German development agency L-Bank has a lower profile than its bigger counterpart, KfW. But Sven Lautenschläger, who is responsible for the bank’s international funding, agrees with other issuers that comparatively small size is not a problem. “Our paper has rarity value,” he says. “Some investors do charge a liquidity premium but over the past few months that seems to have been changing, as people realize that more liquidity also means more volatility. Many AAA investors don’t want that much volatility.
“When KfW and EIB started doing e5 billion deals, it took the market a while to see how they would trade, how they would react to events. Now the market is more mature, and investors don’t want only to own just these big deals. They also need a balancing prime asset from a smaller, less volatile issue from a name like L-Bank or Cades.”
So the bank will continue to focus on smaller, less super-liquid issues. “Our primary focus is building up dollar and euro yield curves, and our funding needs are only about e7 billion a year,” says Lautenschläger. “If we did deals worth e3 billion, we’d only be able to add one new point to each curve per year. Smaller deals of e1 billion to e1.5 billion help us keep our curves current.”
A state guarantee is only as good as the state behind it, and L-Bank’s funding team have had to work harder to explain the credit’s security in the light of Germany’s fiscal problems. Lautenschläger says: “Investors have been less worried about L-Bank’s credit in itself than about wider developments in Germany, particularly concerning the banking system, with its obvious problems. We’ve had to emphasize that we are not a Landesbank, and so our public guarantee is not under threat.”
Marketing L-Bank paper has meant fielding plenty of detailed questions about the German economy and banking system. Lautenschläger emphasizes that he thinks fears about a possible downgrade for Germany are unrealistic in the foreseeable future.
Meanwhile, domestic competition is increasing. Lautenschläger says: “We are having to diversify our funding options as our traditional German investor base sometimes has more alternatives – for instance, they could buy L-Bank or KfW at Libor minus, or a comparably rated ABS issue at Libor+30.”
Efforts to broaden distribution have been concentrated on reaching Asian investors, although Swiss accounts have also been an important source of demand. Over 2003, Lautenschläger says issuance is likely to be in the benchmark three-, five- and 10-year maturities. And he is also interested in potential opportunities in one of the non-benchmark currencies L-Bank has been active in, perhaps Polish zlotys, yen or Swiss francs.
