Waiting for a slipstream

To view the digital version of this report, please click here.The policy bank has been instrumental to South Korea’s economic growth since its inception in 1976 as a government-owned trade finance lender, not only via its lending but also, crucially in debt capital market terms, for providing benchmarking curve points to the universe of Korean issuers of offshore debt.Kexim raised the bar high in terms of its offshore debt issuance activity, by targeting in January a mammoth US$11bn to be raised offshore, or US$700m more than it raised in 2011 and a record total for the lender. Of this, US$4.5bn was earmarked for US dollar issuance, and with typical panache, Kexim managed to achieve half of this total, with a US$2.25bn dual tranche Global. The transaction in early January defied expectations that the offshore markets would be challenging at the start of the year, and possibly shut for a prolonged period. Moreover, the Kexim trade was the largest ever from an Asian quasi-sovereign.The five and 10-year transaction had echoes of the trailblazing dollar Global which Kexim brought in January 2009 at the height of the financial crisis when, as was the case in January, many expected a prolonged market closure.This year’s deal helped propel what has been a record issuance period for the Asia G3 markets, with US$65.8bn-equivalent printing so far this year, according to Thomson Reuters data. Korean issuers account for US$11.7bn of that total, or 17.6%, versus the US$10.9bn which printed in the same period last year.The clear pricing points on the on-the-run five and 10-year Kexim curve have helped provide pricing clarity for the FIG and corporate names which printed over the period.“Given our status as [South] Korea’s largest issuer in the offshore debt markets we see it as our role to provide benchmarking for other Korean issuers. At the same time we always respect the markets and aim to leave something on the table for investors as well as trying not to crowd out smaller Korean issuers from the markets.“In everything we do we are benchmarking against US dollar Libor and if we can achieve our target via issuance in the non-core currencies via the MTN route we will do so. For us it’s all about tenor, pricing to our targets and timing,” said Choi Sung Hwan, head of offshore funding at Kexim in Seoul.Looking EastKexim’s leadership role also extends into opening new markets, and in mid-May a blowout ¥100bn (US$1.25bn) three-tranche Samurai showed the opportunity in Japan. The biggest yen bond from an Asian issuer other than the Asian Development Bank created an auspicious backdrop for other South Korean companies to follow.“In everything we do we are benchmarking against US dollar Libor and if we can achieve our target via issuance in the non-core currencies through the MTN route we will do so. For us it’s all about tenor, pricing to our targets and timing”Kexim’s blockbuster Samurai represented the policy bank’s first wholesale offering this year in the yen debt markets. More significantly, the advantageous yen/US dollar basis swap at the short end of the yield curve meant that Kexim was able to print inside its implied US dollar curve at two and three years. At five years, it priced at a small premium to its implied dollar levels, but nevertheless the trade won wide praise among bankers for its canny take on the basis swap as well as for spreading the net further afield once the dollar market had firmly shut.The policy bank has also set the bar high for South Korean corporate treasurers shopping around for alternative funding sources by issuing in a wide variety of non-core markets, where the basis swap enables it to meet its funding targets at the five-year duration point or less. JP Morgan, for instance, has arranged 20 non-core deals for Kexim this year totalling around US$1bn-equivalent, with the most recent trades comprising South African rand and Russian roubles at five years.Over the past three years, Kexim has also printed in Tur

To view the digital version of this report, please click here.Although the mortgage finance company is consistently among the world’s largest issuers of debt securities – it is in the market less frequently these days. That as much as anything has helped ratchet up demand.“There is just a huge demand for Treasury-like bonds,” said Ralph Axel, analyst at Bank of America Merrill Lynch in New York.The volatility in Europe and the fact that a number of the sovereign, supranational and agency issuers are no longer as highly rated as they used to be has driven investors towards US agency markets, said one dealer.He defined the issuance of Fannie benchmark securities as boring, but noted that for many investors boring was sexy. In the past year fund managers have boosted their allocations to agency debt, as have banks and corporations. They are taking up the slack as central banks pull back. Fannie priced its latest note, a US$4bn three-year benchmark note on May 17, at Treasuries plus 21bp. The agency is achieving historically low spreads as it charts a course to becoming a safe and sound entity. In February the agency priced a benchmark note at Treasuries plus 15.5bp approaching Treasuries plus 13bp it achieved in 2010 on a two-year note.Although Fannie is not considered opportunistic, it is driven to find the lowest possible funding costs, which is achieved by reaching out to a large, diverse set of investors across the globe, said another dealer.Still, it faces the same hurdles that any other issuer faces.“Like any other trade, sometimes the market will collapse when you are in the middle of marketing — in that respect they face the same hurdles that any other issuer faces, but I don’t think we’ve fallen short of expectations since the US turned things around,” the dealer said. That and the programmes have become smaller.  Barclays, UBS and BNP Paribas are the top underwriters for Fannie.The agency had been issuing benchmark notes for 10-years heading into 2008 when the housing market abruptly collapsed taking the US economy with it. Then US Treasury Secretary Henry Paulson seized Fannie and its twin Freddie Mac putting both in conservatorship. Until then, both issued debt under an implied guarantee that the US government would back-stop the debt. When Treasury put the agencies under conservatorship the implicit guarantee became more explicit.Spreads blew out in 2008 and 2009 but have come back since then as investors embraced new guarantees from Treasury.“There was a great effort in 2008 to convince investors that Treasury standing behind the agencies was an effective guarantee instead of a quasi guarantee,” said another dealer.Foreign investors backed away from the names initially, most notably China, the dealer said. Since then many investors have preferred debt of Ginnie Mae, which enjoys an explicit guarantee backed by the full faith and credit of the US government.Changing the mixStill, the flight to quality has meant increased demand for Fannie. But it comes as the agency is shrinking its balance sheet and its need for funding.Supply for Fannie, Freddie and Home Loan were down US$180bn last year. The percentage decline in the first five months of this year has been as great as the entire decline in 2011. As a result spreads have tightened.  The make-up of the debt has also changed.Last year, five-year bullets made up 30% of its issuance. In the first five months of 2012, five and three-year bullets each made up 50% of the issuance. The two-year, which made up 19% of the bullet issuance in 2011, has disappeared. Freddie Mac’s move towards longer dated debt has been even more dramatic with the agency issuing its first 10-year since 2009. Freddie, however, has a better mix, giving investors two and three-year notes as well.In addition to extending maturities, the agencies have moved away from floating rate securities, which accounted for 36% of issuance in 2011 down to just 10% so far this year.Fannie had US$275.6bn in benchm

To view the digital version of this report, please click here.Amid such an uncertain market and given the strong demand for all kinds of bonds in the first quarter, any issuer that considers itself savvy would have met most of its funding needs in the beginning of the year, when investors were still upbeat. So it is no surprise that the ADB has already raised two-thirds of what it will require this year from the dollar market. Add in some timely pre-funding done last year and the ADB has pocketed some US$10bn of the US$14bn goal it has set for itself.Despite having front-ended its funding, the supranational does not seem to be suffering from lack of demand for its dollar paper. On the contrary, as the eurozone uncertainty continues to take its toll, investors are flocking to the Asian multilateral’s bonds. In the past few years, the ADB has seen its range of investors in the dollar market widen and its traditional investor base requesting ever larger amounts of bonds.It is only reasonable that this would happen. With investors looking for safe-havens to park their money and the US Treasury lot overcrowded, almost any supranational that sells dollar debt is received by a cheering crowd. Within the multilateral team, the ADB is a favourite given that it is backed by countries that comprise the region which now drives global GDP growth.Matching liabilitiesThe problem for the ADB now may be less about demand than for its own debt requirements. The conservative lender tries to match its liabilities to its assets as much as possible. Given that its loans often have shorter tenors and that it lends on a spread over six-month Libor basis, the issuer often seeks shorter tenors that can be economically swapped into floating rate.“ADB considers long-dated opportunities as part of its diversification strategy but takes into account the steepness of the curve given that ADB is essentially a cost pass-through institution,” said Maria A Lomotan, head of major currency funding at the ADB. She says ADB has issued a seven-year in the US dollar market in the past three years, as levels for a 10-year US dollar bond issue have been relatively expensiveThis year the ADB has already tapped dollars for US$5.25bn on the three-year, five-year and seven-year points of its curve. So revisiting the dollar market would make more sense on a longer tenor, as a 10-year, unless it wants to cram too much of its maturities in a single year and increase its refinancing risk.Besides, the bank also tries to diversify its funding base. In 2011, roughly half of its funding came from the major currencies markets with the other half coming from a range of other currencies.That limitation is almost frustrating for bankers and investors, which would love to see the ADB printing even more in dollars. From the perspective of nominal yields the bank could achieve very tight levels. Its bonds currently trade at a spread close to 10bp over US Treasuries, emphasising how strong demand for ADB paper has been. This means a new 10-year bond could arguably be sold with a 1.5% coupon, a dream situation for most banks.“ADB considers long-dated opportunities as part of its diversification strategy but takes into account the steepness of the curve given that it is essentially a cost pass-through institution”The ADB continues to undertake issuances in other currencies to deepen and broaden its investor base. It has been very active in Australia, for instance, and in the past two years, the Australian dollar market has provided the second largest volume to ADB’s borrowing program in terms of public issuances after the US dollar. Lomotan said that Australia’s importance in the funding base of the bank has been in terms of both investor depth and cost-efficient longer-dated opportunities.“While the basis is a key factor, ADB’s current curve in Australia does show that there has been strategic commitment to respond to genuine investor demand,” she said.Arbitrage, however, rules the decisio

To view the digital version of this report, please click here.For much of the latter part of 2011 the market for European banks was closed, embroiled in the uncertainty of the sovereign debt crisis that was ravaging Europe, but the Long Term Refinancing Operation had forced the door open early this year by satisfying investors that the European Central Bank was not about to let the banking system collapse. Yet the uncertainty of the time defined SG’s approach to its financing activities. “We had a strategy to use every window that was available,” said Bertrand Badre, group CFO for the bank.“We were in all the markets, for example the Dim Sum bond we issued in April was largely symbolic.”That deal, which raised Rmb500m (US$80m) via a three-year offshore renminbi bond, made SG the first foreign bank to remit the proceeds of a Dim Sum deal onshore, with SG’s Shanghai subsidiary the ultimate beneficiary, supporting lease financing for SMEs in China. In terms of the contribution to the funding of the bank as a whole the deal is insignificant, but it demonstrates the bank’s strategy of tapping any available source, no matter how small. “The backbone of the bank’s refinancing strategy was its covered bond deals at the start of the year,” said Badre. In January, Societe Generale Home Loan SFH completed the first covered bond deal of 2012, selling a 10-year covered bond in France that attracted €1.5bn of orders from 80 accounts. The €1.25bn deal was priced at mid-swaps plus 170bp, with ABN AMRO, BayernLB, Credit Agricole, Societe Generale itself, UBS and UniCredit working on the deal. Ralf Grossmann, head of covered bond origination at Societe Generale, said at the time that the deal had been inspired by the successes of similar French 10 year transactions from CRH and Credit Agricole. The deal added a second point to its curve, following its inaugural €1.5bn five-year deal, priced last May, with German and Austrian accounts dominating the book, and insurance companies and pension funds from an investor-type perspective. The deal was followed by another covered bond in March, which was characterised by its cautious approach as it sold the seven-year Obligations de Financement de l’Habitat at mid-swaps plus 107bp, some 13bp inside initial price thoughts. With Banca IMI, Barclays, Danske, Deutsche Bank, Natixis and Societe Generale lead managing the deal, it attracted €5.5bn of orders, but the bank spent the day defending itself from accusations it had mispriced the deal. Whether the deal could have been as successful with more aggressive pricing is debatable, but banks on the deal defended their actions at the time, citing market volatility that could have undermined the deal at pricier levels. “It’s always easy to back-trade. Arguably, the covered bond market is well-supported, but we should acknowledge that overall the market situation is not ’normal’ at all,” said one banker involved in the transaction. SG was unrepentant. “Our pricing strategy has been prudent considering volatile market conditions,” said Badre. “Overall, our pricing on covered bonds has been consistent with that of our peers in relative terms.” German and Austrian accounts, and asset managers, again dominated the book.Between the covered bond deals the bank had priced its first dual-tranche senior deal of the period of the past year up to May 1 2012 – this deal coming at rather punchy levels. The five-year tranche offered a new-issue premium of about 10bp, compared with the 20bp–25bp paid by Intesa Sanpaolo the day before with the same maturity.This time SG had the advantage of having no specific price target, said Eric Cherpion, global head of DCM syndicate at SG. “By not having any pressure on the size to achieve, we were able to be more aggressive for the pricing.” The bank self-leading the deal also helped contribute to raising investor interest.The €1bn 18-month floater attracted 79 accounts for a total book size of just over €1.5bn, priced at three-month Euri

To view the digital version of this report, please click here.With pent-up demand due to a lack of issuance and investors looking to put money to work in safe top-tier names, America Movil is expected to be able to issue virtually when and what it likes across a range of markets.“A well-known issuer like America Movil could even issue in this climate as investors would buy this as a flight to quality,” said Eric Ollom, a credit analyst at Citigroup.This year it became the first issuer from Latin America to do an offshore renminbi deal. Last year it priced the first corporate yen deal not backed by a JBIC from a LatAm issuer in more than 10 years. The company also re-opened the Swiss franc market, and issued in dollars and euros despite some choppy conditions.    In the period between May 1 2011 and April 30 2012 the telecoms giant borrowed US$9.62bn across eight issues.“Regarding funding this year we will do something similar to last year, doing smaller transactions in several markets,” the company’s CFO Carlos Garcia Moreno told IFR.While the company’s stock was recently oversold, according to equity analysts, credit analysts still maintain that America Movil is a rock solid credit. “The bonds are very stable and they are looking more attractive as they are cheapening out versus comparables like the United Mexican States and US telecoms company AT&T,” said Ollom.America Movil’s 2021 bonds were trading 34bp wide of AT&T’s 2041 bonds close to the end of May, with the difference just 13bp in March. From February to May the firm’s bonds were on average 20bp wider than AT&T. “It has been trading cheap in relative terms considering both companies have the same rating and are of a similar size,” added Ollom.The main focus for analysts and investors is the Mexican telecom giant’s €2.6bn (US$3.4bn) bid for an up to 28% stake in Dutch phone company Royal KPN. It already holds a 4.8% in KPN and is offering €8 per share in cash for the additional stake.“The clear challenge is whether they will do the KPN transaction, but if they manage to pull it off a company like America Movil could issue a bond to take out this amount easily,” said Ollom. “We are not too concerned about how this would affect America Movil from a credit perspective,” he added.America Movil’s market capitalisation is US$90bn and it held Ps60.3bn (US$4.4bn) in cash as of March 31 2012. The company also has a US$4bn equivalent revolving credit facility split between dollars and euros.Analysts say the buying up of assets when a region is in trouble is in line with billionaire owner Carlos Slim’s usual strategy when making acquisitions. Slim purchased assets in Mexico at the start of the 1980s when the country experienced its own financial crisis. The telecoms tycoon also purchased assets in Brazil and Argentina when they were undergoing crises in the early 2000s.Getting a foothold in EuropeAmerica Movil has said for a while it is looking to buy assets in Italy, Spain and Eastern Europe – this would be the company’s biggest investment outside of LatAm. Moody’s said the bid for KPN was credit negative as the business was outside America Movil’s core region of LatAm.“It increases America Movil’s exposure to Europe, a highly competitive region that has been under pressure due to lower purchasing power in recent years,” the report stated. The 28% America Movil is looking to buy is below the 30% threshold that is the trigger for a mandatory takeover of the rest of the company’s shares, though analysts say America Movil would eventually look to take full control of KPN.Garcia Moreno sees the possible acquisition as a foothold into Europe at a time when he considers valuations in the telecoms sector as being attractive, when looking at them from a long-term perspective. “KPN is in a very strong set of countries that are likely to be the first in Europe to go back to normal,” he said.“We still need a better understanding of the market dynamics and regulation and we can

To view the digital version of this report, please click here.The ever-changing creditworthiness of Southern Europe has become a global obsession, with concern reaching far beyond the financial community itself. Greece led the march towards financial oblivion in 2011, with Portugal and Ireland playing supporting roles. In recent months, however, Italy and Spain became more pressing concerns, the scale of carnage likely to accompany a default by one of them upping the ante in the European sovereign debt crisis.  This cloud of uncertainty hung over the Italian Republic throughout the 12-month period, but there were significant developments that had given grounds for much optimism. The defenestration of Silvio Berlusconi and the elevation of Mario Monti to prime minister put Italy in a safe pair of hands and certainly calmed market jitters. However, no government was immune to the effects of the crisis in Europe. A six-month gap between issues in September 2011 and March 2012 came while the broader sovereign market was largely shut to credits facing such uncertainty.The period had started in difficult circumstances, with S&P placing Italy’s A+ rating on negative watch in May. The move had implications for every deal that followed, reinforcing the link between the troubled PIG states and Italy, a country with less acute problems but with such a vast bond market, the idea of bailing it out seemed incomprehensible. The market’s resolve was first tested in June 2011, the sovereign mandating Credit Agricole, ING, JP Morgan, MPS Capital Services and UBS for a new syndicated 15-year BTPei. A new issue premium of no more than 2bp, as well as the €3bn size, were seen as a good result in the circumstances, with pricing set at plus 27bp.The timing of the deal was vital, the sovereign having identified a window of relative stability in which to execute the trade, said Maria Cannata, director-general of the Italian public debt office. This enabled the sovereign to price the deal close to what she judged to be fair value, while many other Southern European sovereigns had to pay inflated sums to push their deals through. In September conditions permitted Italy to sell €3.9bn for a September 2016 issue, and €2.6bn of August 2018s, February 2020s and September 2020 BTPs. In doing so Italy comfortably met its funding targets, although demand was down slightly on its previous transactions in those tenors. Sentiment was certainly being propped up by the ECB’s Securities Market Programme, which saw the central bank buy €13.96bn of securities in the period leading up to the deal. Doing the unthinkableSo far did sentiment in the European sovereign market sink in late 2011 that further issuance by Italy was unthinkable. However, 2012 started brightly, with various issuers coming to market and finding the mood much changed in the new year. Italy was back in March, turning to the retail sector for a four-year inflation-linked offering. The sovereign had to be a little creative to ensure appetite, linking the notes to Italian inflation figures, instead of those for the eurozone as a whole, and this certainly helped stimulate demand. The issue raised €7.291bn, with initial rumours of a €1.5bn deal swept aside inside the first morning of marketing with orders for €1bn coming within hours. Some additional institutional demand also inflated the figure. Meanwhile, Italy’s sovereign borrowing activity was also boosted by Cassa Depositi e Prestiti, the 70% state-owned bank that inherits the sovereign’s rating. CDP had some success in the market, with two issues in the year, in June 2011 and January 2012, the former being its first deal in the public market since a three-year transaction in 2009, coming shortly after its rating had been put on negative outlook in line with its sovereign parent. “We used a combination of French government-guaranteed issues as well as covered bond levels and were able to price the deal at around a 35bp premium to BTP asset-swap

To view the digital version of this report, please click here.Glencore successfully completed US$27bn of loans within 12 months, proving that commodity firms, with their global reach and large ancillary wallets have remained relatively immune to the eurozone sovereign debt crisis.The Swiss trading firm’s US$12.46bn loan refinancing which was completed in May provided a rare first-half highlight for the European syndicated loan market. The picture looked bleak as European loan volumes slipped to the lowest levels seen for more than a decade, while market sentiment remained at rock bottom, hit by the interminable sovereign debt crisis and scarcity of M&A financing.Despite the economic gloom, the success of Glencore’s loan proved there was market appetite for names that could provide appropriate rewards to lenders.Glencore’s refinancing comprised a new US$4.435bn 14-month revolving credit facility with a 10-month term-out option and 10-month extension option; and a one-year extension to US$8.03bn of an existing US$8.37bn revolver, pushing the maturity out to May 2015.The new revolver, which refinanced Glencore’s US$3.535bn 364-day revolver due to mature in May 2012, was split between a US$3.725bn tranche, syndicated in Europe and a US$710m tranche syndicated in Asia. The revolver pays a margin of 125bp – an increase of 15bp on the loan it replaced – and a commitment fee of 35% of the applicable margin on undrawn funds. There was also a 50bp term-out fee on the loan.Banks on the US$8.03bn extension of a financing that was agreed in May last year were offered an extension fee of 45bp on top of the existing 110bp margin.Financial covenants on the financing included a current ratio of 1.1, a minimum net consolidated working capital of US$750m, and a maximum long-term debt to consolidated tangible net worth of 120%.AppetiteThe refinancing was launched in March for US$10bn via a group of 21 bookrunning mandated lead arrangers: ABN AMRO, BNP Paribas, Santander, Bank of America Merrill Lynch, Barclays, Citigroup, Commerzbank, Credit Agricole, Credit Suisse, DBS, Deutsche Bank, HSBC, ING, JP Morgan, Lloyds, Morgan Stanley, Rabobank, Royal Bank of Scotland, Societe Generale, Standard Chartered and UBS.The large group of top level banks, each committing US$350m to the deal, meant there was little pressure when it came to general syndication, anything raised would be used to either increase the loan or scale back the bookrunners.Global co-ordinating banks ABN AMRO, Citigroup, Lloyds, RBS and StanChart held presentations in London on March 28 and in Singapore on March 29.Lenders on the new revolving credit facility were offered fees of 50bp for commitments of US$100m or more and 45bp for minimum commitments of US$15m.The deal closed oversubscribed after receiving commitments from a total of 91 banks and was subsequently increased to US$12.8bn. Banks were not put off by the squeeze on dollar funding that had proved difficult on other deals. Lenders were eager to commit to the deal either to receive more generous margins than other BBB/Baa2 rated European names offered or to tap into the rich vein of ancillary business.“Ample funding remains available, in size, for companies such as Glencore, which are conservatively financed and have long and strong credit track records and banking relationships,” Steven Kalmin, chief financial officer of Glencore said.Merger financingThe incredible depth of bank appetite for the Glencore name was shown as the company simultaneously signed a 364-day, US$3.1bn syndicated loan backing its US$37bn merger with miner Xstrata. The financing, which included a one-year extension option, raised US$11bn in syndication from 31 banks, which saw a scale-back in commitments of more than 70%. Again, if lenders were averse to committing US dollars, they were not showing it.The loan was designed to show regulators that Glencore had enough working capital to fund the merger and the company was not expected drawdown.The fina

To view the digital version of this report, please click here.If anything, investor respect for the market, and the bureaucrats at the US Debt Management Office that administer the issuance programme has increased over the past few years, given the significant challenge of operating amid the leadership vacuum on Capitol Hill.“The US Treasury market remains the most liquid bond market in the world despite QE, Operation Twist and competition from other large debtor countries. To that extent, you conclude that the US Treasury and Debt Management Office are doing a good job. The transparency of issuance programmes and consultation with the market has played a significant role in this success and also been copied in other markets like the UK. The US continues to stand as a model for other countries debt issuance,” said Alan Wilde, head of fixed income and currency at Baring Asset Management, a London-based investment firm with US$48.6bn of assets under management.After four years of consecutive growth in net new issuance, the US was last year forced to apply the brakes as it ran headlong into its legal public debt limit during an unfortunate episode of partisan posturing, reducing its supply of marketable debt from US$8.4trn in 2010 to US$7.8trn in 2011, according to US Treasury data.Although Congress and the Obama Administration cobbled together a stop-gap by temporarily raising the limit by US$2trn from US$14.4trn to US$16.4trn, outstanding debt has grown by more than US$1trn to US$15.6trn since last summer. Indeed, Treasury only has headroom of US$744bn dollars before it reaches the limit again. With the government currently burning through about US$100bn of net new issuance a month, the US should reach the current limit just in time for November’s general election.It is unlikely, however, that Treasury investors will lose much sleep over the details of the compromise, Bill Gross’s public Federal austerity campaign notwithstanding. If recent history is anything to go by, fixed income investors are not immediately concerned by ratings agency downgrades to the US sovereign, nor by the prospect of further political inertia. Investors, for example, responded to last August’s S&P downgrade by buying more Treasuries, taking 10-year yields down 2bp to 2.54% while risk assets sold off. Clearly Treasuries retain their safe haven status, and the full faith and credit of Uncle Sam remains the global benchmark regardless of governance standards in Washington.With little change in the monetary and fiscal policy landscape since then and global investors preparing for the Grexit, Treasury yields across the curve remain at or around historical lows with much of the front-end firmly in negative territory. May’s five-year auction, for instance, printed US$35bn of new debt at a nominal rate of 0.748%, equivalent to a real return of –2.78%, the lowest rate on record for a Treasury auction.Treasuries have never been more in demand than they are right now. “Investors are paying the US to park their money with the US Treasury at unprecedented low rates. With inflation projected to be 3%, and the 10-year offering 1.7%, your real return is wiped out. Contrary to being put off by this, investors are willing to pay up and take whatever they can get their hands on,” said one trader.Federal Reserve Chairman Ben Bernanke’s rapacious appetite for US government debt makes the Fed the world’s largest holder of Treasury securities, with US$1.5trn in disclosed holdings, versus the US$1trn reportedly held by China. Since Operation Twist was launched in September 2011, the Fed has absorbed 100% of 30-year issuance, 75% of 10-year and 50% of seven-year auctions.The million-dollar questionTo the extent that easing techniques have made it more difficult, and expensive, for institutional investors to find US government bonds, it has succeeded in providing a floor for risk assets. But at what cost? If the Fed withdraws from Treasury markets, which at some point it m

To view the digital version of this report, please click here.Japan’s third-largest mobile phone operator raised more than ¥1.14trn (US$14.53bn) from May 1 2011 to April 30 2012, according to Thomson Reuters data. Yet its business delivered solid cashflows that have firmly cemented its present standing in the investment-grade universe; a stark contrast to the cash-strapped, high-yield credit it was in the post-Lehman days.Almost all of the debt is at the parent SoftBank, which has been raking in ratings upgrade after ratings upgrade during the interim. In November, Moody’s boosted the company to Baa3 and S&P followed in January 2012, lifting it to BBB, while Japanese ratings agency JCR promoted it to A in March this year. As far back as April 2011, the company also saw an opportunity to refinance part of the ¥1.45trn whole business securitisation done in 2006 for the acquisition of Vodafone’s Japanese business at lower rates, despite it not coming due until 2016.Acting through its subsidiary, SoftBank Mobile, it kicked off the refinancing process for the ¥745.5bn remaining share of the WBS and for another ¥200bn paid to buy back its own preferred shares from Vodafone, which had been completed at the end of 2010.Three months later, it signed a ¥550bn self-arranged three-year term loan. While smaller than the initially anticipated ¥1trn deal, it still was the third-largest syndicated loan for the Japanese fiscal year 2011, which ended in March 2012. Moreover, at the time, SoftBank locked in its lowest loan pricing rates.Although first priced at a margin of 112.5bp over the Tokyo interbank rate, based on the company’s Ba2/BB+ ratings, its upgrade to BBB– by S&P soon after ensuring a price stepped down to 90bp over.Thanks to this refinancing exercise, SoftBank was freely able to access cashflow from its mobile business, which generated 65% of consolidated Ebitda in fiscal 2010, according to S&P.That, in turn, firmly established its position as a well-established investment-grade credit and, in September, another ¥180bn one-year two-part revolver was rolled over.Akin to a bondAlso in September, SoftBank energised the yen market with the first ever public hybrid offering in Japan. The jumbo ¥200bn sale of 200,000 perpetual callable preferred shares issued through SFJ Capital, a wholly-owned Cayman Islands-incorporated subsidiary, was the latest stage of the refinancing of the complex Vodafone Japan acquisition.The perps, managed by bookrunner Mizuho and co-led by Deutsche Bank, were fixed at 2.04%, the lower end of 1.70%–2.70% guidance. Curiously, the deal was originated by the equity desk, but syndicated through the debt desk, akin to a bond. The issue was around 80% distributed to retail, with the remainder being placed with institutional investors.The main reason for choosing to finance through a perp was to avoid turning subsidiary BB Mobile preference shares, which are booked as minority interests under Japanese GAAP, into debt. For that privilege, SoftBank paid a premium on the deal, compared with the 1% coupon on a chunky ¥100bn five-year retail bond done earlier in June 2011.The preference shares can be called only in their entirety at par from May 22 2015. If uncalled, the dividend payment will step up by 100bp every year to a ceiling of 12%. That date was fixed following the recent four-year extension on the adoption of IFRS accounting rules, under which the preference shares would probably be booked as debt, not equity. But SoftBank’s plan is to finish paying off the acquisition of Vodafone Japan within four years.“Investors already have big exposure on SoftBank. They can’t keep eating that much more from one single name; but it still offers some spread. Another positive sign is it could bring its net debt to zero quickly if it wasn’t for the buybacks. So investors want to be part of these deals as they have money to put to work”As for the ¥100bn retail bond – only three months after the devastating earthquake

To view the digital version of this report, please click here.This year has seen the European Union more than double the average maturity of its benchmark issuance from last year. In volatile times, where some have sought solace at the short end of the curve, this could be seen as a risky strategy. But careful planning and a well-communicated strategy ensured investors were not only aware of what to expect but actively welcomed it.If there is one thing investors like – especially in uncertain and volatile markets – it is a borrower that communicates its intentions and presents a coherent plan.This is what the EU has done throughout this year and it has been rewarded with solid well-subscribed benchmark deals as a result.The stated intention was to extend its maturity profile and it set its stall out early in the year. It sold €3bn of 30-year paper on January 9 in an issue that more than doubled the length of its existing curve. The EU took advantage of a new ruling that superseded the previous one (which capped issuance at the 15-year mark) and which lent further support to sentiment following a three-year deal of the same size on January 5 from the eurozone’s rescue fund, the European Financial Stability Facility.The two issues helped to calm any new year nerves – it was notable that the EU’s choice of tenor marked the first SSA trade in that maturity since a €4bn bond for Belgium in April 2010.“Starting out with a 30-year sent out a strong statement,” said Daniel Koerhuis, senior borrowing manager at the EU. “Even so, some of our banks and peers doubted we could do it as it would have been the first 30-year syndication in the SSA sector since April 2010.”“The success of this deal should improve market sentiment, and this will help other SSA issuers access the market over the coming weeks,” said Robert Whichello, global co-head of syndicate at BNP Paribas at the time. BNP Paribas acted as lead manager on the transaction along with Barclays, Deutsche Bank and Goldman Sachs.Investors were obviously receptive to the approach, given that the order book had topped €4.5bn just over an hour after opening and reached €5.2bn by the time it was closed, with insurance companies and pension funds accounting for a significantly large chunk.This easily accommodated a €3bn transaction, which was larger than many had expected.“The issuer’s funding need for January was €3bn and with this deal it was covered in one single transaction,” said Torsten Elling, co-head of rates syndicate at Barclays. He added that the deal was a strong signal for Europe, especially as it priced 17.5bp through the 3.25% French OAT due April 2041.Naturally, this had an effect on the level of French investor participation, something that has been repeated in subsequent issues, although the magnitude of the order books the EU has attracted without their sponsorship demonstrates that it is well able to survive in their absence.On its next visit, for instance – a €3bn 20-year priced on February 27 through Citigroup, Deutsche Bank, DZ Bank, RBS and UBS – there was no French participation whatsoever. Even so, the order book topped that of the 30-year, breaking through €5.5bn.“The EU continues to cement itself on the very top rung of the SSA world,” said a syndicate official involved in the transaction. “It has now established a liquid curve across 10s, 20s and 30s and this deal demonstrates that the depth of demand persists.”Filling the gapIt was not long before it started filling in the gaps, mid-April saw it target the 26-year part of the curve.The transaction came shortly after the EU announced its intention to raise €4.5bn in maturities between seven and 30 years by the end of May. This itself followed a statement from the previous September which said it was aiming to increase the average weighted maturity of all loans to Portugal, but not to exceed 12.5 years. That meant that the latest transaction was capped at €1.8bn.The restricted size meant that lead managers Bar

To view the digital version of this report, please click here.The European convertible bond market had slipped into obscurity after a rush of issuance in the first years of the 21st century. The years 2001 and 2003 – where issuance was close to US$50bn – are a distant memory, but the first jumbo since the good old days, courtesy of Siemens provided a glimmer of hope for a brighter future.When Siemens returned to the equity-linked market after a nine-year absence it did so in style. The market had rapidly shrunk into something of an irrelevance and bankers faced an annual struggle for survival.Yet the market suddenly came alive as the German engineering business launched an offering of US$3bn bonds with warrants. The last equity-linked trade of that size came in 2003 – from the same issuer.The scale of the deal seemed to suit Siemens which was only in the market with three trades throughout the year to raise its US$8.5bn total – the other major move was a €4bn loan. So making sure the whole trade could be absorbed by the market was crucial.Split into two tranches of US$1.5bn, bonds were offered with tenors of 5-1/2 years and 7-1/2 years and each bond placed came with one euro-denominated warrant attached. The 2017s were launched with a coupon of 0.55%–1.05% and the 2019s of 1.15%–1.65%.Pricing for both came at the best terms for investors with coupons at the top end of the ranges and the warrant premium 37.5%, from guidance of 37.5%–42.5%. Based on guidance, the bond floor was around 92%–95%. One-month historic volume for the stock is around 27% and implied volume came in the low-to-mid 20s.Yet pricing was still punchy considering European convert bankers are out of practice with anything over US$1bn so could not be sure of the scale of demand for three times that amount of paper. Ultimately the unceasing shortage of investment-grade paper and desperate desire from investors to boost the credit quality of their holdings got the deal done. The book was full of outright demand, particularly from fixed income accounts.None seemed concerned at holding dollar bonds and euro warrants, while this structure – rather than a straightforward convertible bond – meant Siemens raised funds in the currency it wished, yet could avoid any foreign exchange-related headaches by issuing warrants in its reporting currency. The euro warrants also ensure that when investors exercise the option it is based purely on the stock performance rather than euro/dollar swings. Investors also benefit by being able to separate the two parts.Deutsche Bank was sole global co-ordinator and was joined the night before launch by joint bookrunners Barclays, Credit Suisse and JP Morgan.The deal not only raised funds for Siemens – it reinvigorated the structured equity market in Europe. It was only the third deal of the year when it priced on February 9 but a rare stream of deals followed in the subsequent weeks, including from adidas and Finnish government holding vehicle Solidium.Back with BundsA measure of the vibrancy of the structured equity market that followed Siemens’ benchmark issue was its swift, but incredibly unusual return less than six weeks later. What initially appeared to be a German state issue of exchangeable bonds into Draegerwerk led by Deutsche Bank turned out to be Siemens using a ravenous investor base to improve pricing on a disposal of shares.Neither the government nor the technology company were involved.Siemens wanted to offload well in the money warrants over 1.25m Draegerwerk preference shares, equivalent to 19.7% of the outstanding, and the success of Siemens’ own deal led it to package these into another bonds plus warrants structure.After Deutsche had made the April 2015 warrants tradable, some Bunds of a near tenor (2.5% due February 27 2015s) were sourced and bundled – to create Triple A rated March 2015 exchangeables.As the warrants have an exercise price of €63.68, versus the €78.40 placing price, this was a true technical trade, bu

To view the digital version of this report, please click here.Priceline.com, rated Triple B, was the first of several issuers to tap into unmet demand with a US$875m, six-year unsecured CB in March that featured a 50% conversion premium; at the time among the highest premiums in years. Equally impressive was the ultra-low 1% coupon paid for the liquidity bump, making the CB a compelling alternative to straight debt.“We had seen very little issuance when this deal was done, particularly by investment-grade companies,” said Jason Lee, global head of equity-linked solutions at Goldman Sachs, sole bookrunner on the Priceline CB. “A lot of the existing investment-grade paper was issued in 2005–07 timeframe, and a lot of that had rolled off.”The declining market for convertibles has largely been driven by insufficient supply. From an all-time high in 2008, the size of the convertible bond market in the US has shrunk from US$350bn to about US$200bn, and the investment-grade component of the universe has fallen from 45% to 25%, according to analysts at Barclays.The major reason for the decline is that persistently low interest rates, dating back to quantitative easing that began in 2008, has made it more compelling for companies to simply sell debt rather than debt-plus-call option (a convertible bond). Total issuance of CBs in the US last year fell from US$34.8bn in 2010 to US$24bn, as compared with high-yield volumes of US$223.7bn in 2011.Year-to-date issuance through May of US$7.7bn puts full-year CB issuance at US$18.7bn.Accounting changes that went into effect at the end of 2008 also served to make convertible bonds less attractive than straight debt, particularly for investment-grade companies. Specifically, companies were forced to bifurcate net-share settle convertibles, by separating the security into equity and debt components and flowing through interest expenses on the income statement at the cash-plus-accreted rate rather than the actual cash interest paid out to investors – effectively undermining the cash saving of a CB versus straight debt.While the accounting change had no effect on cashflows, it suppressed earnings per share. Logic suggested that if companies received no benefit, then they might as well look to straight debt funding, particularly for large, rated companies. Technology companies are an exception.The chasePriceline was in many ways the perfect candidate for a convertible bond – an investment-grade credit, growing fast and with a volatile share price. The company had been pitched by banks on various financing alternatives involving a CB over the past couple of years, allowing it to run a competitive process.Goldman Sachs accelerated discussions by offering to backstop a deal at the 1% coupon and 50% conversion premium. Other banks that previously had pitched for the business were invited to submit bids at a lower coupon, with the conversion premium fixed and a commitment to repurchase US$200m of stock in conjunction with the placement.Bank of America Merrill Lynch and JP Morgan, which teamed up on a US$575m, five-year CB for Priceline in March 2010, were among the shortlist of banks also invited to bid, according to various market sources at the time – such competitive processes became increasingly common for coveted issuers, further highlighting a market starved for supply.Rather than being backed into a corner, as rivals had hoped, Goldman had little trouble attracting investor interest. The bank marketed the deal on an overnight basis at 98.5–99.5 at the fixed terms, before finalising pricing at the top end of that range. It subsequently exercised its overallotment option to increase the total size of the funding to US$995m.Significantly the majority of the offering was placed with long-only outright investors. “We saw significant interest from outright buyers, both in the US and Europe,” said Lee. “A lot of buyers in Europe are orientated toward investment-grade paper because of their charters.”The