Non-Core Currency Bond House
Looking to the future: While the Australian dollar is increasingly important for international issuers, TD is leaving no stone unturned as it looks to the future. As well as occupying a leading role in the Aussie market, the bank has prospered in a variety of transactions and a much wider range of currencies. TD Securities is IFR’s Non-Core Currency Bond House of the Year.
The role played by the non-core markets in international financing continued to rise in 2010, helped by the aversion to historically low interest rates in the core currencies. Western economies have continued to respond to the need to stimulate economic recovery by pursuing a policy of maintaining historically low interest rates.
Indeed, for Europe’s largest borrower and IFR’s SSAR Issuer of the Year, KfW, Australian dollar issuance surpassed the volume of sterling financing it completed in 2010. The bank pursued a strategy centred on developing the non-core markets.
Paul Eustace, head of syndicate at TD Securities, said that 2010 “was the year in which the peripheral markets went mainstream [as] investors realised they needed to diversify away from traditional currencies”.
TD’s objectives were furthered by the desire of issuers to diversify their investor base at a time when access to core markets has fluctuated. Non-core supply often carries the additional attraction of offering funding at more competitive levels. Although 2010 saw a number of issuing houses increasing their non-core profile, TD maintained a leading edge in those markets, which were the most active sources of funding – particularly for the SSA issuers that dominate the non-core landscape.
Australian dollars looked likely to remain one of the focal points of non-core issuance from the very beginning of the year. Investors were focused on the high yields it promised, in conjunction with the potential upside of currency appreciation.
“The Australian market has continued to grow, and partly as a result of this it has started to take on many of the characteristics of more developed markets with the dominant issuers demanding competitive pricing from a much wider range of underwriting banks, as well as assessing [banks’] commitment to the secondary market,” said Alf Constanzo, head of origination and syndication for Europe & Asia-Pacific at TD.
Of all the currency sectors that have benefited from investor diversification away from core market supply, the Australian dollar stands out as offering many core market attributes. The total debt raised was more than A$54bn in the awards period, of which TD was the lead manager of just over A$11bn. That gave it top spot on the underwriting league tables, with no fewer than 98 issues to its credit.
One of the largest deals TD was involved with was the A$1bn August 2020 trade for the EIB, which was subsequently increased by A$600m in early September. This was the issuer’s eighth Kangaroo benchmark deal and the EIB’s first of 2010. It was originally planned as a A$500m trade and carried price guidance of BBSW plus 70bp area. After attracting more than A$1bn of interest from 30 accounts it was increased in size.
“The transaction was successfully priced despite volatility in the underlying market with asset managers dominating the distribution at 61%, followed by banks 23%, official institutions 15% and insurance companies 1%. About 40% of the issue was sold to offshore accounts,” said Eustace.
The IBRD also raised A$1.5bn with a five-year deal co-lead by TD in February, while the bank helped KfW upsize its 6.25% December 2019 issue to A$2.5bn in total before the summer started. The original A$300m deal sold in late November 2009 has been tapped five times to get it to its current size. TD has been involved in the pricing and sale of all its component tranches.
No place like home
The low interest rates and limited scope for currency appreciation in the Canadian dollar market has led to limited issuance, though TD maintained leadership in the domestic currency. Excluding the large deals completed by Canada Housing Trust, TD topped the lead management table with just over C$7bn of deals done in either Maple or Eurobond format. That comprised more than 30 individual transactions.
In terms of internationally recognised names with access to many currency markets for issuance, TD was involved in Goldman Sachs’ C$500m five-year deal, BMW’s C$750m three-year trade – its first in the currency – and a similar C$550m deal for Volkswagen, which was four times oversubscribed.
TD was involved in nearly C$5.5bn of Maple issuance, and some C$1.6bn of Eurobond supply.
“Issuers continue to look at the Canadian market as a way to diversify funding sources,” said Constanzo. “In previous years investors were willing to pay for diversification and issuers were able to access funding at levels not achievable in core markets. Nowadays Canadian investors are only willing to buy Maple credits when they are priced in a global context, typically by reference to the Yankee market. And in a reversal of fortunes, issuers are now placing a much higher value on diversification of funding and therefore are willing to issue Maples at the required levels.”
The demand for the smallest of the dollar currencies was limited, particularly in comparison with the Australian dollar market. Traditionally, New Zealand dollar new issuance attracted offshore attention when swap spreads were wide – providing an incentive to switch into Triple A credit product – and when outright rates were higher than Australia.
This year, both swap spreads and outright yields have on average traded around 60bp through their Australian equivalents. However, despite the weaker backdrop TD has performed. Rabobank’s NZ$225m deal is worthy of note.
As the year progressed and the outlook for Europe in particular became less certain, investors looked in many different directions to maximise returns. Scandinavian currencies were highly sought after, benefiting supply in the Norwegian krone and Swedish krona markets. These are two other areas in which TD has a foothold: it is ranked second place in Norwegian krone, although the Swedish krona market remains a stronghold of the domestic banks.
Norwegian krone supply continued to offer diversification away from core Europe. TD completed almost NKr13bn of financing, consisting of about 45 debt transactions. It was on the top line for the World Bank’s first Norwegian krone deal since 2002, a transaction that became the market’s five-year benchmark trade.
The NKr2.5bn April 2015 3.375% deal, which was subsequently increased to NKr3bn, was well supported by US and Japanese institutional investors, with more than 20 accounts in the final book.
Nestle provided the largest sole-led transaction, with massive demand seen from Swiss investors, which accounted for some 75% of the final distribution for the NKr1.25bn 2.5% June 2014 issue. The bonds tightened by about 10bp after pricing as a result of strong follow-through demand.
Of note in the Swedish market was a SKr3bn two-year deal for Export Development Canada, which provided a US asset manager with a means of diversifying away from the underlying government debt market.
Best of the rest
Other commodity-linked currencies such as the Brazilian Real, South African rand and the traditionally high-yielding Russian rouble and Turkish lira have figured strongly in this year’s non-core supply.
TD was a top five house in terms of South African rand issuance, although activity in the currency was dominated by Uridashi supply targeted at the Japanese investor base.
TD has also continued to offer its expertise in less liquid markets, including the Mexican peso and the Indonesian rupiah. In the former, TD continued to increase the liquidity of the World Bank’s Ps3.6bn 6.5% September 2013 issue. The latter has benefited from strong economic fundamentals and TD has been involved in almost half of the rupiah Eurobonds sold during 2010.
For the future, TD hopes to extend its already impressive reach as other regions develop and the attractiveness of their currencies start to lure the international investor base.
TD has already sold debt denominated in Philippines peso and South Korean Won, as well as looking for supply opportunities in Malaysian ringgit and Indian rupees for issuers such as the EIB, IFC and the IBRD.
Investors will continue to look for the security of familiar Triple A issuers in a format of investments that will maximise returns based on potential currency gains, and TD will aim to sate that appetite.
Mike Winfield
