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Saturday, 18 November 2017

Top 250 2005 - Irish takes benchmark stakes

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With year-to-date borrowing of US$19.1bn equivalent, public sector investment bank DePfa ranks as the 27th largest issuer in IFR's Top 250 borrower list. The borrower's total funding needs this year is about €20bn, of which a minimum €8bn is earmarked for its benchmark programme that focuses on the Irish ACS asset class. By William Thornhill.

So far in 2005, DePfa group has issued three benchmarks, a €3bn seven-year and a US$1.25bn five-year issued out of its Irish unit while its German unit brought a €1bn seven-year.

The €3bn seven-year was marketed on spread guidance of mid-swaps plus 1bp to 3bp, and quickly achieved a €5.5bn order book comprising 150 accounts. After being re-offered a mid-swaps plus 2bp, the 3.25% February 2012 immediately tightened by 0.5bp.

"Our aim was to solicit – and then respond to – direct investor feedback on the maturity and not to push either the pricing or the size, in order to ensure good secondary market performance," stressed Julia Hoggett, DePfa's head of capital markets.

It second benchmark exercise, a US$1.25bn 144a five-year, while not achieving the same order momentum, was nevertheless a resounding success in terms of placement.

An exceptionally high 53% was placed with Asian central banks while funds took most of the remainder. The US took a significant 26%, leaving Europe with 21%. The book stood at US$1.5bn comprising 50 accounts.

DePfa's Hoggett said of the deal, "There were two very compelling reasons for establishing a US dollar benchmark curve; investor diversification and the fact that the dollar market provides some degree of arbitrage versus euros."

Given its relatively large borrowing needs, DePfa is in a somewhat enviable position to provide liquidity to the market, a role that smaller players are incapable of emulating.

"DePfa takes the view that responsibility for generating liquidity sits as much with the issuer as it does with lead managers. That’s why we have a minimum commitment to €3bn (in euros), rather than saying ‘let's reach €1bn and let other people make liquidity in the deal.' We look at it the opposite way," reasoned Hoggett.

Despite demand for liquid products, investors do not tend to reward issuers which come in excess of €3bn. “There is a spread to pay to issue in size from €3bn up to €5bn, but not much of a charge from €3bn down to €1bn. Issuers are not being paid for providing liquidity, therefore rationally they are not going to do it – and investors are not demanding spread for issues that are likely to become less liquid," Hoggett cautioned.

Aside from its funding strategy, DePfa was in the headlines earlier this year after anouncing that it had cancelled the sale of its German subsidiary, Deutsche Pfandbriefbank AG.

The decision reflected its failure to find a buyer willing to pay the price it wanted, according to Gerhard Bruckermann, CEO of the DePfa group. The market speculated that DEPFA had been looking for more than its German unit's €1.1bn book value, but Bruckermann declined to confirm this.

The news was clearly detrimental as it had been hoping to free up equity. "We have been short of equity for more than 10 years, and this has affected us in two ways: firstly in regard to the deposit-taking business, and secondly with respect to large exposures," emphasised Bruckermann.

Bruckermann accepted that DePfa's development of its US business required equity, "but the fact we are not getting it now through the sale of our German subsidiary will not slow down the planned expansion. We have enough equity for this, besides which we are free to take equity out of the subsidiary if it is needed."

While acknowledging the expense and inefficiency of running both a German and Irish operation, DePfa's CEO said there were no plans to sell the AG unit, and as such it would be re-integrated into the group.

"We will re-integrate it again and use competitive advantages regarding its reputation and investor franchise in the German speaking world, especially as an MTN issuer," said Bruckermann.

DePfa Bank plc has total assets of roughly €190bn and equity of about €2bn while DePfa Deutsche Pfandbriefbank AG has assets of a little of €70bn and equity of just over €1bn.

First quarter trading results of €120m, giving a return on equity of 25%, were broadly in line with expectations in line for the issuer to hit the €500m 2005 target. Despite a 56% rise in costs – due to an expansion of its product range – its cost/income ratio of 27.5% is comparatively sound.

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