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Sunday, 19 November 2017

Top 250 2005 - Playing it short

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Liquid benchmarks from agency issuers at the long end are few and far between, whatever the currency of issuance. This is despite the fact that demand for high-quality long-dated assets has been an ongoing theme in recent months. Helene Durand examines the reasons why agency issuers have mostly kept away from the longer tenors.

With demand dynamics apparently dictating that borrowers should concentrate on the longer-dated part of the curve, agency issuers have remained shy of transactions beyond the 10-year mark. This is unlike sovereign borrowers which, since the beginning of 2005, have mainly priced 15-year plus offerings.

The recent change in supply dynamics has seen sovereigns extending their duration, and in the case of the Republic of France, pricing the first ever 50-year sovereign transaction. However, this has not been replicated in the case of agencies which would naturally be the second most obvious candidates to price liquid issues. Covered bond issuers, on the other hand, have jumped at the opportunity and there are now three outstanding liquid covered bonds in 20-years from Spanish cedulas hipotecarias.

However, while their number has been limited, some agency borrowers have been active in the 10-year plus sector. The European Investment Bank (EIB), which has become a veritable pioneer of the long-dated world. Last year, it priced the first 15-year liquid paper from a supranational which was met with strong investor demand. At the time, there had been some questions as to how strong this appetite would be. However, as the transaction grew to €4bn on the back of a €7bn order book, these questions were quickly put aside.

The Caisse d'Amortissement de la Dette Sociale (CADES), propelled by a tenfold increase in its funding programme, followed suit. The issuer priced a 2015 issue at the end of last year and a new 2020 this year. Its €4bn October 2020 was possibly one of CADES's best issues, gathering an order book in excess of €8bn. NRW.Bank was the only other issuer to price a liquid €1bn deal in the maturity.

Meanwhile, EIB was yet again in pioneering mode this year when it became the first supranational to tackle the 30-year plus tenor. The groundbreaking €5bn trade gathered a whopping €11bn worth of orders, and priced flat to where the borrower had priced its 2020 deal the previous year at 2bp over mid-swaps.

"The EIB lends on a long-term basis, and it therefore made sense for them to price such a long-dated transaction. However, for borrowers such as Rentenbank or KfW, they typically don't lend on such a long-term. EIB is leading the pack of the supra/agency market by positioning itself close to the sovereigns. It was relatively cheap for them to extend out to 30-years as there was only a minor pick-up in terms of credit curve," said HSBC syndicate official Armin Peter.

Other borrowers have looked at 10-year plus issuance, mainly the likes of Reseau Ferre de France (RFF) or Societe Nationale des Chemins de Fer Francais (SNCF). However, the vast majority of these issues are very illiquid, driven by specific funding needs which match those borrowers' asset/liability profiles. For instance, SNCF's €500m 15-year printed this year was the first issue of the kind from the issuer since 2003.

Bart Van Dooren, head of capital markets at Bank Nederlandse Gemeenten (BNG), explained that it would be very unlikely that it would ever price a transaction longer than 10-years in a large size in the euro market.

"We are committed to three, five and 10-year benchmarks in euros and three and five in US dollars. We would find it very difficult to justify a 30-year transaction. Not only is it very expensive, but we just do not have the exposure to lend it to clients. It would have a big impact on our balance sheet/ALM. While the Dutch municipalities and housing associations to whom we lend have demand for long-dated financing, this is related to a wide variety of projects – and they are yield-indifferent," he said.

Meanwhile, Stefan Goebel, co-head of funding at Rentenbank, explained that the borrower had not issued a 10-year benchmark in euros or US dollars since 1999. "This is partly driven by our ALM needs as the average life of our assets is six to seven-years. There is appetite for 10-year funding from time to time but we cover this with instruments away from our benchmarks."

"Furthermore, 10-year plus arbitrage is not cost-efficient, so we do not come to this market as we do not need to. However, the arbitrage in the US dollar market has been good of late and we would not rule it out," Goebel said.

KfW's head of new issues, Petra Wehlert, also explained that for ALM reasons, KfW had no need for liabilities longer than 10-years. "This is the first hurdle for us in terms of looking at longer-dated deals. So far, the 10-year is still very important for us as far as being a benchmark issuer in the euro market. However, if the market developed further we might have to think about a 15 or 30-year at some point."

She added, however, that duration overall had been longer for KfW in 2005. Wehlert noted that KfW had printed a 10-year in New Zealand dollars and in Australian dollars. In the euro market, KfW had issued a €500m 30NC7 and several uncallable euro structures.

While some argue that ALM reasons are behind why some agencies issuers stay at the short-end, others believe the reason is even more simple and that it is all to do with cost of funding.

As Hans den Hoedt, global head of public sector origination at ABN AMRO, said, "A lot of these borrowers are Libor-based and simply do not look at longer-dated deals in size as it is just too expensive for them. The inversion of the curve that exists for core European sovereigns is not necessarily achievable for agencies. For an issuer like KfW, why should they pay up for something that they do not really need?

"Furthermore, if we look at the case of the recent Dutch 30-year issue, while it was partly done for diversifying reasons, it was also cheap funding as yields are historically low and a way of limiting their refinancing risk."

However, while large public transactions from these borrowers are scarce, this is not to say that they are not active. BNG's Van Dooren explained that borrowing in 10-year plus maturities had been growing rapidly. Thus, while in 2004 out of the €14.9bn borrowed, 17% had been in 10-years or longer tenors, and 11% in 20-years or longer, this year out of the €8.7bn already raised, 25% had been in longer-dated maturities. He noted that BNG had been active in the US dollar, euro, Japanese yen and Canadian dollar market in 12 to 29-years.

"These private placements in 15-years or longer offer us sub-Euribor levels, which is not the case for a 10-year benchmark. As they are based on reverse inquiries, they offer competitive funding."

This is not to say that there would not be interest for these kind of securities. "KfW could do a 50-year if they wanted to, and I have no doubt that interest would be very healthy," noted ABN's den Hoedt.

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