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Monday, 18 December 2017

Standing tall

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The agency has stood in a league of its own – if any agency is going to be able to withstand the turmoil in Europe this year, it’s KfW.

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

The Triple A rated agency, backed by a government guarantee from the sovereign powerhouse, has stood head and shoulders above all of its eurozone sector rivals this year. It also remains confident that it will meet the remainder €40bn of its 2012 €80bn funding target – the largest for any of the continent’s agencies – with relative ease.

KfW has remained steadfast, as the likes of the European Investment Bank has scaled back its dollar deals, and embarked on a massive front-loading splurge to take advantage of a first-quarter rally in spreads and spike in liquidity.

The EIB has already completed about 65% of its smaller €60bn funding goal, while KfW is roughly at the halfway mark.

A sudden widening in spreads in early April might have left less influential issuers filled with regret that they did not take advantage of hot market conditions when they could. But not KfW. The decision not to front-load was intentional, it says.

“There is no regret about that. We are exactly in the position where we want to be,” said Frank Czichowski, treasurer at KfW.

“There is still a lot of liquidity in the market. Clearly there is a very active political debate about the future of the euro, but it is going to continue and we have to navigate volatile spots. We don’t think the picture will change dramatically for the rest of the year.”

KfW’s reputation for regular issuance across various currencies and tenors seems to have served it well. It has left a trail blaze for other issuers, who have benefited from KfW’s nerve. Not only was it the first European issuer to tackle the dollar market this year, but it pulled off a niche 10-year dollar deal, exempt to all but the best issuers, and was the first agency to go for a 10-year in euros.

The contribution of its benchmark programmes in US dollars for its overall funding has never been larger. In contrast, the EIB has relied more heavily on the euro market this year, which has accounted for 58% – or  €22bn of the €38bn-equivalent it has raised so far. That compares with 46% euro funding in 2011.

“There is still a lot of liquidity in the market. Clearly there is a very active political debate about the future of the euro, but it is going to continue and we have to navigate volatile spots. We don’t think the picture will change dramatically for the rest of the year”

In euros KfW has raised €13bn from three benchmark deals with five, seven and 10-year maturities, and US$16.5bn in the dollar market from four deals, two of which have had three-year maturities and the other two five and 10-year.

“There has been very strong structural demand for KfW, which is partly a reflection of a flight to quality. The benchmark funding has been very much driven by investors’ preference for liquid product,” said Czichowski.

It has also set records along the way: In April it sold US$4bn in its latest foray into the dollar market, and its second three-year tenor in that sector, at mid-swaps plus 5bp. The issuer attracted orders of US$4.9bn despite setting a record low coupon of 0.625%.

“While you might think that people would balk at the coupon, it’s really all about parking cash,” said a lead manager on the trade at the time. “And a short-dated KfW is just the sort of safe investment that they’re after at the moment.”

Records have not been confined to its benchmark programme either.In March, KfW priced a two-year €2bn bond at the tightest level ever seen for a borrower across all sectors – printing at mid-swaps minus 60bp – stealing the crown from Sweden.

Few doubt that KfW’s prudent approach will let it down as a rocky second half looks set to be in store.

“A short-dated KfW is just the sort of safe investment that they’re after at the moment”

The key, said Czichowski, is not to overstretch the market.

“We can assume that a larger differentiation between issuers is going to be the new norm for some time to come. It is something that issuers have to learn to cope with,” said Czichowski. “Issuers have to offer an incentive to investors to commit by leaving some pick-up.”

But in times of turmoil when investors are looking for a safe haven, that may be easier said than done.

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