Thursday, 19 July 2018

DCM 2007: Front-loading continues to grow

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Most SSA borrowers have followed the traditional front-loading route for their financing this year, leaving relatively little for the next few months. The question is what format this will take and what the alternatives could be. Michael Winfield reports.

With most financing completed early in the year, sovereign, supranational and agency borrowing is on course to be running at its lowest-ever level in the last quarter of the year. To date, a total volume of €209.35bn has been raised across the four main currencies of issuance, virtually unchanged in nominal terns from last year. This, however, conceals the reduced sovereign borrowing figures in both conventional and inflation-linked formats, which has largely been compensated for by supranational and agency issuers.

For those that do need to access the capital markets before year-end, most have been holding off so far, although those that have issued have found a very strong level of investor interest, albeit largely concentrated at the shorter end of the maturity spectrum. The EIB was the first to test the US dollar market after the summer with a three-year deal, followed by the Nordic Investment Bank, Asian Development Bank, SEK and KfW (with a two-year).

While in euros, Eksportfinans was able to upsize its inaugural three-year deal in September to €1.25bn. Other issuers, however, have cited the abnormally high level of three-month Euribor in relation to relatively low overnight rates as one reason to wait before re-entering the market, and this level has not fallen despite decreases in the sterling and US dollar interbank markets as the final quarter begins.

In contrast, by mid-September last year both the euro and US dollar markets were in full swing, with the Republic of Italy's last upsized Global deal and a similar US$3bn 10-year for the EIB leading the supply. In euros, KfW had just launched a €3bn five-year benchmark, thereby completing €43bn of its €54.2bn 2006 funding requirement. This year, the volatility seen over the summer in both the swap and government bond markets has contributed to more modest new issue activity. However, with most borrowers even further advanced with their programmes than usual, the fund-raising left to be done should not prove too onerous for the market, assuming the conditions for new issues continue to improve.

In fact, there have been no major changes in the way the SSA issuers are likely to go about finishing their 2007 borrowing programmes, although some have said that they may rely more on shorter-term financing if market conditions remain difficult.

As the largest non-sovereign borrower, KfW has a €60bn 2007 requirement, of which €7bn was still to be completed as of mid-September. This means it has so far finalised 88% of its funding compared to 79% at the same stage last year. “Of note in terms of this year's financing is the increased role played by sterling, which has so far increased from 11% of the total in 2006 to 17% this year," says Horst Seissinger, first vice president, capital markets.

The second-largest borrower, the European Investment Bank, with a projected requirement of around €50bn for the year from December 7 2006, has less than €7bn, or around 13%, left to, having reopened the post-summer market with its US$3bn three-year Global followed by a US$1bn seven-year Eurodollar deal. This compares to €35.5bn completed at a similar stage last year out of a final funding amount of €48bn, or 74% of the total.

Caisse d'Amortissement de la Dette Sociale (Cades), the French social security agency, potentially has a greater amount to do in terms of its more modest 2007 borrowing programme, having only appeared once in the capital markets this year with a €3bn 10-year deal issued in late March. It has an annual need of around €9bn, and taking out MTN issuance, it leaves the French agency with a requirement of around €4bn which could be refinanced through commercial paper and short-term borrowings due to roll over in November and December. "However, if the markets were to allow, then we would consider either a five or 10-year bond issue to maintain our profile with investors," says Philippe Noel, head of capital markets.

Another issuer considering a similar strategy is Austrian government-guaranteed Oesterreichische Kontrollbank. "We have €3bn left to do out of a total for the year of €6.5bn, although may use the roll-over of commercial paper, depending on market conditions," says Anton Ebner, director of international finance. The borrower is understood to be considering two benchmark transactions in the coming months, one in US dollars and one in euros, assuming conditions are favourable.

Norway's Eksportfinanas will also be looking at a final US dollar benchmark in the last quarter to reach its US$16bn–$17bn requirement with US$12bn complete as of mid-September. The Inter-American Development Bank is meanwhile looking at a US$1bn benchmark deal with US$1.2bn of its US$5bn needs for the year remaining. Smaller, targeted trades will make up the balance.

Awaiting better conditions

For other frequent borrowers, such as Landwirtschaftliche Rentenbank, Kommunalbanken Norway (KBN), Bank Nederlandse Gemeenten (BNG), Instituto de Credito Oficial (ICO) and Swedish Export Credit (SEK), there are likely to be further deals when market conditions are more conducive to supply.

Rentenbank may only need €1bn in addition to a similar amount of non-benchmark financing to reach its €11bn total for the year. "Recently, the current cost of swapping the proceeds of an issue into floating-rate euros, given the inflated three-month rate, was prohibitive due to the shape of the yield curve," says Stefan Goebel, co-head of funding and assets. Although, as September was drawing to a close, he added "we have now done enough Euribor-based asset business to warrant funding, irrespective of money market levels".

While ICO is also looking at a similar outstanding requirement (out of a possible €13bn total for 2007), it will return to the market for a US dollar or euro deal only if its lending activity necessitates a further €2bn in total. If only €1bn is needed, then this will be financed through private placements and other smaller transactions. SEK has a similar lending-based approach and, having completed US$13bn already, will consider additional fund-raising if lending volumes require it later in the year.

Exchange-rate movements have pushed KBN's requirements up to US$8.5bn, of which US$5.6bn has already been completed, leaving room for more public transactions this year. BNG may have €2bn-€3bn to add to the €10bn so far completed, which will see it looking at both US dollar and euro-denominated benchmark deals before year-end. Nederlandse Watershcapsbank also has €2bn-€2.5bn to add to the €5.3bn already completed so far this year.

NRW.Bank is around 90% through its borrowing programme with around €15bn out of €17bn complete. The decision on the timing of the launch of its US dollar Global borrowing platform is due this autumn and issuance will commence in 2008. Similarly, after its recent US$1bn three-year Global, the Nordic Investment Bank is also 90% funded with just €400m remaining this year. The African Development Bank has a similar nominal amount to borrow. “We need US$500m out of US$1.5bn in total following our inaugural Maple deal in July,” says Sandeep Jain, senior treasury officer.

For a number of supranational borrowers, such as the International Finance Corporation and the International Bank for Reconstruction and Development, the recent turmoil, while of concern, has not dramatically impacted their plans as their funding periods start in July each year.

The World Bank diversified into the euro-denominated debt market some months ago when it raised €1.5bn through a three-year deal. But the issuer is less dependent on the core markets for its current US$10-$12bn annual requirement (little changed from last year), having issued in a variety of other currencies over recent years. So far in this financial year it has issued in New Zealand dollars and rand and will continue to monitor other strategic markets. The International Facility for Immunisation, whose borrowing programme is handled by the World Bank, is not expected to return to the market this year following its inaugural deal in 2006. Next year it is expected to have a requirement of between US$300 and US$500m.

Similarly, the IFC, which typically raises US$1bn through an annual five-year Global deal, envisages a 2007/2008 borrowing need of US$5bn equivalent (up from US$2.8bn in the year just ended). It also plans to continue to stimulate growth in emerging capital markets by issuing bonds in local currencies and accessing other markets "in which significant volumes can be raised at attractive costs", says John Borthwick, deputy treasurer and head of funding.

The European Bank for Reconstruction and Development has raised €1.8bn this year without recourse to the main debt markets and has around €200m remaining. The 2008 programme is likely to be for a similar amount and will probably focus on New Zealand and Australian dollars and South African rand, assuming yen-based carry trades continue to make these markets attractive to investors.

Another borrower that will have a reduced profile for the remainder of this year is the UK's Network Rail Infrastructure. Having recently completed a £500m 40-year sterling inflation-linked security, its third so far this year, it finds itself in the position of being well ahead in terms of its borrowing requirement. Having substantially shifted to index-linked funding, Network Rail has adjusted its maturity profile substantially away from the shorter end of the market.

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