Best sovereign borrower:
Italy
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The Republic of Italy has won our global sovereign borrower of the year award before. In the past 12 months, though, it has surpassed its own impressive performance in previous years. There is no sovereign that comes close to it in either volume of issuance or market innovation.
Apart from the US, it is the biggest sovereign issuer in dollars and became the one and only sovereign to do a 30-year maturity dollar deal. “In the US, it stands side by side with agencies and supranationals,” says Cesare Roselli, vice-president at Morgan Stanley. “No other sovereign comes close to it in dollars. In the past year, Italy has broken through the agency pricing reference and is now priced below US agencies. Its constant presence in the market and the liquidity it provides has enabled it to do that.”
Italy has also used innovative syndication techniques, rather than auctions, with its European benchmark bonds in the past year to achieve scale. “If we realize that there is a concentration of a certain type of investor that wants to buy the bond, we will use syndication; if there’s no such concentration of investors, it’s better to do an auction,” says Maria Cannata, director general of public debt management at the Italian treasury in Rome, who heads the five-strong team. Roselli says: “They have taken the syndication technique, usually used by countries that don’t have the same visibility in the market, and used it to achieve very large placements that go directly to end investors.”
Keeping investors keen In September last year, the sovereign did a e7 billion 30-year deal, the first syndicated government bond in euros in the maturity. The $8 billion, 15-year deal in March was the largest single tranche ever done by a government entity. Italy has hardly been out of the euromarket in between. For it to do one deal of this size is an impressive achievement; to tap the market again and again in different maturities, achieve these sorts of sizes, with large-scale oversubscription, and still leave investors eager for more is another thing altogether.
Scott Lampard, head of frequent borrowers at JPMorgan in London, says this is largely a result of the fact that the borrower attracts large, high-quality order books. “They generate demand from a wide range of investors, which means that where other borrowers struggle to execute e2 billion to e3 billion via auctions, Italy has been repeatedly able to execute e7 billion to e8 billion transactions via syndication. Leveraged funds and prop desks get involved because they know these deals have momentum in the secondary market, but its ability to attract real money accounts has been the largest success factor.”
It is not just in euro and dollar benchmarks, where it is always present, that Italy has found success. For example, it launched its first ever Australian dollar denominated bond in February, worth A$1 billion.
But perhaps most impressive of all has been its performance in the European inflation-linked market. Before last September, it hadn’t done any issues. Then it hit the market with a e7 billion five-year deal, spotting an investor need for supply in this maturity. Since then, in the space of eight months, $22 billion has been issued, creating a yield curve from scratch.
The volume of inflation-linked bonds the borrowing team have done in this short time compared with other European issuers such as France is testimony to the buzz they have created, continually going on roadshows and educating investors. Dimitra Koutsoukos, executive director at Morgan Stanley, says: “At every inflation-linked conference, there is a speaker from the team, educating investors in the product. They are not just selling inflation-linked bonds, they are helping to create a market for the product.”
The achievement is quite staggering but Cannata says that once Italy had decided to embark on an inflation-linked programme, it always intended to issue in large size.
“We have a policy of immediately giving a large volume to the market to ensure liquidity and to ensure good performance in the secondary market,” she says. “Now the plan is to do some more very long dated inflation-linked bonds. Once our analysis on the very long inflation-linked market is over, we will issue where we think there is the strongest demand.”
It’s this kind of thoughtful market monitoring that means that the Republic of Italy’s issuance is not just enormous and innovative but also very popular. “They have a strong understanding of market dynamics, both in terms of interest rate trends and investor demands and they also communicate very well their rationale for coming to the market,” says Lampard. “It means investors know and like them and they will buy into their bonds again and again.” Kathryn Tully
Best sub-sovereign borrower:
California
It is a welcome boost for a state that has endured four years of problems, starting with the bursting of the technology bubble in 2000, which led to major losses of jobs and tax receipts in northern California. Then came the energy crisis of 2000/01, a growing budget deficit and last year’s political fiasco, which resulted in recently re-elected governor Gray Davis being ousted from office in a referendum that led to film star Arnold Schwarzenegger being elected in his place.
California is not out of the woods yet: Standard & Poor’s and Fitch maintain their triple B rating of the state, though the former has said that it is taking a favourable view of recent economic and political developments. Even a rating of A3, though, would still leave California as the lowest rated of the 50 states.
And there’s still the deficit to deal with. California, with 35.9 million residents, 12% of the US population, has an annual budget of $103 billion. Even with measures the governor has introduced and is at present trying to get the state congress to pass, there will be a hole of $6 billion or more next year, and deficits will continue for some years.
But the upgrade is proof that interested parties in the financial markets are heartened by the progress that seems to have been made. The first evidence of that came earlier in the month when the state sold $7.8 billion-worth of bonds dubbed economic recovery bonds. That will jump by another $4.5 billion or so if and when the floating-rate portion of the deal is launched in June.
Staving off a crisis Without the deals, California would have been facing a liquidity crisis. This month, $14 billion of revenue anticipation notes and warrants that were issued last June fall due. And it was no easy path to the launch. Residents had to vote in a referendum in March to approve the deal, which then had to be legally ratified by the committee set up to oversee the bonds. The ratification came 15 days before the deal was launched, the referendum 64 days before.
It couldn’t be just a regular muni bond deal. Too many investors would be locked out of a triple B deal, and the cost to the state of servicing the debt would be high. “We set out very carefully, with the state treasurer, to differentiate this deal from other state borrowings,” says Peter Taylor, head of the muni desk in Lehman Brothers’ Los Angeles office. So the deal was constructed to be backed up by future sales tax revenues. And for that to work the state will be imposing a new quarter-cent sales tax as of July 1. It will be kept separate from all other sales tax revenue, will be used solely to service the economic recovery bonds and will not be reduced for the lifetime of the bonds – their duration is from one year to 13 years.
The structure was devised by bookrunner Lehman Brothers in concert with the state treasurer’s office run by treasurer Phil Angelides and the governor’s budget office.
Taylor says: “The challenge was to educate investors about the state’s economy. It is so large that it should bring enough comfort that we could tell them that this is the bond for you.”
Along with the rating agencies, Taylor’s team worked with the two state offices to show that a bond backed by state-wide sales tax revenues would ensure just that. Taylor and his team were at an advantage already, as they had been working on some form of sales-tax bond late last year, so already had a substantial database. “We came up with scenarios from the past to show that a precipitous decline in revenues in one part of the state can be overcome or heavily ameliorated by revenues from elsewhere,” explains Taylor.
One such example was the $6.5 million drop in sales tax revenues between 2001 and 2002 in Santa Clara county, home to many of the dot-com and high-tech companies. That revenue had shot up to its 2001 peak in just two years, and in 2002 was still just above the 1999 receipts, but in the meantime three counties in southern California – San Diego, San Bernadino and Riverside – had a combined annual revenue increase in 2002 of $2.8 billion. There was still a shortfall, as there was statewide, but it seemed to show investors that even with all the troubles California had undergone in recent years, sales tax revenues were a reliable source of backing for the bonds.
Taylor mentions another example: ” Back in the early 1990s, Los Angeles and Orange counties suffered from the loss of defence industry jobs. About 100,000 were lost. Yet in the same years revenue from other counties helped offset that.”
The projections worked. Moody’s gave the bonds a rating of Aa3, Standard and Poor’s AA–, and Fitch A+. The banks – there were 50 in the syndicate – took 9,000 orders on the day of the sale, $2.3 billion of orders came from retail investors and the institutional market oversubscribed by $7 billion.
There’s still a long way to go before California is out of the fiscal mire, but it certainly seems to be improving. Spreads on its general obligation debt had come in from their wide levels in recent months. They were as wide as 80bp over the Municipal Market Data (MMD) index, but traded at 50bp over in mid-May. A well-received multi-billion dollar bond deal and a rating upgrade will probably have an even bigger effect in the months to come.
Best high-grade corporate borrower:
GE/GE Capital
“With the investors we already had we went into 2003 continuing the work we had started in 2002 of being more transparent about our funding plans,” says Kitty Yoh, assistant treasurer of long-term funding at GE Capital.
In the past 18 months, though, GE Capital’s funding team has managed to do what no company with borrowing needs in excess of $50 billion a year ought to be able to do.
In the words of one debt syndicate banker in New York: “They’ve managed to create a scarcity value for their paper. Imagine that, a company that issues $50 billion a year is regarded as an infrequent borrower.”
The result is that GE Capital is back to getting spreads on its new issues in line with or better than it was getting in the days before commercial paper volumes raised concerns. A couple of years ago new two-year paper was pricing at about 20 basis points over Libor. That’s down to Libor flat, and just 5bp over for three-year deals. Its five-year new issue spread has come in from 45bp over Libor a couple of years back to just 11bp over.
Spreading the paper about GE Capital has achieved this, says one debt capital market banker, “by being very disciplined in its approach. They’re not saturating any one market with paper, instead they’ve spread it out across currencies, markets, and even within them.”
For example, when 10-year paper stopped being so in favour, GE Capital quickly switched its next US deal to a five-year bond. It has also used structured notes and tapped retail demand.
“Their approach is very intelligent,” says another debt capital markets banker. “They’ve realized that no more than $10 billion needs to go out into the term US syndicated bond market.” They do just one benchmark deal a quarter, and rarely show any inclination to increase the size of a deal. “We only do one term global a quarter, are careful to size it appropriately. We tell our investors this in advance,” confirms Yoh. Bankers say that a recent deal for $1 billion, split equally between a fixed-rate tranche, a Fed funds tranche and a Libor tranche, could easily have been doubled in size had the company wanted that. “The leverage GE has by not coming out with a deal for three months and then not growing it is huge,” says one banker. “It’s very different to two years ago when you could pick up GE paper with ease.”
Yoh says: “Most of our funding supports two growth businesses – consumer and commercial finance – and they are global businesses. We made the choice to source the funding out of the areas where the assets are located. That means that 50% of our total funding will be outside the US.”
To make a success of this strategy has involved a great deal of work with investors. The $3 billion multi-tranche deal in March with Lehman, Morgan Stanley and UBS as bookrunners is a case in point. A few weeks before the deal was launched the funding team had gone on a non-deal roadshow around Asia. Part of the next deal, the $1 billion fixed-rate tranche, was then structured to appeal to that segment of the investor base, and about 35% of the deal was placed in Asia.
“We’ve changed the way we tap the market,” says Yoh. “We used to do one annual roadshow. Now we do non-deal roadshows focusing on a particular investor base or region. One of the things that came out of out two-week trip to Asia was how to make it easier for investors to participate in our transactions. Usually our deals launched in the morning, New York time, and are priced by the close of business in the US, which means Europe gets to have a look, but Asia does not get a chance to participate. So on our first quarter global we announced it at the close of the New York market and closed the books mid-morning the following day, giving Asia a full business day to work on the transaction.”
Investor focus goes all the way down to structuring small, single trades for specific investors up into deals for hundreds of millions of dollars. “No one cares more about investors than GE does,” says one banker. “And of course no-one else needs to.”
Best financial sector borrower:
Principal Financial
Principal Financial is by no means the biggest financial services borrower in US financial markets. Both Goldman Sachs and Morgan Stanley issued more in one day in the first quarter than Principal did in the whole of last year, $3.2 billion.
But in the past 18 months Principal has impressed bankers and investors alike in building both a yield curve and a broader US investor base. It has done so with deals that were never more than $400 million in size and until March this year were 144a deals. It’s not that Principal, a US insurance company, is a new borrower, but it had not until a couple of years ago done much if any of its issuance in the domestic US market.
For one thing, regulations prevented it. The kind of bonds that Principal and other insurance companies tend to issue are known as GICs, guaranteed investment contracts, and US regulations did not make it easy to issue them. There was a block on allowing broker-dealers to deal in insurance securities, although by 2001 the brokers were finding ways around the restriction.
So GICs found a home in the European market, and there they stayed until the post-dot-com bubble market crash after 2000. “They were early users of the European market,” says Fred Sherrill, a managing director in debt capital markets at CSFB who covers Principal. “They issued in sterling, euros, and Swiss francs, among others. But then access to the market dried up for insurance companies around 2002.”
The problem was the European insurers, many of which suffered significant losses in their portfolios because so many of them had a lot of their holdings in equities. US insurers, on the other hand, had invested up to 90% of their cash in bonds, but investors in their bonds lumped all the insurers together. They could still have tapped the market, of course, but issuing GICs is a spread-margin business, so while a deal at, say, 20 basis points over Libor would be fine, an extra 2bp could make it uneconomic for the issuer.
Principal Financial was already working on a US debt issuance programme when the European market tanked. Being among the first, and among the best issuers, was vital, says Sherrill: “With 15 companies issuing them, GICs face becoming a commodity product.”
Principal got out there early, and spent much of the past 18 months building up a complete yield curve. It issued its share of floating-rate two- and three-year paper as others did, but also brought two five-year fixed-rate deals in April and June, of $400 million and $250 million respectively, a $300 million 10-year deal in January that it doubled with a tap a month later, followed by a new 10-year deal in October of $350 million.
But it is two other deals last year that observers feel really make Principal stand out: its 12-year $300 million issued in March and then the $200 million 30-year deal launched on the same day in October as its second 10-year deal.
“GICs are a product for the shorter end of the curve,” says one banker. “The only other company to issue a 30-year GIC is SunAmerica, an AIG subsidiary.”
This year Principal has continued along the same path, though it also received approval from the SEC to issue domestic dollar bonds. It printed its first such deal in March, a $350 million five-year deal, and the three deals done since have each been SEC-registered domestic deals. One of them was a first: a $75 million inflation-linked 12-year note.
One big factor in its favour now is that Principal is one of the few insurers with a positive credit trend. After the company sold its mortgage unit to Citigroup last month Moody’s put the firm on watch positive.
The company hasn’t forgotten about Europe, either, having done non-deal roadshows in the region even though the market is still effectively shut.
