Supranational/Sovereign/Agency/Regional Issuer
Size no problem: The challenge for large Supranational/Sovereign/Agency/Regional issuers in 2010 has been to maintain enough flexibility to use the often fleeting windows of opportunity to achieve their funding requirements. KfW raised €75bn of funding and always led the market by example, to become IFR’s SSAR Issuer of the Year.
In 2010 KfW, the largest SSA issuer, was able to issue in all the benchmark maturities in both the US dollar and euro-denominated markets. Uniquely, it was able to access the 10-year US dollar market on two occasions, both of which resulted in US$4bn deals.
KfW continues to adopt a three-pillared approach to funding: benchmark supply; other large public deals (including structured debt); and private placements. The Triple A issuer operates across the maturity spectrum and in all currencies – this year it has priced about 300 individual trades in a total of 17 different currencies, with Australian dollars the third largest currency of issuance after US dollars and euros.
Apart from sterling, traditionally the third main currency of supply, the trend to diversification has this year favoured both the Norwegian krone and Swedish krona markets.
“KfW is the only issuer in the world that each year consistently updates its three to 10-year euro and US dollar curves,” said PJ Bye, head of public sector syndicate at HSBC. “This strategic approach may sometimes requires issuing in difficult markets but the liquidity benefits are enormous and investors have rewarded the approach with tighter and tighter trading levels versus both swaps and government securities.”
The ongoing challenge for KfW, and all other large issuers, has been to raise huge sums at a time of high volatility, with rapidly changing political, economic and monetary policy variables. A firm believer in its strategy, which has proven highly successful over the years, KfW has navigated significant political and economic upheavals – and made it look easy. It achieved its €75bn funding target, as it did in 2009 when it borrowed €74bn, through a combination of funding in all sectors of the market.
The agency, which operates with the comfort of the guarantee of Germany, Europe’s strongest sovereign, always looks to act decisively when market conditions present opportunities in any of the currency markets in which it operates. It also seeks to reward investors with transactions that offer the potential to outperform.
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 it had again reopened the 10-year US dollar market – as it had in early summer 2009, when the issuer sold a US$3bn Global deal. This time, the issue size was set at US$4bn, making it KfW’s largest 10-year to-date. The final pricing was at the tighter end of the mid-swaps plus 28bp–30bp range.
By September, when KfW returned to the US dollar sector for its second 10-year dollar Global of the year, a US$4bn 2.75% issue, it had cemented its position as Europe’s foremost provider of long-dated SSA benchmark issuance. KfW was the first issuer to respond to the increase in investor demand for duration after a pronounced decline in US Treasury yields coupled with curve flattening.
Asia led the bookbuilding. The initial guidance was set at the mid-swaps plus 35bp area compared with the outstanding January 2020 issue, which was bid around plus 33bp. This was revised to mid-swaps plus 34bp−35bp after early interest amounted to US$4.5bn and before the US$4bn trade was priced at the tight end of guidance based on a final book of US$5.2bn.
Although this offered only a modest funding advantage compared with the cost of funding in KfW’s home currency, there was an estimated 30bp benefit through swapping the proceeds back to euros.
By February, 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 US$1.25bn Eurodollar trade with the same tenor in May.
Another three-year deal in July was the issuer’s largest US dollar trade of the year: the US$5bn July 2013 deal attracted a book in excess of US$8bn, enabling the pricing to be set at mid-swaps plus 18bp, compared with original guidance at plus 20bp area.
In its last foray into the US dollar market in October, the ongoing Asian demand for assets saw KfW selling US$4bn of five-year paper (of which 42% was placed in the region). The deal was priced at mid-swaps less 1bp, or 25bp over US Treasuries, and within days was 5bp tighter – remarkable for an issuer that regularly appears in the market.
Perhaps outstripping that performance was the tightening that investors in its autumn 10-year enjoyed: the issue was quoted in the high single digits over mid-swaps by early November, or around 25bp tighter than when it was sold.
And in euros
In the euro market, KfW made issuance in the 10-year sector its first priority, as it had in previous years, raising €5bn with a deal priced at mid-swaps plus 18bp in January. It also raised €5bn with a five-year issue at mid-swaps flat, after attracting a final order book in excess of €6bn in the spring.
The economics of issuing in US dollars has remained more attractive than financing in euros because of the benefit available through the euro/US dollar basis swap and the three/sixes swap, but KfW has remained present in all markets.
When it 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 theoretically 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, which was priced at 5bp through three-month Euribor in February, and a €200m three-year Eonia-based trade at plus 17.5bp the following month equivalent to a Euribor spread of about minus 11bp. KfW went on to sell three and seven-year deals in June and August, the latter helping to establish the seven-year sector as a benchmark maturity.
The €5bn 2.25% September 2017 new benchmark carried initial guidance at the mid-swaps plus 2bp area for a transaction that neatly filled a gap in KfW’s 2010 euro benchmark curve. It came after the issuer had already completed its 10-year deal in January, a five-year in April and a three-year trade in June, each for €5bn.
At the time, outstanding KfW euro deals were trading well inside swaps at the shorter end of the curve, in fact – very conveniently – all the way out to around the seven-year point. Its 2018 issues – also high-coupon – were in the low single-digits over mid-swaps.
“The bookbuilding was driven by European real money and Asian central bank demand, and the final size was in excess of €5.3bn made up of 200 accounts,” said Alexandra Basirov, co-head of SSA DCM at BNP Paribas. The deal was priced in line with the original guidance, at mid-swaps plus 2bp, or at 39.3bp over the 4.25% July 2017 Bund.
In sterling, traditionally the third pillar of KfW’s core issuance, supply has diminished this year, although the £600m December 2014 deal sold in January was the largest sterling SSA trade of 2010 after it was tapped for £200m later in the year. The deal is notable for the rarity of new sterling bonds of any significant size from high-rated agency borrowers. The majority of supply has constituted taps of existing issues.
With fewer opportunities for sterling supply this year, issuance in Australian dollars has outstripped the £2.5bn of sterling funding KfW has completed. Of a total A$7.5bn of financing, A$6.5bn was sold in Kangaroo format, including a new 10-year Kangaroo bond issue in August that raised A$750m (US$685m) at 103.5bp over the 2020 Australian government bond. The margin was exactly in line with indicative pricing of 67bp over the semi-quarterly swap.
The offer was increased from a minimum size of A$500m and benefited from a surge in overseas demand for Australian dollar-denominated debt and favourable swap rates, making it cheaper for foreign borrowers to raise money in this market.
This was the fourth 10-year Kangaroo bond sold in 2010: issuers have been keen to spread out their maturity profiles, which in general have tended to be concentrated at the shorter end of the curve in many currencies. In all the currencies in which KfW raises debt the message it sends is the same: it is a transparent and reliable issuer that, in the majority of cases, offers investors assets that are fairly priced and promise good secondary market performances.
Mike Winfield
