If the crisis of the past year has had one major effect on the primary bond market, it has been to concentrate investors’ minds when it comes to assessing creditworthiness. Relying purely on ratings, or even reputations and historical rankings, no longer counts as a valid strategy – if, indeed, it ever did. Spreads that were once bunched up at the lower end of the spectrum have now become strung out along the curve.
“Pre-crisis, we were viewed as a frequent Triple A borrower,” said Michael Gower, head of long-term funding at Rabobank. “Now, the pendulum has swung completely the other way and investors are looking at us more as another bank.”
But Rabo is not just any other bank. It boasts Triple A ratings independent of any sovereign or regional support and continues to hold a place in investors’ hearts across the gamut of accounts, from institutional to retail.
“That does not mean that we have not experienced proportional spread widening the same as everyone else,” said Gower. “It is just that we are still seen to be in a different league from some of the other borrowers.”
Part of Rabo’s relative resilience can be attributed to its abstemious approach to the benchmark public markets since the onset of the crisis. Having launched a €2bn 15-year in June 2007 at a spread of 6bp over mid-swaps at a time when the market was approaching its high-water mark, it has been largely absent from the scene. It respected history in January, continuing its now-traditional approach of being one of the first issuers of the year to hit the screens, selling €1.25bn of 10-year paper.
And Rabo’s experiences act as a microcosm of the general market. While 2007’s issue was placed at 5bp over mid-swaps, 2008’s came at plus 19bp, a level that Gower notes “seemed expensive at the time, although with the benefit of hindsight was obviously not”.
The bank has returned to the public market only once since, but in some style, taking advantage of the strength of the Samurai market by launching the largest transaction of the year to date in early June, a ¥160.3bn three-trancher spread across three and five-years and including both fixed and floating elements.
But generally, it has preferred to rely on other avenues to satisfy a funding requirement of some €20bn for 2008 – in line with 2007’s target, but down from the €25bn ultimately raised last year.
The private placement market has been the principal alternative approach supplementing Rabobank’s diet of non-core and niche currency issuance, which has otherwise kept the bank’s appetite largely sated. When Rabobank decides to do something it is not renowned for half measures: in mid May it sold US$3.5bn of two-year floating-rate paper that was placed with what Gower termed “a fraction of a handful of investors”.
Achieving a price of 40bp over Libor tells one tale, despite compelling reasons why such an exercise can be preferable in such torrid times. As Gower explained, there are no execution risks, and no effect on Rabo’s outstanding euro curve. There is a real danger of contamination, given the levels at which primary issuance needs to be priced, even if new issue premiums have tightened in from their recent highs.
“Investors acknowledge that they can take a lot more out of the public markets than they used to,” he said.
That is not to say that a further euro benchmark issue is completely out of the question, however. Funding is a long-term game and Rabo will have to commit to the market at some stage. In the meantime, it has other options available. Would it issue in this sector in 2008? “Maybe” was as committed as Gower was prepared to go, though if the situation remains unchanged at the start of 2009 “then we have a new set of parameters.”
As of mid-May, Rabo had raised around 65% of its annual requirement. While this would seem to put it well on track and at an advantage over some peers, it is still some 10% lower than at the same stage in 2007. The €3bn 10-year in January that year, and the €4bn five-year that followed in March, will have played a major role in this result – proof, if any were needed, that the landscape has indeed changed.
What has not changed is Rabo’s approach. It is still conservative and cautious, key tenets that underpin its approach to the whole business and ones that are valued by investors who are still willing to give the bank space in their portfolios. As Gower said, “steady as she goes.”