International supranational, sovereign and agency borrowers raised billions in dollar issuance during the first half of the year. This was a continuation of 2007, when volumes from supras and European agencies rose 14% to €241 billion, according to Dealogic. The dollar activity was driven, in large part, by central bank investors that were attracted by wide swap spreads and their wish to diversify away from the government-sponsored enterprises. The woes of the GSEs have increased and the high-level investor sponsorship the European Investment Bank received at the end of August for its $4 billion three-year issue, led by BarCap, Citi and JPMorgan, illustrates the state of the frequent borrower sector.
"Prior to the opening of bookbuilding it wasn’t obvious that a $4 billion transaction would be straightforward. We certainly had no expectations of a book in excess of $8 billion within just a few hours. New players are coming into the global market – and established investors are playing in increasingly massive size. We could have driven on to a $10 billion order book, and a substantially bigger deal. The reason for that? The EIB’s dollar bonds are trading in the secondary market at Libor less 55," says Philip Brown, head of public sector origination, EMEA, at Citi.
Never before has the EIB garnered anything like $8 billion of orders for a global dollar bond. The price was equivalent to mid-swaps less 35 basis points – nearly 10bp tighter than the new-issue spreads it was able to achieve at the start of the year.
"As long as the GSE situation continues, we’ll see more real-money investors becoming interested in the SSA sector. With the EIB deal we were seeing big US asset managers coming in with orders of $100 million," says Brown.
Typically, US demand for non-domestic issuers comes from the New York offices of central bank money, supplemented by orders from state pension funds. The big US asset managers have traditionally focused on the GSE agency market for rates product. As doubts about these credits continue they have re-evaluated their stance.
"The true value of a European triple A has been finally recognized. So long as the GSE situation remains ambiguous, that is good for the SSA sector," Brown says.
So all is well in the sovereign, supranational and agency sector? Relatively, yes. Compared with the woes facing most financial institutions, SSA borrowers are enjoying excellent market conditions – there has been no comparable blowout in spreads. There have been negative headlines in the sector – the extra €5 billion of funding required by KfW because of its bail-out of IKB, and the fair-value losses to asset-backed bonds experienced by Eksportfinans in its treasury book. KfW has decoupled from the EIB – its paper now trades 5bp and 7bp to 9bp back from the supra at the short and long end of the yield curve, respectively. Eksportfinans is no longer a sub-Libor player, having printed a three-year euro at plus 13bp in April this year. That was the clearing level of the transaction and the bond was a success. However, not all issuers have been willing to pay the price for benchmarks.
"I think investors are starting to do more credit work and taking the non-guaranteed agencies on a name by name basis. There are distinctions between public-sector borrowers; they all have access but not at the price they had it at last year. A number of issuers have not yet been willing to crystallize what are probably appropriate clearing spreads," suggests Brown.
Those public-sector borrowers that are rated double A have experienced spreads widening by up to 10bp – as they are left behind the leaders of the pack. Investors’ strongest bid has gone to the supranationals, such as the EIB and the Asian Development Bank.
"While the headlines around the sovereign, supranational and agency sector are that it has benefited from strong investor flows, not all issuers have felt that benefit. Conditions have been fantastic for the top five to six but there are also many borrowers within the sector that have found it tough to find a market opening over the course of this year," says Nick Dent, head of frequent borrower syndicate at Merrill Lynch.
Dollars: a rising proportion of supra, agency supply
Public sector borrowers’ issuance volumes
Dent suggests that marginal funding costs might have risen for many issuers and that consequently they have not had a great year. That said, he points out that the private placement market continues to tick over and provide aggressive funding.
For second-tier issuers it has proved difficult to diversify their investor bases or add duration to their liabilities. Demand lessens after the three-year maturity and falls off the cliff at five.
"The great news is that there has been a detachment from the international SSA sector versus GSE debt," says Dent. "While the spreads on the EIB, for example, might be something like 30 basis points less than that available on Freddie or Fannie, investors have experienced excellent performance of non-US agency new issues."
But that detachment is a double-edged sword, because it is an elite half dozen or so names that have benefited most. All borrowers have a parsimonious streak but for those left behind there is an understandable discomfort at seeing similarly rated fellow issuers printing bonds at better levels than they can achieve themselves.
"Success for triple-A issuers comes down to a simple question. Are they on the central bank buy list or not? We need more non-central bank investors to come into the market," says a frequent-issuer banker.
But when investors can buy triple-A-rated GECC, which is still just about regarded as a good name, in three-year FRN format at Euribor plus 75bp, it is hardly surprising that some of these SSA borrowers are struggling to attract substantial demand to the sub Libor/Euribor spread that their credit offers.