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Thursday, 19 October 2017

Carpe diem

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The EIB took advantage of a liquid and highly receptive market for its paper over the first quarter. And while other supranationals and agencies were not slow in spotting the opportunity, it was the EIB that maintained what at times seemed like omnipresence in the market. This approach has enabled it to fund more than 60% of its total annual fundraising allocation of €60bn.

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The market’s bullishness had three major sources. First, markets had built up a wall of liquidity following a near closure at the end of last year; greater use of the LTRO boosted demand; and some evidence of a desire for a resolution to the European sovereign crisis increased overall confidence. The result was a hunger for paper from Triple A rated issuers.

But some bankers have raised concerns that early fundraising may preclude issuers from benefiting if spreads tighten later in the year.

“We have to be quick on our feet and capture the opportunities. We have certainly enjoyed the fact that demand for longer dated paper has been there, and this is a phenomenon that is not there every day. There has been a remarkable tightening since the beginning of January, from an excessively high level of course” said Eila Kreivi, director and head of the capital markets department at the European Investment Bank, explaining the issuer’s rationale.

“But at the beginning of January, accessing the market didn’t look that obvious,” she added.

However, she said, some tightening was inevitable when there has been front-loading, as spreads naturally tend to tighten when supply in the market is getting scarcer.

“We, among others, front-loaded a lot in the first half of 2009, and in the second half the spreads tightened in. But they tightened in because the bulk of supply was already behind us, not only for EIB but for most large borrowers.

“Where spreads would be if we were not this advanced, we don’t know. The important factor for the EIB is that the duration that we needed was available and we took it. Without that, if most of the funding had been available at the short end, it is unlikely we would be quite so well advanced.”

The scale of demand for liquidity from large institutions, such as the EIB and KfW, means that “they have no choice but to seize the moment when it presents itself in the market”, said the treasurer at a smaller SSA borrower. “When you have a large borrowing programme, you have to pick all the opportunities you can. There is definitely better market sentiment and we are seeing a resumption of liquidity. But these things can come and go pretty quickly.”

But the SSA with a large fundraising need is constrained on timing. However, it can be more flexible in selecting maturities and the currency of issue.

“Larger issuers don’t have the luxury of waiting around and saying they won’t fund this month because they suspect spreads will tighten. What you are really saying is, ‘which is the better of my maturity options at this moment as opposed as to picking the optimal time for when to fund for the entire year’,” said John Lee-Tin, JP Morgan’s head of public sector DCM.

The timing of issuance will be determined by factors such as liquidity levels, the issuing activity of peer SSAs and availability of other funding sources.

One market participant at a smaller SSA borrower said: “[The] EIB and KfW don’t have the luxury of the liquidity cushion. You have to factor in the size, and other things that can come in and affect the situation, such as competing supply or simply other headline risks that may knock you off course. You also have to take into account the liquidity policy and how much time you have to finance. So, if the markets were to shut for a period of time, could they survive?

Some bankers warn that market enthusiasm for EIB paper may not last, if the spread between sovereign paper and that of the EIB stays as wide as it is currently. They pointed out that there is a 100bp disparity between the cheapest and most expensive Triple A national and supranational institutions.

“[The] EIB and KfW don’t have the luxury of the liquidity cushion. You have to factor in the size, and other things that can come in and affect the situation, such as competing supply or simply other headline risks that may knock you off course. You also have to take into account the liquidity policy and how much time you have to finance”

“Investors seeking a Triple A name may prefer to buy French bonds rather than EIB bonds, as France is a major shareholder in the EIB and its spreads are significantly wider.”

Much of the activity in the early part of 2012 had its origins in a near market close-down at the end of last year, said Kreivi.

“During the last two months of 2011 there was almost no issuance done by anybody, and even non-European names largely stayed out of the market. We came to January 2012 and the market rapidly gained confidence. The LTRO had a role to play, but there was also liquidity elsewhere that had built up during the autumn.”

Wider issues impress Horst Seissinger, head of capital markets at KfW. “There has been some positive sentiment owing to a better outlook for a solution to sovereign debt crisis and some backwind from the LTRO. We have seen very strong demand, focused on the top credits, so the funding targets we have achieved have been quite attractive.”

The EIB realised that market conditions had changed when it was able to build up a €9bn book for a €5bn three-year euro offering. One market source said at the time: “This signalled to the market that there was depth and demand for their name. They could have printed more but they restricted it to save capacity to print at other maturities and other currencies.”

The same enthusiasm for the name was shown in market responses to a series of taps aiming for €500m but getting subscribed up to €1bn.

The market showed no let-up in its appetite for EIB paper in March when a US$3bn bond obtained a US$5.3bn book.  They could have reasonably printed US$4bn,” said Lee-Tin. The deal was sold at 33bp over mid-swaps and that tightened in the next two weeks by some 10bp.

Despite the scale of EIB’s fundraising in the first quarter, the market’s interest in its issues remains strong, with spreads continuing tight.

“We still look very good relative value compared to our peers. We hope the spread will not widen,” said Kreivi.

In fact, KfW was also able to obtain some very finely priced funding in the market in March this year, said Seissinger. It issued a €2bn two-year Eurobond in the middle of the month at a record-low spread of 60bp through mid-swaps.

“This reflects the strong demand based on the positive sentiment and support from LTRO,” he said.

EIB issues in the US dollar market have been equally well received, starting with its debut for the year in that sector, a US$3.5bn five-year at the end of January that came in at a larger size than many had been expecting on the back of an order book in excess of US$4bn.

No shortage of proposals

Banks have latched on to the market frenzy, said one participant, and they are actively promoting plans to issuers for tapping the market.

“If you are on the dollar side of the EIB, you have several ideas coming across your desk every week. If you are on the euro side, there are 12 or 15 proposals in front of you every week from different banks. The success of what they have done this year means they are ahead of plan. They have done a lot of longer dated funding and don’t need much more. The average duration of what they need is seven years and they are above that,” said Lee-Tin.

The EIB has an ambitious issuing programme, covering a number of currencies and maturities. “We will probably see some more benchmark issuance in euros, probably at the longer end. We will also be active in the dollar market, which tends to be concentrated more in the short to medium terms. Hopefully, we can do something longer there at some stage as well,” said Kreivi.

And if market conditions continue to be favourable later in the year, she envisages the possibility of a limited amount of pre-funding of next year’s fundraising allocation.

“If we are this well advanced, we could also think about doing some pre-funding but that depends on the state of the market. Last year, pre-funding was practically impossible.

“When we are done with the €60bn, we could possibly do a few billion more which would be against the 2013 funding needs. Most large borrowers do this, because you don’t want to close your shop in October and not take any opportunities in the last part of the year.”

However, she observes that the last few years have shown that the last quarter can be very quiet in the primary markets.

 

 

 

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