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Tuesday, 24 October 2017

New kids on the block

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A host of new SSA issuers have arrived on the scene, such as Spanish guaranteed FADE and FROB, and EAA and FMS-Wertmanagement in Germany. But what impact will their arrival have on the broader market? Michael Winfield investigates.  

To view the digital version of this report, please click here.

The SSA market has seen at least four new issuers appear so far this year. And not only has it been able to absorb the initial supply pressure, the signs are it may even be starting to benefit from it.

Despite a year of ongoing volatility, the SSA market has continued to thrive. The largest issuers had completed around 40% of their year to date funding by the end of Q1, despite a number of new entrants with sizable borrowing programmes that in some cases financed ten years worth of activity.

For most of the new market entrants the euro markets is likely to be their first preference, for two reasons: firstly, they are European based issuers and borrowing in euros will eliminate the need to use cross currency swaps; secondly, it is their home market that has traditionally provided access to the widest cross section of investors. However, some of the new SSA issuers do have the ability to finance in other currencies which may – particularly in the case of US dollars – offer an incremental funding advantage.

For now the new market entrants are concentrating on building their yield curves in euros and establishing their names with the investor base that will provide the bulk of their funding requirements. The fact the market has so far been able to accommodate the new issuers is already a testament to the depth of demand from within Europe – and to the measures taken and being planned to ensure the viability of the Eurozone project as a whole.

The first new market entrant this year was the European Financial Stability Facility which accessed the euro-market with outstanding success in January on behalf of the rescue package for Ireland. In effect the borrowing activity of EFSF and the European Union took over the liabilities of the sovereign – and its banks. Being in possession of a top notch Triple A credit rating ensured their success in being able to access the market.

The acceptance of the EFSF offered an early signal that market participants had faith in the Eurozone, despite the clear difficulties facing some of its weaker members. While there remains uncertainty over the long term outcome of the rescue packages so far provided, the fact that the debate has already shifted to its successor, the European Stability Mechanism, is providing comfort to those investors which are embracing the new SSA issuers.

“The market has in general displayed a capacity to absorb the new SSA entrants some of which have replaced sovereigns which previously had direct market access,” said John Lee-Tin, DCM official at JP Morgan. “There has been periodic volatility which has tended to favour the rapid execution of new issue business, often on an intraday basis, but overall investors have remained positive on developments in the rates markets so far.”

Spanish proliferation

The task for the new Spanish guaranteed issuers, Fondo de Amortizacion del Deficit Electrico, the Spanish-guaranteed electricity deficit amortisation fund, and Fondo de Reestructuracion Ordenada Bancaria, were not so quite so straightforward. Both issuers share the rating of their guarantor, the Kingdom of Spain, and were therefore ultimately reliant on the sovereign’s ability to successfully access the market.

At the beginning of the year doubts hung over the Eurozone project as a whole, although Spain’s ability to sell both 10 and 15-year deals enabled it to distance itself from the more troubled sovereigns.

One of the unusual aspects of FADE’s inaugural appearance in the market was that it preceded the sovereign. In January it sold a €2bn 4.8% March 2014 benchmark through BBVA, BNP Paribas, CA CIB, Deutsche Bank, Goldman Sachs and Santander. This followed an investor roadshow at the end of 2010 which was held in Madrid, London, Amsterdam, Paris, Milan, Dusseldorf, Hamburg and Munich.

The leads took indications of interest at 80bp over the mid-swap level of Spain’s three-year Bono issue, and attracted a final book of around €2.5bn, made up of 120 institutional investors.

The sovereign’s subsequent ability to distance itself from the more distressed Eurozone economies has, of course, also played into the hands of the government-guaranteed agencies, with spreads tightening across the board.

FADE was created to allow the electricity companies to sell Tariff Deficit Receivables over five years to the fund and to be financed in the capital markets. It is an open-ended fund that can buy Tariff Deficit Receivables and finance them by issuing bonds with maturities of up to 15 years. The fund has the potential to raise up to €18bn this year and is expected to focus on building a euro curve in order to achieve this. It subsequently issued a €2bn June 2015 issue as well as a €2bn March 2021 deal.

But FADE has not been alone in competing for the attentions of Spanish investors. Apart from the sovereign itself, FROB also re-surfaced in the capital markets in January. The entity that was set up to fund the restructuring of the Spanish banking sector in 2009, FROB raised €3bn in January with a three-year transaction. The agency was seen to be pre-empting plans to force small, weak regional savings banks to become conventional banks with stock market listings.

Like FADE, its access to the market was at around 75bp over the mid-swap trading level of the underlying sovereign. The amount and frequency of its borrowing is not clear: it is linked to the demands of the banking sector’s restructuring which is difficult to predict.

“The bid for these issuers was accentuated by buying from accounts that were previously underweight the sovereign at the beginning of the year who needed to rebalance their portfolios to address the negative carry implications of being short Spain,” said Dan Shane, head of SSA syndicate at Morgan Stanley.

A more familiar agency issuer, Instituto de Credito Official was also active, with an annual borrowing programme of €20bn expected for this year. By the end of the first quarter, ICO had completed 65% of its likely requirements after selling three, five and 10-year issues. It was thought to be eying a return to other markets such as US dollars, Australian dollars and Japanese Yen.

“Spreads for ICO were certainly impacted by the creation of the sovereign guaranteed bank sector and will continue to be affected by the presence of the new agency issuers. This said, ICO still has a strong pricing advantage over these new entrants due to superior name familiarity with international investors and the fact it has an established liquid secondary curve,” said PJ Bye, head of SSA syndicate at HSBC.

German supply

Investors seeking diversification of German assets have already seen one new issuer in the market this year – WestLB’s bailout agency, Erste Abwicklungsanstalt (EAA), which loosely translates as “First Winding-up Agency”.  

EAA is in direct competition with other German state borrowers, particularly its guarantor, the state of North Rhine-Westphalia, as well as NRW.Bank. EAA, rated Aa1/AA–/AAA, began its expected €5bn annual debt issuance programme with a five-year sale in late March. As Germany’s first so-called bad bank, it has created a multi-currency debt issuance programme to fund around €77bn nominal of assets transferred from WestLB (rated BBB+).

EAA has the option to fund in either euros or US dollars for at least 10 years. The size of its borrowing programme and the expected sponsorship of the German investor base are likely to limit its impact on other non-German SSA issuers.

The issuance of EAA, with the backing of the German state of North Rhine-Westphalia attracted a strong domestic bid for its inaugural deal sold in March. The state guarantee also appealed to a number of other investors – in particular Scandinavian accounts, which took almost a quarter of the €1.5bn five-year issue.

EAA should have little trouble achieving its funding target, despite being in direct competition with both Land NRW and NRW.Bank. It offered slightly more generous terms to ensure strong German support for its inaugural deal.

“The spread on its first deal, or those of comparable regional issuers, has barely fluctuated since pricing, suggesting that there it is unlikely to lead to a significant repricing of the sector,” said Shane. “Similarly, at this stage supply from other German issuers is unlikely to have a material impact on larger issues such as KfW.”

The assets, owned by EAA, are divided between structured credit at 39%, loans at 37% and tradeable securities at 24%. Within the last category, Italian assets make up 16%, Spanish 15%, Portuguese 10%, Greek 6% and Irish assets less than 1%.

EAA will be followed by FMS-Wertmanagement, another German bank rescue vehicle, this time for Hypo Real Estate. This issuer rated Triple A by all the rating agencies and has a potential programme of €20bn–€30bn to fund.

“To date, a lot of FMS-W’s funding has been sub-two year and has targeted European investors which are familiar with the structure of the issuer. It is likely that it will ultimately focus on the three to five-year sector,” said HSBC’s Bye.

FMS is the successor entity for Hypo Real Estate’s bad assets and despite its rating, may suffer from a lack of formal guarantee, it has been suggested. Being supported by Germany, rather than being explicitly guaranteed, will deter some investors and will require a concession to other established issuers such as KfW and Rentenbank.

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