Crisis? What crisis?

IFR Top 250 Borrowers 2008
4 min read

KfW, the Triple A rated promotional bank of the Federal Republic of Germany established in 1948, has the largest funding need of the European agencies at €70bn for this year. Despite this the issuer still tries to makes opportune use of the capital markets to achieve its funding and maximise the performance of its public deals. Mike Winfield reports.

KfW had funded in excess of €36bn by the end of April through public bond issuance, taking it beyond the halfway point in its funding programme. It is a similar position to the one it experienced last year, when European agency with the largest funding requirement targeted €55bn. By the end of April it had raised more debt in nominal terms than last year, and in the remaining eight months it has proportionally less to borrow than it did going into the second half of 2007. What does the future hold for Europe's largest non-sovereign issuer?

Many observers had suggested KfW would have little choice over the timing of its bond-based funding this year. In reality, however, despite being the largest European agency issuer, KfW actually borrowed €64.6bn in 2007 – well above its target. As a result, the projected funding volume for this year is only up by about 7%. Nevertheless, it does need to be attuned to market developments to capitalise on any windows of opportunity that open up.

The public programme is based on benchmark issuance in the three main funding currencies – US dollars, euros and sterling. In 2007 the euro benchmark programme consisted of four issues in three, five, 10 and 15-year maturities, accounting for 38% of its overall needs. US dollar issuance was the second most important currency of issuance, accounting for 28%, while sterling represented around 16% of debt raised. As the year drew to a close KfW had issued over 550 transactions denominated in 25 other currencies placing it "…among the top issuers of the European league and consistently providing investment products that met the needs of investors", said Frank Czichowski, treasurer.

The rise in the borrowing volume compared to €50.7bn in 2003, up from €54.1bn in 2006, is attributed to three factors: the ongoing growth of KfW's lending programme, largely a function of the strength of the German economy; the funding requirement of the European Recovery Programme Special Fund, which was this year included in the KfW funding estimate for the first time (instead of being funded by the fund itself); and the provision of liquidity to IKB conduit Rhineland-Funding.

"The main reason for the growth in our funding volume has been the rise in promotional business," said Czichowski. "…although we expect the pace of recent growth to moderate in the year to come. The increments to the borrowing target for this year were largely one-off changes and although certain factors, such as redemptions, are known for future years, the impact of calls being exercised – a function of interest rates levels – are more difficult to predict."

KfW issued the only US$3bn 10-year benchmark to appear in the first four months of the year, and almost achieved the same distinction in the euro-market with its €5bn 10-year, in addition to raising €3bn through a two-year trade and €5bn in threes. In US dollars, KfW also issued US$5bn three-year and US$4bn five-year Global trades as the flight to quality bid favoured shorter dated assets. Demand in the secondary market also reflects this point: the three-year – sold at swaps less 23bp – tightened to as much as less 40bp, while the 10-year had eased back from minus 13bp at launch to less high single digits by the end of April.

Following the pricing of its second euro benchmark in April, KfW returned to the US dollar market for a US$3bn five-year trade, which took its funding to just over €36bn, divided roughly equally between US dollars and euros, at 37% and 34% respectively. A further 19% was raised in sterling, with just over 10% in other currencies. Benchmark transactions made up around 59% of the total debt, with the rest mainly made up of public transactions and, to a lesser extent, private placements including loans and credit linked notes.

"The completion of over 50% of our annual funding by the end of April sees us slightly further advanced with our borrowing programme than in recent years, when-on average- we have completed no more than around 40%," Czichowski said.