan is also one of the few stable democracies in the region, and it has oil reserves that could put it in the league of Saudi Arabia and Kuwait. The recently discovered Kashagan oil field is expected to be the biggest in the republic, and if a capacity of 30 billion barrels is confirmed, it will be the fifth largest oil field in the world.
The country’s oil export capacity will be increased by new pipelines. One is to be built by the Caspian Pipeline Consortium, and will run through Turkey, and another is planned to be independent of both Russia and Iran.
A final boost in confidence was delivered by a major increase in oil prices. After Opec voted to cut production in March 1999, prices recovered from $10 a barrel in early 1999 and reached new highs above $28 a barrel by January 2000.
Payne explains that, once convinced of the country’s credit merits, “investors needed a compelling relative value argument to commit to the transaction”. They were offered a 13.625% coupon and an initial spread of 825 basis points over US treasuries. The pricing was very generous, considering that the outstanding 2002 issue was trading at 700bp over.
But the sovereign wanted to be sure of the deal’s success. It has not issued since the two dollar deals it did in 1996 and 1997, and wanted to establish a benchmark for further borrowing. It also wanted to be absolutely certain of its ability to pay off the $200 million Eurobond that was due in December 1999 so as to set itself apart from its defaulting neighbour.
Market participants also thought the wider spread was appropriate because Kazakhstan would need to offer a pick-up over B2-rated Brazil’s 2004 and B1-rated Turkey’s 2005 dollar bonds, which respectively traded at spreads of 810 bp and 600bp over US treasuries.
In the end, the $200 million issue was so well received by investors that two subsequent taps of $75 million and $25 million followed in November, both priced below the September offering. ABN Amro and Deutsche Bank sold the issue to institutional investors in the US and Europe, including specialist emerging markets funds, hedge funds and conventional global bond funds.
On receiving the mandate in June 1999, the leads had initially wanted to market a euro-denominated bond to retail investors. This plan was quickly abandoned, when an atmosphere of crisis blew up around emerging market bonds after Argentine presidential candidate Eduardo Duhalde demanded the cancellation of foreign debt, and it persisted when Ecuador defaulted on its Brady bonds and Ukraine was forced to restructure.
“But by September we had the 144A regulation in place, and thought it would be advantageous to include the US on a roadshow to broaden the investor audience,” says Schikaneder. “This added to the status of Kazakhstan as a professional and flexible issuer.”
In April, the 2004 issue had tightened to 450bp over US treasuries. Despite the choppy markets at the time, a second $350 million bond was successfully launched. Only six month after its amazing breakthrough, Kazakhstan was rewarded for its perseverance when it borrowed seven-year money at a spread of 500bp over treasuries.
AH
Best European corporate: Vodafone AirTouch
Competition for telecom capital in Europe may be fierce, but Vodafone has taken the massive funding required to turn itself into Europe’s pre-eminent mobile phone service provider in its stride with a series of jaw-dropping deals. Following a $14 billion bank financing to support its acquisition of AirTouch, it stunned the markets in December by raising a total of e30 billion in the loan markets in the middle of its hostile takeover of Germany’s Mannesmann. Not only did Vodafone executives face convincing their own shareholders and Mannesmann’s reluctant shareholders to accept the takeover deal, they also had to bring in new and existing investors.
At e30 billion, Vodafone’s loan backing the Mannesmann takeover was the largest ever syndicated loan. Bank of America, Barclays, Citibank and Goldman Sachs ran the global books for the three-tranche deal, which was arranged with seven other banks: ABN Amro, BNP Paribas, Greenwich NatWest, ING Barings, National Australia Bank, Toronto-Dominion and Warburg Dillon Read.
Hard on the heels of the syndicated loan, Vodafone came back to the market with a $5.2 billion bond issue. The deal was not only launched on the very day Mannesman’s board capitulated and recommended the Vodafone bid to shareholders (February 4 2000), it also set a new high as the largest deal ever for a UK corporate. Although the markets had been turbulent for most of the week leading up to the deal, news of the successful bid opened the markets and Vodafone easily raised its money within its expected price range. By the time the deal was launched, lead-managers Goldman Sachs and Salomon Smith Barney had built a book in excess of $8 billion.
Just three months later Vodafone went on to win a third-generation UK mobile phone licence. This demanded a quick funding response. In the event, Vodafone was the first telecoms company in the bidding war for the UK universal mobile telephone services (UMTS) licences to come into the markets, with a $3.75 billion, two-tranche short-term FRN via Lehman Brothers. The deal, which formed part of the company’s interim financing package for the new licences, was placed in difficult markets ahead of uncertainty over the Federal Open Market Committee meeting. Permanent financing will come through asset disposals and expected IPO issuance by subsidiaries. This will protect Vodafone’s credit standing going forward and this was a key selling point in marketing the FRNs. Says Michael Burrow, managing director and head of corporate debt capital markets at Lehman: “This was a particularly smooth transaction. Considering the background noise and the tsunami of telecom deals expected by the markets, it was a phenomenal performance and a testament to Vodafone’s good standing with fixed-income investors.”
In the end, although the borrower paid a couple of basis points more than it would have done earlier in the year, the deal raised more than the targeted $3.5 billion and achieved very attractive spreads of 10 and 23 basis points over Libor at a time when many telecom deals are being scaled back, cancelled or launched at wider spreads.
CP
Best Asian sovereign: Korea Development Bank
Korea Development Bank has done more than any other Asian borrower to set new benchmarks in the market in the wake of Asia’s economic rehabilitation. Despite an increasing number of Asian issuers, many Asian deals have so far been somewhat limp. KDB has been the exception and has kept a consistently high profile in the markets with a string of successful and innovative deals, many of which set benchmarks that will pave the way for other returning Asian borrowers.
Headline deals from KDB in the past 18 months have included the borrower’s euro sector debut that opened up a new market for Korean borrowers. The five-year benchmark transaction was roadshowed across Europe and Asia and raised e500 million, breaking the borrower’s previous reliance on the dollar and samurai markets for large funding transactions. Although KDB was a regular issuer in the European markets before the Asian crash, issuing in several European currencies, the deal marked an important return to the continent and its new currency.
Other issuers from Asia had already tapped the euro sector, including Hutchison Whampoa, Korea Electric Power (Kepco) and the Philippines, but none of the borrowers have been as successful as KDB. Since Kepco has been forced to buy back its euro deal in order to prepare for its privatization, the KDB issue is the only benchmark issue for Korean borrowers considering the euro sector. Says Tae Jin Jeong, deputy general manager at KDB’s international finance department, in charge of non-dollar borrowing: “Korea needed a benchmark euro issue, to give other borrowers an alternative to the US dollar markets. The development of the euro sector is very significant and competition between the dollar and euro markets will improve borrowing conditions. The fact that KDB is representative of all other Korean borrowers required that KDB establish a euro benchmark.”
The creation of an alternative market for Korean borrowers is important. Says Stephen Diao of Barclays Capital in Hong Kong: “Asian borrowers have to some extent been held hostage by a US investor base and forced to accept new-issue pricing for US dollar offerings that were unreasonably wider than existing secondary spreads.”
Although KDB struggled a little on pricing the deal, it eventually achieved its funding target of 100 basis points under dollar Libor. Other innovative recent deals include KDB subsidiary KDB Capital Corp’s securitization of $144m of equipment leases via a bond issue that raised $101 million. Daiwa and IBJ led a highly successful ¥50 billion ($460 million) three-year samurai, marking KDB’s return to the market after nearly three years away. “We needed to set another benchmark,” says Jeong. “Once again with this deal, we hadn’t issued in this market since the crisis.”
Another landmark deal came from KDB in the form of a $1 billion five-year global launched in April 1999 led by Chase and JP Morgan, marking KDB’s return to the financial markets after an 18-month absence in the wake of the crisis. The success of this deal contrasts notably with the failure of KDB to raise funds in the international markets in December 1997 at the height of the Korean liquidity crisis. This time around KDB issued on the back of a rally in Asian bond spreads, catching the market’s full attention with a deal that had the full backing of both the Korean government and international investors. In the event, the roadshow proved a successful opportunity for the country to demonstrate its economic progress since the crisis hit.
Other successful deals by KDB include a $100 million one-year transaction by Barclays Capital, a $500 million three-year fixed-rate private placement by JP Morgan and a $100 million one-year FRN via Merrill Lynch.
Charles Piggott
Best Asian corporate: Asia Pulp & Paper
In March 2000, Indonesian company Asia Pulp & Paper (APP) was the first Asian bond issuer to return to the markets after the Asian financial crisis, with a $403 million 10-year bond deal issued in the name of APP China, but guaranteed by the group. Just weeks before the bond launch, another APP subsidiary, PT Indah Kiat, was also the first Indonesian borrower to tap the international loan markets after the crisis in early 2000 with a refinancing of a $400 million bank facility that was also guaranteed by the parent company.
APP’s return to the markets in March was an important step in Asia’s financial rehabilitation and APP stands out among Indonesian companies as one that has never missed or been late on a payment for any of its debt. “The group has clearly demonstrated the importance of access to long-term capital and has done a lot to turn its situation around in the wake of the crisis,” says Rod Sykes, executive director at Morgan Stanley Dean Witter in Hong Kong. Some saw it as symbolic that APP’s affiliate company PT Pindo Deli was the last Indonesian issuer to access the international markets before the meltdown in the autumn of 1997. APP was also the first Indonesian borrower to return to the international loan markets just a few weeks before the bond launch.
APP has a large amount of outstanding dollar debt and it is likely that much of this can now be refinanced on better terms than before the APP China deal. APP has nearly $1.5 billion of debt coming due during the year and it is possible that further high-yield offerings could follow the APP China issue.
Although APP has remained one of the few credits able to tap the international markets in the wake of the crisis, it has generally held back from the capital markets. The exception was a $350 million American depositary receipt launch that brought in investors from the US, Asia and Europe, despite the worsening political situation in Indonesia at that time. APP had otherwise refrained from accessing the long-dated bond markets since 1997, perhaps because of its constrained credit ratings.
Although APP is domiciled in Singapore, its rating was originally constrained by Indonesia’s Caa1 sovereign ceiling. However, Moody’s unusually upgraded the recent bond issue to B3 to take into account the wide geographical spread of the group’s operations and its solid hard-currency earnings. Together with the APP China deal, this constraint on APP’s borrowing has now lifted.
According to Morgan Stanley Dean Witter, which led the deal, the biggest challenge was to convince investors to buy the new bonds rather than existing bonds that were readily available in the secondary market. To do this, the APP China deal was cleverly constructed to include an embedded option whereby the issue included detachable warrants that can be converted into common stock. During the marketing period for the issue, APP’s secondary market debt spreads tightened significantly and the new issue was able to take advantage of this and still price inside the levels of outstanding paper.
Although APP’s debt of nearly $10 billion has put a strain on its liquidity, management has increased the company’s leverage in order to fund its rapid expansion, for example into China, where demand for paper and packaging has been fastest in the region. Once this has been done, the company expects to start retiring its debts.
CP
Best Latin American corporate: CTC
Chilean telephone company Compania de Telecomunicaciones de Chile’s (CTC) five-year e200 million bond deal last July was one of the brightest and most fought over deals to come out of Latin America in the past year. Mandates to bring Chile’s leading telecom company to the market were hotly contested. They eventually went to Germany’s Dresdner Kleinwort Benson and Spain’s BBV. The two bookrunners, helped along by JP Morgan and ABN Amro as joint leads, managed to bring the deal to market at incredibly tight margins.
When swapped into dollars, the deal came in at around 200 basis points over US treasuries, around 40bp tighter than the level at which an existing CTC yankee bond was trading at that time. Although criticized as aggressive by some of the investment bankers’ competitors, the deal has to be seen as a triumph for the issuer and for the banks that used their European distribution power to excellent effect to get the deal away at such a price.
Although some members of the syndicate became nervous when the market showed signs of weakness, the leads’ decision to hold on to the original pricing and take on some of the bonds themselves was in the end vindicated. Says an official at Dresdner Kleinwort Benson: “The pricing was aggressive, but there was a great deal of appetite for telecoms paper in Europe and also a lack of Chilean paper in the market. We found that in fact many big tickets were not that price-sensitive on this deal and many buyers have held on to these bonds.”
The transaction was also the first investment-grade Latin American corporate issue in euros and the first euro deal to come out of Chile, thus giving European investors their first chance to invest in a Chilean name without taking on any currency risk.
The two-week roadshow convinced investors of the value of a deal that offered a 100bp pick-up on European A-minus credits and the majority of the deal was sold before launch. The issuer had a good story to tell and this was helped by the fact that the recently appointed CEO turned up to explain the company’s financial strengths. CTC is rated at the sovereign ceiling for Chile and had an equity capitalization of more than $6 billion at the time of the deal, making it the largest quoted company in Chile. CTC also boasts 90% of the local domestic telephone market and, despite the overall economic slowdown in Chile in the preceding year, CTC’s revenue had climbed an impressive 14%. European investors also felt comfortable with exposure to a company that is 44% owned by Telefónica de España.
The CTC deal has opened a new market for Latin American borrowers that had previously relied on the US dollar markets for foreign funding. Other Latin corporate borrowers are sure to follow.
CP
Best Euromarket high-yield issuer: Level 3 Communications
Denver-based Level 3 Communications set new records in the high-yield market in late February with a $2.2 billion bond deal that included the largest ever high-yield offering in euros. Not only did Level 3 raise e800 million, the largest ever non-dollar high-yield bond issue, it went on to raise more than $5 billion on the same day through parallel equity and convertible bond issues. “This really was a windfall deal for the borrower,” says one of the co-lead managers. “I think Level 3 really surprised themselves with how much they could raise in the markets. This is certainly a landmark for them.”
It was also a defining moment for the European high-yield markets. The fact that European companies are pushing towards the important $1 billion mark in high-yield issues has sent an important signal to borrowers that the European markets offer a viable alternative to the US markets for large high-yield financing. The previous record for high-yield euro issues was held by UK cable company NTL, which raised e720 million via Morgan Stanley in November 1999. Bankers note that new issues, particularly in the telecom sector, are seeing a better welcome in the euro sector than in the dollar market.
The B3/B rated deal was in fact the fourth-largest high-yield bond issue ever. Bankers believe that Level 3 could have raised significantly more: demand for the euro slice was estimated at around e1.4 billion and in theory the euro tranche could have been raised to this amount. Now that European investors are getting used to high-yield issues, there is every sign that the market will develop rapidly.
Level 3, which is one of the world’s leading broadband communication companies, is using part of the deal’s proceeds to build out its internet protocol based fibre-optic networks in Europe and Asia. Proceeds were also used to finance services offered to internet companies, one of the hottest growth areas in the telecom sector. Says Doug Bradbury, Level 3’s CFO: “The European communications market is a key part of our strategy and Level 3 is extremely pleased with the reception we received from European investors.”
AC
Best US high-yield market issuer: Williams Communications
The US high-yield market has been in retreat for the past 18 months, some would say even longer, since the near-meltdown in the credit markets after Russia defaulted on its domestic debt in August 1998. Issuance so far this year is 49% down on 1999 levels, and it’s been one of the longest periods of a flat to negative performance in the asset class since the US market’s revival in the early 1990s.
The only issuers that seem able to come to market are telecoms companies – in fact, nearly 70% of this year’s deals are from that single sector.
Against this tough market backdrop, the award for best issuer goes to Williams Communications for its capital-raising outing last September. At the time Williams was one company working in two separate businesses, one being a giant energy company, the other an owner-operator of a fibre-optic network. At the time the company needed to raise $5 billion, split roughly between the two businesses, but if the telecoms arm, a potential high-yield credit, issued any debt, the company’s investment-grade rating, based on the energy business, might have been put in jeopardy.
With the market illiquid and full of uncertainty, several high-yield issues had been pulled or reduced in size. Just to make the whole process even tougher, the Securities & Exchange Commission had been investigating the company’s accounting policies.
Its response was to issue a high-yield bond while also preparing Williams Communications for an IPO and listing it on the New York Stock Exchange, raising $680 million in equity capital. Merrill Lynch acted as bookrunner for both transactions, with Lehman Brothers and Salomon Smith Barney acting as co-leads on both pieces.
The bond deal came first. Initially, Williams Communications planned to raise $1.3 billion earlier in the year, but that was delayed as a result first of the SEC investigation into accounting policies, and second by market turmoil. But there was a benefit to the delay, as this created a certain amount of pent-up demand. So the deal was twice increased before the offering, finally settling at $2 billion.
As a result of the IPO, both the energy and the fibre-optics businesses were able to raise the capital they needed, and the investment-grade rating of the energy arm was left unaffected. And by issuing a jumbo high-yield bond after a dearth of such deals, Williams Communications acted as a lever to prize the door to the market back open, for a few months at least.
AC
Best bank issuer: Barclays
Not everything that has happened to Barclays in the past few years has been positive. But behind the scenes, the UK financial services group is gaining a clear reputation for the growing sophistication of its capital and balance-sheet management. Two recent deals, both linked to balance-sheet management, have greatly enhanced the bank’s reputation, both as a borrower and as an innovative deal maker.
In November 1999, Barclays secured the largest European credit card securitization to date via Barclays Capital. Although this was Barclays’ first credit card securitization for its Barclaycard business, this did not stop the bank from wading into the market to set a new benchmark for securities backed by European credit-card receivables. Rather than issue into Europe’s fledgling asset-backed market, Barclays headed straight for the most liquid market for asset-backed securities in the US. The resulting deal, a $1 billion three-year soft bullet, was of a similar size to transactions by US credit-card companies that form the bedrock of the US asset-backed market. Although Barclays went first to the US markets, the innovative new structure of the deal, which borrowed some mechanics from MTN programme structures, will allow the issuer to follow up with deals in other currencies.
The deal was a trailblazer in several respects. In the past few years, European credit-card securitization deals have largely been overlooked by European financial companies. But this and other securitization deals by Barclays have sent a powerful signal to large European financial institutions of the advantages of active balance-sheet management through securitization.
Barclays has in fact been at the forefront of securitization for more than a decade, issuing three mortgage-backed securities worth £766 million and a £280 million bond backed by unsecured consumer loans between 1989 and 1994.
But Barclays’ balance-sheet management goes much further than taking assets off the balance sheet and the bank has invested a lot of time and energy in matching its capital to its foreign liabilities. Says Hugh Graham, deputy group treasurer at Barclays: “The process of using foreign currency capital to match foreign liabilities and hedge against exchange rate volatility began in the 1980s, but the advent of the euro has provided us with an enormous capability to develop this process further.”
In this context, Barclays’ tier-one transaction that came to the market in mid-April was one of the most innovative deals of the past few years. Not only did Barclays Bank set a new record in tier-one transactions in the euro sector with a e850m deal via Barclays Capital, it did so at a time when similar deals were competing for capital.
In the wake of the deal, Barclays believes it has found a superior structure for tier-one issues by UK institutions. Investors particularly liked the simplicity of a deal that avoided special purpose vehicles used in the previous seven UK tier-one issues, and that gave them direct access to the issuer’s credit.
By using the simpler Reserve Capital Instrument structure, and avoiding unnecessary complexity, Barclays shaved about 20 basis points off its funding costs, with the prospect of larger savings on future issues once investors have fully understood the benefits. One of the advantage for investors is that reserve capital instruments are bearer bonds rather than perpetual preference shares. Investors have the added security that the instruments will remain bearer bonds and cannot be converted into any other form of security.
CP
Best Asian bank: Hanvit Bank
When a number of Korean financial institutions were looking to raise capital through a bond issue, Hanvit Bank beat them all. Then Hanvit dared to make its issue a two-tranche deal and raised $850 million.
Clearly investors were ready to take a chance in the Korean market, which was still reeling from the Daewoo crisis. Jonathan Brown, global head of emerging market bond syndication at JP Morgan in London, and lead-manager of the deal, says that Hanvit’s issue reveals the depth of the market.
When Hanvit first approached JP Morgan in December 1999, there had recently been only two other issues of comparable size, by Korea Development Bank and Korea Electric Power Corporation. But neither of those issues came from a sub-investment grade bank and neither had the accompanying risk of Hanvit’s two-tranche issue. Cho Hung Bank’s issues accounted for the only other activity in the financial services sector, but they were considerably smaller, more traditional and did not have a significant impact on the market.
The decision to make Hanvit’s issue a two-tranche deal was important for the bank. Because it intended to raise such a large amount of capital, it needed to tap every investor base. In the three and a half weeks it took to complete the issue, attention focused on the roadshow. Most investors were already familiar with Hanvit, Brown recalls, so its strong credit history only helped investors to feel comfortable with the bank. However, he says, some investors, especially in the US, were unsure how to position the investment in their portfolios.
Of the total issue, $550 million was upper-tier-two debt, priced at 612.5 basis points over treasuries. Due March 2010, the deal will step up to 918.75bp over treasuries in March 2005. The remaining $300 million was lower-tier-two tranche and was priced at 520bp, stepping up to 780bp over treasuries.
Brown said that investors were aware of the potential in the Korean market: “They wanted to take more risk to get more spread.” Asian and US investors were most receptive to the issue, accounting for 85% of the upper-tier-two tranche and 90% of the lower-tier-two tranche. European orders came in lower than expected, but the books still closed at $950 million.
There were between eight and 10 accounts in the US that expressed interest in the issue during the roadshow but didn’t participate because the deal was too risky. Since then, according to Brown, those investors have had to buy the bonds in the secondary market.
The issue has had such an impact on the market that it has achieved benchmark status. But the size of the issue was sufficiently large that it may have edged out most of Hanvit’s competitors for the time being. Even though other financial institutions expressed interest in raising capital through a bond issue, the market has been almost silent since Hanvit activity. However, in March Cho Hung Bank raised $400 million through a two-tranche deal similar to Hanvit’s. In the light of the success of Hanvit’s issue, there may be many more to follow.
Christina White
Best US financial issuer: House-hold Finance
Edgar Ancona and Bruce Foster were in Japan last month. This is nothing unusual for the treasurer and his vice-president of Household Finance, although a casual observer might wonder what a largely domestic US consumer finance company is doing over there.
It is part of the company’s strategy of broadening its investor base. In the past 18 months, for example, UBS Warburg has taken the company on investor presentations to 15 cities around Europe and the Middle East. And of course Household is yet another borrower that has realized that the best way to get your paper out there is to issue big. This year the company expects to issue roughly $10 billion in debt securities, nearly $1 billion more than last year, to finance its major businesses: credit cards, both private label or the old staples of Visa and MasterCard, credit insurance, and auto finance.
Dollar global bonds and benchmark deals in euro and Deutschmark currencies are the more public of the deals it has used so far to do this. But in the past, including last year, the company issued a lot of smaller deals in a variety of structures, including US MTNs, Euro-MTNs, certificates of deposit, and asset-backed deals. But this year, the company is changing that strategy to keep up with investors’ requirements.
“Household Finance intends to rely less on MTNs aside from short-dated and floating-rate issues,” says a banker at UBS Warburg. “Instead it is continuing to expand and deepen its investor base and provide investors with the liquidity they’re is looking for by issuing in larger size.”
AC
Best covered bond issuer: Rheinische Hypothekenbank
Germany’s Rheinhyp has convincingly kept its lead this year in the covered bond sector with a string of deals put together by a dedicated structured finance team that has only been in place for just over a year. Rheinhyp’s securitization of its European commercial mortgages across several countries broke new ground in Europe’s cross-border structured finance markets. Even though the legal hurdles for such a deal might have proved insurmountable, Rheinhyp and Barclays Capital together found a structure that should ignite interest from other asset-backed issuers to use similar synthetic structures to place pan-eurozone portfolio deals into the market.
Says David Wells, director of high-yield capital markets at Barclays Capital in London: “This deal took more than a year to put together and both Barclays and Rheinhyp worked very hard on the structure. It took a long time, but it certainly paid off.”
The innovative synthetic cross-border structure packaged together 99 commercial mortgages in Austria, France, Germany, the Netherlands and Spain and gives investors access to credit risk, while Rheinhyp remains responsible for servicing the loans. The issuer managed to skirt round the legal barriers involved in putting together a multi-jurisdictional deal by leaving the loan portfolio on the issuer’s balance sheet. A special purpose vehicle, Europa, was then created to guarantee the portfolio against non-payment and this vehicle then issued e1.345 billion in the bond markets. The proceeds of this were invested in Rheinhyp’s own Pfandbrief bonds and MTNs which will be held by Europa to back its guarantee to Rheinhyp. Once the rating agencies had given their blessing to the deal, investors responded very positively to the diverse nature of the credit portfolio.
Apart from Morgan Stanley’s prior transaction that packaged together mortgages from the UK and Ireland, this is the first European securitization to bundle assets from more than one country into a single deal and it marks an important step in the development of a true eurozone market.
The reasoning behind the deal was simple. Rheinhyp’s pan-European lending business is growing, and fast-consuming capital, given the 100% weighting attributed to these assets under these guidelines. This has led the mortgage bank to lay off some of its existing portfolio in the markets in order to free up the equity needed to underwrite more new loans. The synthetic nature of the transaction also appealed to investors because of the removal of many risks associated with traditional commercial mortgage-backed security structures. Rheinhyp now intends to concentrate on loan origination and servicing.
Rheinhyp has in fact been breaking new ground since it issued the first German mortgage-backed security in 1995, which prompted the German banking regulator to prepare guidelines for German bank securitization issues. More recently, Rheinhyp also won plaudits for getting away a 10-year e3 billion global Pfandbrief after a prolonged period of unfriendly markets. By watching the markets closely for the first sign of an upturn, Rheinhyp managed to issue the deal at a time when many mortgage banks had been forced to the sidelines. Says Rüdiger Luchmann, Rheinhyp’s head of treasury and capital markets: “After announcing our plans in December, we were confronted with a difficult market in which investors were concentrating on the shorter end of the yield curve. At the time, nobody wanted to issue into this segment. In the end it paid off to wait and the markets respected the fact that we were willing to wait.” When the deal finally came at the start of March, it was the first 10-year Pfandbrief deal for nearly six months.
CP
Best central and eastern European corporate: TPSA
After issuing the largest dollar deal ($1 billion) in December 1998, Telekomunikacja Polska (TPSA) delivered the largest euro-denominated corporate issue from the region in October 1999. It was another textbook deal.
Despite the generally weak demand of October 1999, and the particular lack of appeal of corporate issues from the region since the Russian crisis, the deal was a tightly priced blow-out. Lead arrangers Deutsche Bank and Salomon Smith Barney launched the five-year e400 million offering at 150 basis points over the four-year Bund.
In fact, investors’ craving prompted the leads to increase the issue from e300 million to e400 million, and to reopen it in December. The e100 million tap was launched inside the October spread at 145bp.
Investors across the spectrum found it hard to resist the high spread performance potential of the Baa3/BBB rated Polish telecom. TPSA not only benefits from its dominant position in the largest telecom sector in the region, the outlook for Poland’s convergence with the European single currency system and sovereign credit upgradings. TPSA also enjoys enormous scarcity value. The only other Polish investment-grade issuer is the Polish Republic, and it did not come to the market at all in 1999.
But TPSA’s status as a high-grade issuer owes as much to the company’s good management, says Aidan Freyne, managing director on the syndicate desk at Salomon Smith Barney. “TPSA is a well-run and professional company and displays a rare continuity of management and policy. The management spent a lot of time with investors to establish a good relationship.” And, adds Zenon Komar, adviser to the managing board of TPSA: “All our investors have made money from our deals.”
By February 2000, TPSA was so well established that it did not even need to go on a roadshow to launch a twice-oversubscribed 2007 e475 million issue. With this deal TPSA reaped the benefits of its previous efforts. The transaction was launched at 125bp over Bunds, and it attracted a solid institutional investor base and a significant number of first-time investors.
The e475 million was the second and final deal of the $1 billion EuroMTN-programme. Future borrowing requirements will involve another $1 billion programme for the coming year, though no issuance is planned for 2000, says Komar. In the meantime, TPSA will stay in the spotlight. The Polish government, TPSA’s majority holder to date, has just announced France Télécom to be the elusive bidder for a 35% stake that could increase to a 51% stake. AH
Best structured securitization issuer: Italy
On finding large gaps in its 1999 budget, the Italian treasury decided to deal with one notorious problem – delinquent social securities payments – in an unusual way, by simply selling them. It was a bold and intriguing deal and led to plenty of arguments among the banks that bid for it. But it produced a hefty cost saving for the Italian treasury.
The securitization of these overdue payments brought the country e4.65 billion in cash. Italy’s state pension manager, Istituto Nazionale della Previdenza Sociale (INPS), issued three FRNs at e1.55 billion each. The bonds were secured against delinquent social security payments from corporates, self-employed people and agricultural enterprises. Two soft bullets with an expected maturity of 1.2 and 2.2 years were priced at Euribor minus 5 basis points and Euribor minus 2bp respectively, and an amortizing tranche with an average life of 3.8 years at 11bp over Euribor.
The low borrowing costs on the deal were a tremendous achievement for the Italian treasury. But the price was too tight for the taste of many observers. According to one banker, the deal was very aggressive, because the leads compared it to traditional government bonds.
A second reason for the aggressive pricing was the fierce competition that accompanied the bidding for the underwriting mandate. Though Banca IMI, Morgan Stanley Dean Witter and UBS Warburg arranged the deal, the Italian treasury gave a separate mandate for underwriting the bonds to Caboto, Merrill Lynch and BNP Paribas.
The bonds widened soon after launch, indicating that the winning bid might have been inside where the market saw value. But according to Vincenzo La Via, director general of the public debt department of the Italian treasury, the issues were attractively priced, particularly when compared with the ABS market at the time.
The pricing also reflected the fact that the bonds received a triple-A rating from all four agencies. This, however, was somewhat of a surprise, because the issue does not carry a government guarantee. It is the largest securitization ever issued by a public entity without a government guarantee in Europe.
La Via explains that one of the main objectives of the transaction, the establishment of a benchmark, would have been impossible to fulfil with a government backing. Secondly, an off-balance sheet treatment of the transaction does have the advantage of reducing Italy’s debt. “It was a major exercise in our budgetary operations of 1999,” says La Via. “With L8 trillion, this securitization greatly contributed to the reduction of our outstanding debt from 116.3% of GDP in 1998 to 114.9% in 1999.” Though startling at first, the notion of borrowing against payments that are already overdue became an effective way of reducing state debt.
The Italian treasury had been discussing the possibility with different counterparties since 1997. The deal then needed to be structured thoroughly, but had to be designed to look fairly simple. “The bonds needed to be understood more quickly than the average ABS deal in order to maximize the efficiency of the auction,” explains Peter Shorthouse, head of European asset-backed securities at UBS Warburg. Thus over 20 banks were able to compete for, and quarrel about the deal.
But the main obstacle, says La Via, came in form of legal constraints. For the deal to receive a triple-A rating, specific features that discipline securitization in Italy needed to be attached. But these features, such as segregation of the issuer’s assets and provisions for the issuer’s bankruptcy remoteness, required a change in law. The changes were achieved before the launch of the transaction.
La Via finds that “the soundness of the legal structures has been particularly appreciated by the rating agencies.” These considered the transaction – without government guarantee – even safer than the straight debt of AA-rated Italy. The credit was thought to be strong enough based on its over-collateralization, a debt service reserve of e508.8 million, and the fact that any default would violate the Italian constitution as well as the country’s obligations to the Council of Europe.
The budget law for 1999 had already legalized the securitization of INPS’s assets. And another law, the securitization law of April 1999, contributed substantially to the reduction of the overall costs of the transaction.
In April, the treasury started with the operational preparations for the transaction, and brought together with the management of INPS and the arranging banks. The deal was then concluded in record time. “Compared with other precedents of ABS transactions, six to seven months of arranging this deal is a major achievement,” says La Via.
The treasury plans to issue another tranche of INPS’s secured assets this year. After all, the parliament legislated to reduce state debt by way of securitization by L8 trillion each year in 1999, 2000 and 2001.
AH
Best emerging-markets securitization issuer: Garanti Leasing IFC Finance Limited
In January 2000, Turkish leasing company Garanti Leasing became the first entity to benefit from securitizing Turkish domestic assets.
A $43 million transaction securitized future receivables from equipment leases and provided Garanti Leasing with the equivalent of a $51.4 million loan from the International Finance Corporation. In times of tough competition from European high-yield issuers and investors’ concerns hanging over from the Russian crisis, the ability of an emerging-market corporate to raise such amounts is noteworthy. But to do so at investment-grade pricing is a milestone for future issuance.
The deal received a rating of Baa2 from Moody’s Investors Service and BBB from Duff & Phelps – five notches above Turkey’s foreign currency rating of B/B-.
Even the high rates of default and delinquencies experienced by Garanti Leasing towards the end of 1998 and during the first half of 1999 could not affect the success of the transaction. The key to its favourable rating was a well-structured package created by the IFC and underwritten by Dutch bank Rabobank. Bear Stearns advised Garanti.
The IFC, a member of the World Bank group, provides loan and equity financing for private-sector projects in the developing world. Through the IFC’s syndicated loan programme (“B-loan programme”) its clients are able to receive funding from banks and institutional investors, since the IFC’s status as a preferred creditor mitigates transfer and convertibility risks.
IFC’s recently established securitization team came up with a new structure whereby an offshore special-purpose vehicle (Garanti Leasing IFC Finance Limited) is the sole participant in a B-loan. For Garanti’s deal, it was a $44.1 million equivalent loan, which the SPV funded by issuing four-year asset-backed notes in three tranches.
The remaining $7.3 million of the IFC’s $51.4 million loan to Garanti Leasing is kept by the IFC as an own-account A-loan. The A-loan and B-loan from the IFC will be repaid by future revenue streams from a pool of 164 lease contracts, worth $67.6 million. These are dollar- and euro-denominated leases from Garanti’s clients in the textiles, printing and packaging sectors.
This new structure is a hybrid, a bond from the SPV’s perspective, and a loan as far as the IFC is concerned. Being able to apply its loan scheme is important for IFC’s mandate to foster long-term, stable funding. The IFC asserted greater control over investors by putting transfer restrictions on the deal that ensured investors fulfilled a list of eligibility criteria.
“These restrictions and the short maturity of the deal were part of the design for a placement bond,” explains Charles Gundy, director of securitization at Rabobank. “This deal is not expected to be actively traded on the secondary market. It was intended for buy-and-hold investors.” This type of investor did show strong interest, says Mark Northway, head of illiquid credit trading at Rabobank.
There were other attractive details that offer protection against default. Credit enhancement was put in place in the form of over-collateralization of 24% – as recommended by the rating agencies – and an offshore liquidity reserve of 4% of outstanding debt. Also, BBB-rated Garanti Bank, which owns 80% of Garanti Leasing, acts as back-up servicer. This, too, is a new and untested concept in the Turkish market. Finally, hard-currency payments of the lessees and the notes’ short average life of one to two years reduce the currency risk.
“Still, despite its investment-grade rating, the ‘Turkishness’ of the deal might have put off some investors,” says Northway. “But the most important objective was to introduce this new structure to investors.”
In fact, this is not only the first securitization of Turkish onshore assets, but also the “first internationally rated equipment lease securitization for an emerging-market issuer”, says Arun Sharma, head of structured finance at the IFC.
He continues: “This deal will be a model for similar finance agreements with IFC loans. We think that securitization has the potential to help emerging-market borrowers to go beyond corporate ratings, and often beyond sovereign ratings. Securitization also improves the market credibility of the issuer, as it requires managing their balance sheet, as well as high standards of monitoring and supervision of their financial assets. And the improved transparency of the issuer will help them to access the markets in the future.”
There is already more demand from Turkey, and a successful transaction of $81 million has been closed for Sogeko, the Korea-French Merchant Banking Corporation. Other emerging market corporates are likely to follow.
AH
Best Latin American securitization issuer: Argentina
When Argentina needed to raise money last year, it could not easily convince investors to buy its credit. Though usually it is one of the busiest Latin American borrowers, with annual funding needs of around $10 billion, investors were not well disposed towards emerging markets generally. And Argentina, already at a low Ba3/BB rating, faced further possible downgradings. It had been hit by a recession, high funding costs, and a presidential election to be held in October. To make matters worse, in June Peronist party candidate Eduardo Duhalde spoke of not repaying all of the country’s debt. Though he quickly reassured investors that he did not mean that Argentina should default, a tremor of unease passed through the international bond markets.
Argentina struggled to meet its funding needs by issuing a domestic bond here and a small Eurobond there. But its most important source of funds, the US dollar market, was effectively closed after its last bond in April 1999. Yet, on October 7 1999 the sovereign produced a $1.5 billion offering at near impossible prices ranging from 250 basis points to 470bp over US Treasuries over a range of maturities. A $250 million guarantee by the World Bank made it possible. Argentina was the first sovereign to benefit from the Bank’s new policy-based programme, which will provide a total of $2 billion worth of guarantees to emerging markets borrowers.
The lead managers, Goldman Sachs and JP Morgan, designed a new structure that squeezed out maximum benefit from the guarantee. The zero-coupon deal came in six tranches: priced between Libor minus 15bp and 470bp over US treasuries, and with maturities of between one and five years. The first tranche carried the Bank’s guarantee, and thus a triple-A rating. Once Argentina repays this tranche in October 2000, the guarantee will be rolled over to the next tranche.
The five subsequent tranches received investment grade ratings from Standard & Poor’s (BBB), Fitch IBCA (BBB+) and Duff & Phelps (A/A/BBB+/BBB+/BBB+). The BBB+ rating is four notches higher then Argentina’s long-term foreign currency rating of BB. Only Moody’s was not approached because, unlike the other agencies, it will not give a higher rating to a country’s external debt than to its domestic debt.
The lead managers were careful not to put in place credit enhancements that would resemble the complex structures of Brady bonds, which carry unfortunate associations of forced restructuring. Instead, the structure is based on the fact that Argentina’s obligations to the World Bank carry preferred creditor status.
“The transaction capitalizes on the sovereign issuer’s higher propensity to repay the World Bank than creditors like you or me,” explains Richard McNeil, managing director of the capital markets group at Goldman Sachs.
Should Argentina default on the bonds, the World Bank will take over payments for 60 days. The credit agencies judged that Argentina will undertake the utmost effort to repay the World Bank within this limit, so as to avoid a cut-off from the Bank’s essential financing and from that of other multilaterals.
With this structure Argentina achieved its main goal – access to the market. “It also saved about 200 basis points over what it would have paid for an unstructured bond, and it also left enough breathing space to not rush into future issuance,” says Gabriel Bochi, vice-president, Latin American capital markets, at JP Morgan. “Another important achievement is the enlargement of Argentina’s investor base to include high-grade investors. We were able to place about two-thirds of the issue with investors who usually buy high-grade corporate issues. The remainder went to emerging markets investors and global funds.” The lack of liquidity that resulted from the small tranches was therefore not a drawback. In fact, each one of the six tranches was oversubscribed.
One minor drawback did come in the form of Argentina’s downgrading. In an untimely manner, Moody’s decided to downgrade Argentina from Ba3 to B1 just a day before launch. But, says McNeil, the downgrading was not entirely unexpected and didn’t cause the leads to price outside the ranges at which the bonds were already marketed.
AH
