Sunday, 16 December 2018

Proven strategy

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KfW has a reputation as a solid borrower, always ready to exploit market opportunities as they arise, in a range of currencies, underpinned by its core holdings in three majors. A firm believer in its strategy, which has proven itself highly successful over the years, it has navigated significant political and economic upheaval – and made it look easy. Michael Winfield reports.

The German development bank, KfW, remains a leader in most sectors of the capital market, with an estimated €70bn-€75bn financing requirement for this year. The Triple A issuer will achieve this – as it did in 2009, when it borrowed €74bn – through a combination of funding in all sectors of the market. As a borrower, it is always eager to exploit new markets and capitalise on opportunities in familiar ones.

The agency, originally set up in 1948, has no option other than to act decisively when market conditions present opportunities for issuance, in any of the currency markets in which it operates. Its strategy revolves around issuing debt in the US dollars, euro and sterling markets, with an increasingly significant amount of debt being raised in the non-core sector. The recent challenge for KfW, and all other large issuers, has been to successfully achieve its objectives at a time of high volatility, with rapidly changing political, economic and monetary policy variables.

“Our funding strategy has proven itself very well and enabled us to respond flexibly to a changing capital market environment. KfW’s first-class credit standing has also contributed to this excellent result,” said Gunther Braunig, member of the managing board, after announcing the conclusion of KfW’s 2009 funding operations.

KfW is unique in the agency sector, having repeatedly been able to renew its benchmark supply across the maturity spectrum in both the euro and US dollar markets, despite an investor focus on shorter-dated issuance in recent years. In the year ending in December 2009, KfW raised €19bn and US$21bn through issuance off its benchmark programmes. A total of 412 transactions were completed in 2009 in 19 different currencies.

This year the nature of the challenges facing issuers in the international markets has been different, after the transfer of private sector liabilities to the public sector throughout much of 2009. More recently, the biggest challenges to have faced issuers culminated in the EU/IMF rescue package agreed for Greece. The situation has been no different for KfW, which operates with the guarantee of Germany, Europe’s strongest sovereign: identifying windows of opportunity and rewarding investors with transactions which offer the potential to outperform their peers.

In the US dollar market, KfW first opted to refresh its three-year issue, selling a US$4bn transaction at mid-swaps less 2bp in the first week of January, after upsizing the originally planned US$3bn deal. Within weeks, the award for reopening of the 10-year US dollar market again went to KfW – as it had in early summer 2009, when the issuer sold a US$3bn Global deal. The issue size on this occasion was set at US$4bn, making it KfW’s largest 10-year deal to date. Pricing was at the tighter end of the mid-swaps plus 28bp–30bp range.

The following month a US$3bn five-year deal saw the issuer already in the position of having renewed all its US dollar on-the-run maturities. It then sold a US$4bn two-year Global issue in March, and a non-benchmark Eurodollar trade of the same tenor in May.

In the euro-market, KfW chose to make issuance in the 10-year sector its first priority, as it has in previous years, raising €5bn with a deal priced at mid-swaps plus 18bp. It raised €5bn with a five-year issue at mid-swaps flat, after attracting a final order book in excess of €6bn.

The economics of issuing in US dollars has continued to be more attractive than financing in euros, because of the benefit available through the euro/US dollar basis swap and the three/sixes swap. When KfW sold a €2bn two-year deal in March, however, this anomaly increased the issue’s appeal to investors: at mid-swaps less 31bp, accounts could swap back into a three-month US dollar floating-rate asset on attractive terms.

KfW has also accessed the market with a €1bn three-year FRN, was priced at 5bp through three-month Euribor, and a €200m three-year Eonia-based trade at plus 17.5bp, equivalent to a Euribor spread of about minus 11bp.

In sterling, the third pillar of KfW’s core issuance, supply has diminished this year, after the sale of a £500m 3% September 2013 bond at Gilts plus 58bp late last summer. The deal is notable for the fact that new sterling bonds of any significant size from high-rated agency borrowers are rare – the majority of pricings being taps of existing issues. Although sterling supply has been less frequent recently, in 2009 the market accounted for 7% of KfW’s activity with euro issuance at 44%, US dollars at 35%, Japanese yen at 4% and Australian dollars 4%.

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