There are two ways of looking at Rabobank as a bond issuer. It is either an expensive bank or a cheap Triple A. What is certain is that it is a bank at the forefront of the market. Philip Wright reports
With annual funding requirements of around €20bn, there is ample scope to view the Dutch agricultural co-operative as either. The bank's willingness to cast its net wide in its attempts to enfranchise as many investors as possible also means that this is a discussion not restricted to its mainland European home turf.
Case in point is the sterling market, where Rabo has issued £3bn since 2004 and built a complete curve spanning 2006 to 2029. Within the major currencies, the US dollar is the obvious next port of call, according to the bank's director of treasury, Michael Gower. The US currency has played a relatively small role in its activities to date. There are historic reasons for this, however, not all of which will simply evaporate at the first sight of a marketing drive.
In the Asian markets, for example, the attitudes of important buyers are influenced by risk-weighting considerations. While this does not preclude public sector and central bank endorsement of Rabobank product, it does mean that ticket sizes tend to be smaller. While US$100m to US$200m clips are not uncommon in zero weighted transactions from the likes of EIB and KfW, 20% weighted Rabo tends to attract sizes around half this volume.
With less than 20% of its 2005 funding executed in US dollars, the scope for growth is obvious. With only one third of that sold to US-based investors, the main direction of that thrust is perhaps predictable. "There is a huge pool of liquidity in the US", said Gower, "although Rabobank is still unheard of by many investors." The first hurdle to overcome, he maintains is to wean this audience away from making comparisons with domestic US names. Rabo often trades 15bp or more inside them in the euro arena.
Investor education is key and the bank is making conscious efforts to address the situation. This is by no means a departure from normal practice, however. Investor contact constitutes an ongoing and important part of the bank's ethos. But Gower fully realises certain concessions may be required. "There is always a price to be paid for diversification", although one that he said was difficult, if not impossible to quantify. And neither would he contemplate diversification at any price: "We would never pay up unrealistically", he said.
The situation is already showing signs of change, however. Three years ago, US dollar funding would have been around 10bp wider than what could have been achieved in euros. Two years ago that had been cut to 5bp, whereas now the only cost is that of the basis swap required to switch the proceeds back to euros.
Hand-in-hand with the investor work goes a commitment to secondary markets. A long-time retail favourite, institutions are attracted by the back-stop this offers, not to mention the gradual spread tightening as bonds disappear into the networks. This needs to be a constant process, however. "It's amazing how quickly attitudes can change", says Gower by way of caution.
But even these two over-riding features require further augmentation and that comes in the form of flexibility. In markets where borrowers are vying with each other for investors' cash, the ability to offer bespoke solutions can tip the balance between success and failure. Speed of response is also is also as important as the willingness to contemplate ideas that may not be obvious or commonplace.
While some trailblazing work is done by the SSA community, Rabobank "likes to be the first non-sovereign/agency borrower in these places that others don't go", said Gower. A key component in this is the use of non-core currencies, a sector that accounted for 11% of the bank's funding in 2005, a proportion that it is envisaged will have grown to 15% by the end of 2006.
As a mutual society and therefore having no shareholders, hybrid capital issuance takes on an even greater significance. Here, too, Rabo's innovative approach is evident. Its member certificate programme supplies non-innovative core Tier 1. "We are always looking for liquidity in interesting places," Gower said.
This also displays a flexibility and nimbleness not always associated with large institutions that often prefer to rely more on reputation than innovation. Rabobank is well aware that it cannot afford to rest on its laurels in an increasingly competitive world.