Germany took its bankers’ advice last month and moved sooner rather than later to launch its first foreign currency bond since World War II. Deutsche Bank, Goldman Sachs and Morgan Stanley were lead managers. Books on the $5 billion, five-year deal opened in Asia on the morning of Monday May 23. After 36 hours, the deal had attracted a book of around $14 billion. It priced with a re-offer spread of US Treasuries plus 12 basis points, and at dollar Libor minus 31.5bp to swaps.
59% of the deal went to Asia and half to central banks, indicating that their appetite for dollar assets is still high. Germany was under pressure once it committed to doing a dollar deal in the first half of 2005.
Referendums on the EU constitution, the Federal Reserve meeting, and Germany’s desire to tap an existing five-year euro issue all made June a difficult month for the deal.
“They had to take it now or go immediately after the referendums,” says the head of sovereign, supra and agency debt at one European bank. “Germany hit the Asian market on a Monday morning and everybody had got out of their way anyway. The US is making a lot of noise about Chinese revaluation, which is not necessarily dollar positive, but that has not happened yet.”
Germany coming at low double-digits to US treasuries could be good news for KfW.
“A German dollar issue could be negative for other issuers, as it is simply more triple-A supply in the market that needs to be digested,” says Allegra Berman, head of frequent borrower coverage, DCM, at UBS. “But it could also be positive. KfW has an explicit government guarantee, and as a sovereign, Germany could come through where KfW trades. Investors would see that KfW is good value and its spreads would tighten closer to its sovereign.”
KfW’s spreads to its sovereign have been wider than those of, say, OKB and Austria, both of which did 10-year dollar deals last year that now trade within two or three basis points of each other.
The inevitable comparison is with the UK’s June 2003 deal, which priced at 2 bps to treasuries and saved the UK taxpayer an estimated £8 million. Germany’s rarity value is even greater than the UK’s. This was be its first dollar deal in 77 years, not seven. But the UK issued dollars when its public finances were perceived as strong. Today, many investors already own Bunds and are anxious about Germany’s economic performance. “The deal went well but it wasn’t the riot the UK was,” says one banker.
