Fixed income investors survey 2010: Consistency pays for the world’s biggest borrowers
The turbulent markets of the past two years have provided a unique challenge to debt issuers that can never be closed out of the market. Clive Horwood asked four of the world’s leading borrowing officials how they have maintained access throughout the crisis. From cooperative bonds to building their own banks, the best issuers continue to innovate.
THE WORLD’S THREE best borrowers, according to a survey of more than 1,700 fixed-income investors worldwide, are among the biggest issuers in the market.
Deutsche Finanzagentur, the debt office of the German government, needs to raise almost €350 billion this year. The European Investment Bank expects to reach €80 billion in borrowing in 2010. KfW, the German development bank, will issue in excess of €70 billion for the third consecutive year.
Does the size of these issuers’ funding programmes equate with success? Not necessarily, as the performance of some other large sovereigns, supranationals and agencies in our survey (results of which can be found here) testifies.
But for the issuers that get it right, size does bring its advantages. First, the size of the programme means that the issuer’s senior management needs to have big, experienced funding teams in place that can keep an eye on multiple markets, engage with investors and manage relationships with banks that help them access the markets.
Second, funding programmes allow issuers to provide the liquidity that investors crave in benchmark issues, while at the same time offering tailor-made deals to smaller groups of fund managers in currencies or structures that secure competitive funding rates.
But perhaps the most important factor is this: for issuers with such enormous funding needs, the markets can never be shut, no matter how distorted, volatile, costly or difficult they become. For that reason above all else, the best borrowers have a professionalism that is hard to match.
For their part, these funding officials know the key qualities that they must exhibit: the ability to generate trust among investors; transparent and consistent funding programmes; assurance that they execute as well as they can on deals, even when the markets are against them; and the flexibility to spot opportunities when they arise.
Germany stays the course
Of course, a highest-quality credit rating does not go amiss – something that is not lost on Carl Heinz Daube, managing director of the Deutsche Finanzagentur. "We’ve had oversubscription on nearly all of our auctions this year," he says. "We’ve diversified our investor base, selling more bonds in countries such as Canada, Switzerland and the Netherlands, as well as to key accounts in Asia. If investors want euros, then they are buying a large share of German government bonds. We have shown we have the best credit, as well as the best liquidity."
"Investors appreciate the fact that Germany has issued bonds the same way for more than 10 years now. We believe it was a good decision to stick to the auction system"
Carl Heinz Daube, Deutsche Finanzagentur
Daube is perhaps most pleased, however, with the consistent performance of Bunds throughout the turmoil – first in the banking system, now on concerns about European sovereigns – over the past 18 months.
"The yields on our 10-year bonds have remained very steady," says Daube. "When there’s been generally positive economic news, yields have risen up to 3.3%; when economic news is bad, we get a flight to quality, and our yields have fallen to around or, in recent weeks, below 3%. This consistency of yield is a big plus for us, when we have to borrow in the region of €343 billion plus €12 billion to €16 billion of inflation-linked debt this year."
It has only been in recent weeks, as concerns about potential defaults in Greece and the possible break-up of the euro have risen, that German 10-year yields have breached the 3% to 3.3% range, falling to around 2.82% in the middle of May.
Consistency is one of the key buzzwords that Daube uses, and it’s the main reason that he has resisted pressure to use the syndication process to sell bonds.
"We think that investors appreciate the fact that Germany has issued bonds the same way for more than 10 years now," he says. "We believe it was a good decision to stick to the auction system."
The Finanzagentur has also been keen to keep stability in the maturity profile of its debt, although last year issuance of short-term Bubls rose to about 50% in total, in large part because of the introduction of the Financial Stability Fund. The aim usually is to issue around one-third in short-term debt, and the rest in medium to long term.
But Daube hasn’t been tempted to go further along the curve than 30 years, as some sovereign issuers such as the Agence France Trésor have. "Every time we look at a new maturity, we consider whether the exercise would either reduce the risk of our portfolio or the overall cost. So far, for 40- or 50-year issuance, we don’t see those benefits, even if there may be demand for such issues."
Daube hasn’t been able to be as consistent as he would have liked to be in an ideal world. Germany has had to adjust its issuance calendar, notably in March 2009 when the government brought in a supplementary budget to help shore up the banking system. Now, although the net borrowing requirement for the year has been reduced from €86 billion to €80 billion, Daube has no plans to change the calendar in 2010.
Judgement counts for EIB
Consistency, as well as good judgement, have been the key to the European Investment Bank’s funding programme over the past year, according to its deputy director general of finance, Barbara Bargagli-Petrucci. "We’ve made sure we issue at the right time, and investors see that," she says. "Our great success has been to judge the market correctly. We did not run into execution risk over the past year."
"We’ve made sure we issue at the right time, and investors see that. Our great success has been to judge the market correctly. We did not run into execution risk over the past year"
Barbara Bargagli-Petrucci, EIB
For an issuer that is in the market as often as the EIB, that is some statement. EIB issued in more than 20 currencies last year, mixing benchmark issues in core currencies of euros and US dollars with more opportunistic deals in sectors such as the Turkish lira and the Australian dollar.
In 2009, EIB focused on long-dated euro transactions as it tried to correct mismatches in the maturities of its lending and funding programmes. Although there was an inevitable cost to the EIB for extending its maturities, it has managed to offset some of that through non-benchmark issuance.
As the year progressed, however, the team changed its focus. "We were beginning to see big concentrations of issuance in some narrow windows," says Bargagli. "We decided not to exaggerate our presence at those times."
The approach thus adjusted, EIB looked to spot less-crowded opportunities and act quickly on them. It wasn’t always easy. "We sometimes found that after the market rallied we would not be able to offer the yield levels investors needed, and achieve an acceptable spread for ourselves," she says.
Bargagli is perhaps most pleased with EIB’s record in doubling the number of investors that bought the supranational’s bonds over the past 12 months compared with its investor community in 2008. By extending duration, EIB has been more successful in attracting large insurance companies and pension funds in Europe. It has issued a number of large global dollar transactions that have boosted investor numbers, particularly in the US and Asia. And it is rebuilding a retail base that has been harder to access since the days of the Luxembourg franc market, through issuing cooperative bonds – floating-rate notes sold through savings bank networks, at first in Germany and with a plan to roll the product out across Europe. "We’ve issued €11 billion in cooperative bonds since last year, which has really helped us increase our distribution channels into smaller banks that have not previously been involved in our deals," says Bargagli.
Some of these banks, as well as selling EIB bonds through their branches, are increasingly coming into other EIB deals as well. "Even for our biggest transactions, our investor base is such that no orderbook is dominated by a few lead orders," says Bargagli. "Granularity is certainly our buzzword for 2010."
Bargagli says EIB is well placed for the rest of 2010, having completed €38 billion of its up-to-€80 billion requirement by the middle of May, including €5.5 billion in non-core currencies. She’s pleased to be ahead of the game as she does have some concerns about the market. "Issuance windows seem to be getting shorter and execution risk is increasing," she says. "The orderly execution of competing demand could prove to be challenging."
Diversification benefits KfW
KfW’s funding challenge has grown from just over €50 billion in 2005 to almost €75 billion for 2009. For head of capital markets Horst Seissinger this has presented an opportunity. "It is very important in markets such as these is to avoid getting nervous," he says. "We’re in a comfortable position, because our funding volume needs allow us to be highly diversified with the products we offer. We do not rely on either benchmarks or EMTNs, but try to have an efficient mix."
He admits that he wasn’t so calm 18 months ago. "At the beginning of 2009, given the state of the markets we were worried about having to raise as much as €75 billion," Seissinger says. "But we showed that not being reliant on one market allowed us to be in markets where we were prepared to pay the clearing price. We also showed that it’s best not to squeeze for the last basis point, especially on benchmark deals, if you want to get back to the market successfully. A tight price is great, but you have to take the long-term view."
"It’s best not to squeeze for the last basis point, especially on benchmark deals, if you want to get back to the market successfully"
Horst Seissinger, KfW
Seissinger agrees with Bargagli that the pace at which you have to act when accessing the market has accelerated in recent times. "In the old days, you’d mandate a deal on a Friday, work on it over the weekend, and launch on Monday or Tuesday. You have to be quicker than that now. You have to gauge the market permanently, pick your opportunity and go for it. Even for larger, benchmark transactions, the whole process needs to be completed in 24 to 36 hours."
Seissinger is particularly proud of KfW’s achievements in the US dollar market over the past two years. "We’re the only European issuer to regularly bring benchmark issues in three-, five- and 10-year maturities," he says. "It gives us a decisive advantage. Investors see our presence is not temporary, but that it is an essential part of our strategy to provide regularity and liquidity across the dollar yield curve."
Banks step up to the plate
And what of the performance of the banks on which all issuers rely?
"In 2008, we had seen some of our bank counterparts struggle given the state of the markets," says Norbert Mayer, head of corporate finance at BMW. "But over the past 18 months, we’ve seen debt capital markets teams at our relationship banks get a grip, and really improve their performance on providing advice and execution. We hope that continues."
Seissinger says that the size of KfW’s funding programme means that he and his team receive plenty of the right type of attention from coverage officers. "We have very reliable bank partners. But they also have a good incentive to perform well: given our funding volume, they can expect to get a number of mandates from us if they do so."
Daube is pleased that his concerns about a reduction in the number of banks participating in German auctions has not come to fruition. "We have had a very stable Bund auction group over the years," he says. "Recently the number of members fell because of merger or bankruptcy. But we’re happy that since the beginning of 2010, five new banks are participating in our auctions."
Bargagli at the EIB says her core group of lead managers have consistently performed well, but that she is especially pleased with the new relationships created with new, smaller banks through the cooperative bond offerings.