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Best borrowers 2011: A triumph for transparency

Bond investors no longer put blind faith in top credit ratings – even the safest-seeming borrowers can expect searching questions. So the openness of such issuers as the Spanish sovereign has paid big dividends. It is a lesson even the most successful issuers are learning. Philip Moore reports.


THERE IS A case for arguing that votes cast by fixed-income investors for Spain in this year’s best borrowers survey should count double. If they did, it still wouldn’t give the Tesoro enough votes to challenge Germany’s Finanzagentur at the top. However, it would make the Spanish Treasury’s achievement over the past 12 months even more impressive than its ascent from 47th last year to 11th in 2011 already is. Pain not in Spain

Less than a year ago, there was no shortage of commentators who were publicly forecasting that Spain would default. It still might. But the chances of a Spanish rescheduling seem more remote now than they did last summer.

Until recently, it was assumed that if Portugal ran aground, so would Spain. And if Spain was the next of the dominos to fall, the same assumption went, the days of the euro project itself would be numbered. That view is less widespread these days, although the country has not entirely de-linked itself from the eurozone’s troubled periphery. For doing more than its fair share to pull the European market up by its bootstraps, issuers and investors across the fixed-income universe have a lot to thank Spain for – even if they don’t hold Spanish bonds.

The credit for that goes to the Tesoro for delivering a transparent story about the Spanish credit, rather than for indulging in petulant buck-passing. "The Tesoro has not looked to blame investors for speculation about the prospects for Spain. It has not blamed the CDS market, nor has it blamed the banks," says Sean Taor, global head of public sector debt capital markets at RBC Capital Markets in London. "Instead, it has focused on keeping the market informed about developments in the economy and the banking industry and on maintaining a dialogue with dealers and investors about its funding plans."

One of the most visible examples of this relationship with the investor community is the frequency with which the Tesoro updates the comprehensive presentations on its website. These feature historical as well as prospective data on everything from the latest developments in the Spanish banking and real estate markets through to updates on the Tesoro’s funding plans. In a virtual world full of useless and outdated (and often undated) web pages, the Tesoro’s online presentations are a breath of fresh air.

You don’t need to be convinced about all the information transmitted in these presentations to be impressed by the detail of data they provide. There are plenty of investors who think Spain is a long way from being out of the woods, and that neither the banks nor the housing market are half as resilient as the Spanish authorities would like them to think.

Since last July, however, investors have been prepared to give Spain the benefit of the doubt in the primary and secondary markets. Don’t just take this survey’s word for it. Look at the relatively high level of foreign ownership of Spanish debt, which "has remained far more stable than in smaller euro area countries, at about 50%", according to a recent Fitch update.

More tellingly, look at investors’ response to Spain’s most recent syndicated benchmarks. Its €6 billion, 10-year transaction at 225 basis points over swaps in January generated demand of €12.5 billion from 234 investors, with only 27% placed in Spain. When it pushed out to 15 years, with a €4 billion issue in March priced at 217bp over swaps, the book was worth more than €7 billion, with 72% distributed outside Spain.

Among other European sovereign borrowers, there are some surprise movements up and down the table in this year’s survey. Poland’s slide might look a harsh judgement on an economy that weathered the crisis so well and continues to generate strong demand in the new-issue market. The leap into the top 10 by the Netherlands, meanwhile, might raise eyebrows among investors who are growing tired of waiting for the much-heralded Dutch syndicated benchmark in the dollar market.

Deutsche Finanzagentur balances bunds and bills

The European sovereign borrower that remains firmly entrenched in the same position as 2010, however, is Germany. Once again, the Finanzagentur was the clear winner of Euromoney’s best borrower survey, extending its lead over the second-placed European Investment Bank by a wide margin. This strengthened position at the top might partly reflect the role played by Germany’s Finanzagentur in January’s jaw-dropping issue for the European Financial Stability Fund. It is, after all, curious that the EFSF – able to generate well over €40 billion for its debut bond – should be ranked 46th, sandwiched between Heidelberg Cement and Tesco.

The Finanzagentur’s extended lead at the top of this year’s survey is also a function of the strength of the German credit in a world of diminishing risk-free benchmarks. And it reflects the helping hand that Germany’s Bund market has been given by the constitutional ruling on its so-called debt brake (Schuldenbremse). Indeed, so many external factors seem to have combined in favour of Germany in the past 12 months that there is a lot of truth in a remark made by one banker to Euromoney. The Finanzagentur, this observer says, could have "closed the door and turned off its website and still won this year’s borrowers survey".

"In good as well as bad times, we have always stuck to an issuance strategy based on predictability, reliability and transparency"

Carl Heinz Daube, Finanzagentur

Carl Heinz Daube, managing director of the Frankfurt-based Bund issuer, the Deutsche Finanzagentur


Perhaps. However, Carl Heinz Daube, managing director of the Frankfurt-based Bund issuer, the Deutsche Finanzagentur, says there is a lot more to it than that. "Of course we benefit from the strength of the German credit but I think our success as a borrower comes from a mixture of the credit and our funding strategy," he says. In 2010, he adds, 73 auctions generated an average bid-to-cover ratio of 1.9, or a bid volume of about €600 billion. "In times of uncertainty, that is a brilliant job for German taxpayers," says Daube.

He adds: "In good as well as bad times, whether in the wake of German unification or after the Lehman crisis, we have always stuck to an issuance strategy based on predictability, reliability and transparency. But that is not to say that our approach is inflexible, because we have adjusted our issuance calendar several times over the last two years in response to changes in investor demand."

In terms of the overall structure of its debt, the most obvious tweaking of the Finanzagentur’s issuance in recent years has been aimed at finding the optimum balance between Bunds and bills. Daube says that the sharp rise in Bubill issuance in 2009 meant that at the height of the crisis total funding between capital market and money-market instruments was roughly 50/50. "Our aim is to return to the balance we had prior to the crisis, which was approximately one-third in Bubills and two-thirds in Bunds," says Daube. "That won’t be achieved overnight, but we reduced issuance of bills much more than of Bunds in 2010, so we are moving back towards the pre-crisis balance."

Hypothetical burden alongside EFSF and EFSM

In spite of the macroeconomic and technical influences that support the Finanzagentur’s issuance, the German credit is by no means one that sells itself. "The events of recent years mean that the questions we receive are far more granular than those we were asked before the crisis," says Daube. "Two years ago we were being asked very detailed questions about the German banking sector. Today, we are being asked about the sovereign debt crisis and the hypothetical burden that Germany may have to bear alongside the EFSF and the EFSM.

"Investors obviously appreciate having the opportunity to discuss these issues on a one-on-one basis rather than by relying on Reuters or Bloomberg, which is why I spend so much time on the road talking to investors," says Daube, who took up his present position in February 2008.

Another issue that Daube has needed to address in his meetings with investors worldwide is the Finanzagentur’s approach to syndicated issuance versus auctions, and its philosophy regarding benchmark issuance in dollars. "I am often asked about our approach to the dollar market," says Daube. "And my response is that issuance in foreign currencies, such as US dollars, must be an opportunistic rather than a strategic exercise. When we issued our benchmark dollar bond in September 2009, we saved the German taxpayer something like €25 million in interest payments. If a similar opportunity were to re-emerge, we would certainly recommend it to the government."

He adds: "It’s a different story in the inflation-linked market. There, we are committed to building and maintaining a yield curve. For example, we recently launched a new 2018 linker issue, which is not a standard maturity in the euro market."

Whether or not the Finanzagentur’s funding strategy has helped it to broaden its investor base over the past year or so is open to question. Daube thinks that on balance it probably has. "My general feeling is that some investors would love to buy Germany but can’t afford to," he says. "But many others have changed their attitudes to risk since the crisis and have been moving parts of their portfolio into highly liquid paper with pure triple-A ratings."

If the Bund market continues to be an anchor holding for a large cross-section of euro investors, it also appears to be a market that no bank eager to play an active role in the European capital market can afford to overlook. Daube points out that Nordea is the most recent entrant to the Finanzagentur’s primary dealer group. That brings membership of the group to 38 banks, compared with 27 at the height of the crisis. "If you look at our auction results, we usually have bids from all the banks in the group, so interest in the rates business has obviously gathered momentum."

Landesbank Baden Württemberg climbs rankings

It is not just the Finanzagentur that has benefited from the strength of the German economic recovery and a reduced borrowing requirement. Among German financial institutions, Landesbank Baden Württemberg (LBBW) is a notable climber in this year’s survey, which might reflect the role it played last summer in helping to reopen the Eurodollar segment of the covered bond market. Its $500 million, three-year transaction, led last July by BNP Paribas, Citi, JPMorgan and LBBW itself, was the first benchmark Eurodollar covered bond since before the crisis, and well over 80% of the issue was placed outside Germany. About a third, meanwhile, was sold to central banks.

To LBBW’s Stuttgart-based head of funding and investor relations, Jörg Huber, maintaining a presence in the market and a dialogue with investors, even in periods of sharply diminished funding needs, is the key to a sustainable borrowing strategy. And in contrast to previous years, LBBW’s funding requirement nose-dived in 2010 to €8.3 billion, compared with €19.3 billion in 2008 and €21.2 billion in 2009.

"Our low funding needs last year would easily have been covered by our traditional domestic investor base, which is made up of savings banks, insurance companies and retail investors via instruments such as private placements," says Huber. "But we believe it is important to stay committed to issuing benchmark transactions even in a difficult year. We issued our covered bond in Eurodollar format last year after very extensive consultation with investors, even though it was not absolutely necessary to do from the perspective of our funding needs."

Doesn’t that inevitably mean compromising on price, relative to what would be available domestically? "No, it doesn’t," Huber insists. "Of course we have to ensure that pricing is attractive to investors. But internally there is no way we could go out and offer to pay up an extra 30bp or 40bp in the international market while we have such a deep domestic market."

BMW's performance

Another German borrower that could comfortably cover most, if not all, of its funding requirement in the domestic market is BMW, which again takes top spot among corporate borrowers.

Norbert Mayer, senior vice-president of finance and group treasurer at BMW

"We use a wide variety of funding instruments for the very simple reason that if one market becomes inefficient or uncompetitive we can shift into another"

Norbert Mayer, BMW

Norbert Mayer, senior vice-president of finance and group treasurer at BMW, agrees that the domestic market could cater to all the company’s funding needs, which were much lower in 2010 than in previous years. "But the spectrum of investors we’re addressing is a key component of our risk and liquidity management strategy," he says. "We use a wide variety of funding instruments for the very simple reason that if one market becomes inefficient or uncompetitive we can shift into another."

He adds: "This approach to risk management is also important in our discussions with ratings agencies. To them, diversification of funding instruments is critical."

To Mayer, as to the other German borrowers that do well in this and previous polls, consistency is pivotal to ensuring that access to this diversity of funding options is maintained. "We did not change our approach in 2010," he says. "Success in placing bonds is determined by the relationships you build with investors over a long period of time, not by individual transactions."

The way BMW cultivates and maintains its investor relationships certainly appears to be welcomed by analysts and investors alike. "BMW arranges an annual dedicated investor day that is very professional and impressive," says Pierre Bergeron, senior credit auto analyst at Société Générale. "It helps to strengthen the perception that the premium segment is as attractive for corporate and individual customers as it is for fixed-income investors."

It is striking that BMW retains its good standing with investors while driving a hard bargain on pricing, with bankers saying that its recent bonds in euros and Swiss francs have priced at minimal new-issue concessions. Then again, the CDS market suggests that BMW remains the first choice in the sector for investors. In early May, its five-year CDS was trading at 73bp, which, as Bergeron says, is tight compared with the other German automakers, with Daimler at 90bp and Volkswagen at 83bp. It is tighter still compared with French credits such as Peugeot and Renault, both of which were trading at a little over 200bp on the same date.

BMW’s CDS price, however, remains a far cry from the single-digit spread at which it was trading four or five years ago, which Mayer concedes was itself an aberration testifying to how wildly risk was mis-priced before the crisis. 



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