Growth in tricky circumstances

IFR Triple A Borrowers 2009
4 min read

Instituto de Oficial Credito is one of Europe's largest agency debt issuers with an established profile and widespread investor recognition. The borrower responded rapidly to the downgrade of its guarantor, Spain, earlier this year, and has remained open for business. With annual financing needs of €20bn, it is responsive to the changing tides of investor interest and emergence of the sovereign guaranteed bank sector. Mike Winfield reports.

ICO is a 100% state-owned institution founded in 1971, supervised by the Spanish central bank and rated Aaa/AA+/AAA in line with its guarantor, the Kingdom of Spain. Its role is to "support and foster any economic activities which contribute to the growth and the improved distribution of the national wealth. [In particular activities] which, on account of their social, cultural, innovative or ecological significance, merit priority attention." In order to provide direct financing to fulfil its objectives, ICO borrows against its €43.9bn loan portfolio to mainly SMEs and domestic loan recipients (which made up 94% of the total as of December 31 2008).

ICO has seen steadily increasing activity recently, with a 45% rise in year on year interest revenue between 2004 and 2008. International funding grew by €16.4bn in 2004, rising to €39.4bn by 2008. In terms of medium and long-term financing, the overall amount to be funded has risen from just over €3bn in 2004 to €14.6bn last year, with a projected requirement of €20bn for 2009. This was mainly financed by debt issuance in US dollars and euros in 2008 (at 44.5% and 36% respectively). Sterling was the third most important element at 10.7%, while other currencies accounted for 8.8%.

ICO draws on a broad investor base which sees Asia with a 20% role, the Americas 14%, the Middle East 10% and Australia 1%. Europe provides the most significant number of investors at 55%. Finally, according to last year's data, central banks, asset managers and banks are the most important investor types, with 49%, 27% and 18% respectively. Insurance companies, pension funds and retail make up the balance.

This year, ICO is expecting to issue between three and four benchmarks in both euros and US dollars, as well as complimentary issuance in other currencies to reach its target level of funding. Market developments, however, are likely to impact on some of the patterns seen last year both in terms of the relative importance of different parts of ICO's investor base, and in terms of the probable currency composition by the end of 2009. In terms of investors, the repricing of the SSA sector as a whole has seen a much greater reliance on the domestic account base than has historically been the case for the SSA market in general.

ICO raised €1.75bn with a 3.375% December 2011 trade late last year in an exercise aimed at prefunding some of this year's needs, at what is now a very attractive level of mid-swaps plus 28bp. "The SSA sector has been re-priced since the advent of sovereign-guaranteed supply, [making] our debt more attractive to domestic asset managers and insurance companies,” said Antonio Cordero, ICO's head of funding. “The placement in Spain has consequently increased." On this occasion, 39% was placed domestically, compared with the 11% for ICO's last two euro-denominated deals. Additionally, the first quarter of 2009 has seen the euro-market providing the better financing opportunities enabling ICO to price a €1bn five-year deal in early January at mid-swaps plus 60bp, as well as a €2bn three-year at swaps plus 75bp.

ICO also undertook a Japanese investor roadshow ahead of a ¥50bn five-year dual-tranche Samurai deal, priced in April, after it registered a ¥300bn Samurai programme in January. This was larger than the expected ¥30bn size and resulted in an oversubscribed transaction that was capped at ¥50bn at the issuer’s request for liquidity reasons. The domestic format of the deal attracted rare regional interest which was understood to have accounted for about one-third of the demand for the floater. Central financial institutions were also strong buyers and were rumoured to have taken a similar share in the FRN and close to half of the fixed portion. ICO is now understood to be looking to launch some yen private placements on the back of reverse enquiries it received during the marketing period. It is also mulling a return to the Samurai market in the second half of the year if there is sufficient market demand.