Dollars go Dutch

The Dutch State Treasury Agency finally introduced its Dutch Direct Auction process to the US dollar market after spending more than a year explaining it to investors around the globe. This thorough preparation proved key to the exercise’s success, with the agency eventually able to allocate US$3,274,649,000 of five-year paper – well in excess of the US$2bn that was initially flagged.

The apparently strange amount was the result of the way in which the auction works. According to the DSTA, it is a “rules-based auction where investors get equal treatment”. The DSTA acts as sole bookrunner on the exercise and bids can be placed through primary dealers of choice, being split between them if so desired. There is no pot, which is probably the most notable difference from what investors have become used to.

“They had to work through a lot of technical issues to get the system working for dollars,” said a syndicate official with knowledge of last week’s trade. “This was a first-time issuer [in the currency] and a new format, so they had to be sure it would work.”

Deutsche Bank, HSBC and RBS advised the DSTA on the transaction, though the issuer itself maintained complete control throughout the process, having the final say on size, pricing and account type.

“The focus is on real-money clients,” explained the agency. “[They] receive priority at the cut-off spread, although, to safeguard liquidity, the DSTA reserves the right to raise the allocation to other clients up to 35% of the total allocated amount.”

“They had to work through a lot of technical issues to get the system working for dollars. This was a first-time issuer [in the currency] and a new format, so they had to be sure it would work”

The agency has a clear definition of what it considers “real money” and what it does not. The former comprises asset and fund managers, central banks, agencies, supranationals, insurance companies, pension funds and private banks; the latter comprises banks and trusts, hedge funds and other trading desks.

Odd-looking size

Bids are placed within ranges and the spread set at whatever level needed for the agency to achieve its desired size. The ultimate size can sometimes be slightly odd-looking, as the real-money component at the final spread is fully allocated.

The benefit of the process is that it provides a “single uniform price and the winner’s curse is avoided”, said the agency.

The single uniform price on this occasion was 9bp over mid-swaps, the tight end of 9bp–12bp guidance and the 9bp–10bp refinement. Real-money placement was 76% and the geographical split saw almost half placed outside Europe. The Americas took 25%, the Middle East 9%, Africa 8% and Asia 7%.

The week before last saw Canada – perhaps a special case – come significantly through swaps on its five-year, while the EBRD priced flat and KfW at plus 23bp. At plus 9bp, therefore, the Netherlands looked relatively cheap for a European sovereign, especially one of the most well regarded. Then again, it was a new issuer in a new format.

Either way, it not only achieved investor diversification, but also made savings of anywhere up to 20bp versus its euro cost of funding.