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SSA Borrowers in the US Dollar Market

June 2013

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Overview 1

June 2013 EuroWeek ❘ SSA Borrowers in the US Dollar Market

It was a welcome problem to have, and one that broadly represented the supply-demand dynamic that has characterised the Us dollar market for ssa credits in 2013. when sEK priced its five year dollar global in a transaction led in March by Citi, Daiwa Capital Markets, Deutsche Bank and Morgan stanley, demand was such that it ended up printing an unusually sized $1.3bn issue.

“Because we’re outside the eurozone, and because sweden is still rated triple-a by all three agencies, we have been able to maintain our safe haven appeal,” says Petra Mellor, a director at sEK’s stockholm headquarters. “But we were very pleasantly surprised by the strength of demand for our dollar benchmark. the quality of the order book was very high, with 59% accounted for by central banks and official institutions. this made the allocation process so challenging, which is why we issued $1.3bn.”

this is a narrative that has been heard again and again in the dollar market this year. take, for example, a comment from one of the bookrunners on a three year transaction that raised a similarly unusual amount, $2.35bn, for sweden’s local government debt office, Kom-muninvest, in april. “we did what we could to restrain demand,” said one of the bookrunners on the Reg s/144a issue, which was Kommun-invest’s largest dollar trade to date. “we were all set for a $2bn trade, but then another $500m came in at the last minute.”

Carl-Henrik arose-nius, head of investor relations, said that made Kommuninvest’s recent benchmark the largest to date in the dollar market from a Nordic issuer. “It was a fantastic success, and it mirrors what many Nordic ssa borrow-ers have been seeing in the dollar market, which are big order books and heavily oversubscribed deals at better rates,” he says.

Nordic borrowers have certainly been chalk-ing up a number of firsts in the dollar market this year, with the municipal funding agencies especially popular. In January, for example, Norway’s Kommunalbanken (KBN) kicked off its $20bn-$22bn funding programme for 2013 by launching its equal largest ever dollar benchmark. Led by BNP Paribas, Daiwa, JP Morgan and RBC Capital Markets, this was priced at 22bp over swaps, which was described at the time by Christopher Brown, head of fixed income at Daiwa Capital Markets, as a “negligi-ble concession to secondary issues”.

In spite of this tight pricing, the KBN bench-mark generated demand of $2.5bn from almost 90 accounts, itself a record for KBN, which

Big order books and heavily oversubscribed deals at better rates. SSA issuers in the US dollar market have been enjoying being on the right side of the supply-demand equation this year. That trend is set to continue with central banks, bank treasuries and Japanese institutions still firmly on the hunt for triple-A credits.

Top credits retain their lustre in dollars

Christopher Brown, Daiwa Capital Markets

2 Overview

EuroWeek ❘ SSA Borrowers in the US Dollar Market June 2013

included a number of investors from Europe and the Us that were new to the KBN name. KBN followed its January benchmark with a shorter dated two year $1.5bn trade in april, 73% of which went to central banks and official institutions.

another first for Nordic borrowers in the dollar market in 2013 was an inaugural five year issue from Kommunekredit of Denmark, which in January priced a $1.25bn 2018 transaction via BNP Paribas, Credit suisse, Daiwa and Nor-dea at mid-swaps plus 28bp, increasing the deal from an originally planned $1bn.

also from the Nordic region, among the most striking of the debut benchmark issues in the public dollar market this year was the long-awaited inaugural 144a transaction from Finland’s MuniFin. Its $1.75bn five year issue, led in april by Citi, Credit suisse, JP Mor-gan and Nomura, was MuniFin’s largest ever benchmark, with a book of $1.95bn allowing for a larger trade than the borrower originally planned. Having first issued in Eurodollar for-mat in May 2011, Munifin comments that the 144a transaction “extends the Munifin curve and further underlines [its] commitment to the Us dollar market as a recurrent and high quali-ty benchmark issuer.”

the same pattern of oversubscribed bench-marks and larger issuance volume has been discernible among many of the most frequent ssa borrowers in the market, which is allowing some to increase the overall share of dollars in their funding for 2013. Cades, for example, was able to print its largest ever dollar benchmark in January, issuing a $3.5bn five year Reg s/144a transaction via Daiwa, Deutsche, Goldman sachs and RBs (see page 4 for more details).

the EIB, meanwhile, has also increased the proportion of dollars in its funding programme this year, which it kicked off by launching its first $5bn five year transaction. this highly successful benchmark, led by Citi, JP Morgan and Morgan stanley, was the first of four $5bn issues in a little over four months for the EIB. the most recent of these, led in May by Citi,

Deutsche and Goldman, generated demand of $6.8bn at the EIB’s lowest dollar pricing for two years of mid-swaps plus 4bp.

sandeep Dhawan, head of funding for the americas, asia and Pacific at the EIB in Luxem-bourg, says that the larger scale of its funding in the dollar market this year has not been the product of demand from several new investors for the EIB name. He says that the fundamental changes to have affected the EIB’s funding pro-gramme this year have been investors’ increased confidence in the prospects for the eurozone as well as a deeper appreciation of the EIB’s busi-ness model.

“Our main buyer base is broadly unchanged,” he says. “the only significant change from an EIB perspective is that our perceived vulnerabil-ity to European tail risk has been reduced over the last 12 months — rightly so, in our opinion. additionally, headline events in Europe have become less frequent.”

Double impactthe impact on EIB of reduced headline risk and narrowing spreads across the board in the dollar market has been two-fold. First, it has made its dollar benchmarks increasingly appealing to investors on a relative value basis. “we’re still trading an appreciable number of basis points over some of our peer group, so investors see value in the EIB at these levels,” says Dhawan.

second, strength of demand is likely to allow the dollar component of the EIB’s total funding programme to return to its historical norm. “In the last couple of years dollars have accounted for a lower proportion of our funding,” says Dhawan. “Last year dollar funding accounted for about 26%, when historically it was about 35%. Year to date, euros are around 45% of the total and dollars, 35%, which I don’t think will change much over the rest of 2013.”

that may be. But others say that they have seen changes in the pattern of demand from central banks and other official entities at two levels. First, as arosenius at Kommuninvest says, central bank demand for the top-rated ssa

Overview 3


borrowers has inev-itably become more concentrated around a smaller group of issu-ers over the last 12-18 months, reflecting the shrinking in the over-all size of the triple-a universe.

second, some issu-ers report demand from central banks that are new to their names. Pierre van Peteghem, director in the treasury depart-ment at the african Development Bank (afDB), says that new central banks have been an espe-cially notable source of incremental demand for its recent dollar benchmarks. “we have seen a much stronger following from african central banks, and not just from the oil-producing countries,” he says. “Demand has come from across the whole of the continent, which is allowing us to build up a domestic investor base in the same way as the aDB has in asia.”

while central bank demand for top-notch ssa credits is rising, bankers and borrowers say that there are, or will be, two other notable sources of increased demand for top credits in dollars. the first is bank treasuries, which are becoming increasingly attracted by triple-a dol-lar ssa bonds. “the Basel III regulations have increased demand among banks for ultra-safe bonds such as those issued by the afDB,” says van Peteghem. “Bank treasuries have become a much more significant component of our inves-tor base. In the case of the recent $425m tap of our $1bn 2018 benchmark, bank treasurers were equally important drivers of demand as central banks.”

a third potential source of rising demand for ssa borrowers offering a reasonable pick-up over Us treasuries is the Japanese institutional base, which many strategists say will increasing-ly be pushed towards foreign bonds in the wake

of the Bank of Japan’s recent momentous policy shift. a recent analysis by Morgan stanley, however, concluded that in total, rebalancing of Japanese institutional portfolios into riskier assets than domestic government bonds may be muted. Morgan stanley does not expect banks or pension funds to rebalance their portfolios materially, which leaves life insurance compa-nies as the institutional group most likely to make notable changes to their asset allocation. “Life insurance companies will likely allow their allocation to JGBs to drift lower over time and increase their holdings of foreign bonds by 2% to 3%, equivalent to $60bn to $100bn, over the next one to two years.”

the jury is out on how long strength of demand at very depressed yields can be sustained in the dollar market. already, say bankers, there is evidence that even the most conservative investors are starting to chase higher yields in the ssa space of the dollar mar-ket. “In some instances, the Libor-plus names have tended to trade better than the nine-a issuers, some of which have struggled, at least in certain maturities,” says Brown at Daiwa. “the lower yields go, the greater the incremental val-ue of the spread becomes.”

He adds that they have seen aggressive pric-ing versus swaps from some top names, and with swap spreads so tight this has meant a very thin spread to treasuries. “some of these issuers are now offering only a few basis points above the Us government curve,” he says. “some investors may still assign value to a relatively less liquid bond paying 5bp-10bp above treas-uries, but there is a point at which many start to think that for the sake of such a small spread they would prefer a more liquid instrument.”

For the time being, however, the strength of support for the strongest names has been a mild surprise even to some of the issuers themselves. “a number of our bankers told us that after our bonds performed so well in 2012 there might not be much scope for further outperformance in 2013, and that investors would demand high-er spreads from us,” says Klaus-Peter Eitel, vice

Grant Lewis, Daiwa Capital Markets

4 Overview


aMONG European ssa borrowers in the Us dollar market, there has been a wholesale change in recent years in the strategy of Cades, the agency that was set up in 1996 to redeem and amortise France’s social security debts. Having raised just over €30bn in the capital market in 2012, Cades, rated aa1/aa+/aaa, is one of Europe’s most active and regular benchmark issuers across a range of currencies.

Philippe Noël, head of capital markets at Cades in Paris, explains the backdrop to the dollar component of the agency’s funding programme. “Before 2006/07, our total annual funding requirement was between €3bn-€5bn, so accessing the Us dollar market was not a strategic priority,” he says. “so when we funded in Us dollars we did so purely for arbitrage reasons.”

that has changed for at least two reasons. First, because its annual borrowing require-ments have risen substantially. second, because since the financial crisis, while central banks’ demand for exposure to European ssas has remained robust, their demand for euro-de-nominated assets has been less consistent. “the euro market was closed to us throughout much of the crisis, whereas the Us dollar market remained open, and the favourable basis swap ensured that the costs remained competitive,” says Noël. “so today, the Us dollar market has become a strategic source of funding for Cades.”

the clearest indication of this strategy came in early 2011, when Cades completed its 144a documentation allowing it to penetrate the Us institutional investor base. “turning to a

Reg s/144a format allowed us to change the minimum volume of our benchmark issues from $1bn to $2bn, but demand has been such that we have been able to issue in much larger volumes,” says Noël.

that was evi-dent when Cades launched its first dollar benchmark in January, building an order book of about $4bn for a five year deal led by Daiwa, Deutsche Bank, Goldman sachs and RBs. this robust demand allowed Cades to print a $3.5bn trade, which was its biggest Us dollar benchmark to date, with pricing set at 50bp over swaps (64.2bp over treasuries), which was the tight end of guidance.

Cades followed this benchmark with a $1bn benchmark in the more challenging seven year maturity, led in april by Bank of ameri-ca Merrill Lynch, Barclays and Citi, priced at 62bp over mid-swaps. Noël says that Cades had originally planned to issue a 10-year dollar benchmark in the fourth quarter of 2012, but that this would have been pre-funding for 2013 and the government was uneasy about upward pressure on its debt ratio.

“It was important for us to extend our curve, but we recognised at the start of this year that the 10 year market had become increasingly difficult,” says Noël. “we were pleased with how the deal went, although there was perhaps less demand from Japan than we expected.”

Best proxyMore broadly, however, Noël

Cades happy to turn to US

Philippe Noël, Cades

page 5 >>

When Cades found its access to the euro market closed off by the financial crisis, it made a strategic shift towards the US, says its head of capital markets Philippe Noël.

Overview 5


president of capital markets at Kfw in Frank-furt. “this has not happened. we have issued two large dollar benchmarks this year, both of which surpassed our expectations in terms of size and price. so the dollar market has clearly continued to be receptive to high grade names such as Kfw.”

Long end challengeOne of the main challenges for dollar issuers has traditionally been accessing the longer end of the curve. “In this low rate environment you would have assumed that investors would regard longer-dated bonds as a good way of picking up extra yield,” says Daiwa’s Brown. “But the Us curve has flattened substantially through March and april, and the cost to borrowers in spread terms of extending also contracted, so the addi-tional value investors can generate by going down the curve has been significantly reduced.”

Rather than adopting this strategy to earn enhanced yields, investors are going for dou-ble-a or second tier triple-a names, he says.

a number of ssa borrowers confirm that opportunities in the 10 year part of the dollar market can be elusive. “Issuing in 10 year dol-lars is all about mitigating execution risk and the best way to do that is to line up a number of committed investors beforehand and then hope you can find an execution window,” says

Dhawan at the EIB. “that’s not easy in today’s market and it explains why we haven’t issued 10 year dollars for two years now. we’re always on the lookout for opportunities in that part of the curve, but three and five years are likely to remain our bread and butter maturity bucket in dollars.”

Even for a borrower with a funding pro-gramme as hefty as the EIB’s, it is a moot point if longer-dated dollars are even needed. as Dha-wan says, the EIB was able to extend the average maturity of its debt issuance in 2012 to about 8-1/2 years, which is much higher than in pre-vious years, when the average tended to range between five and seven years. “we find that our duration requirements have been more than adequately met through the euro and sterling markets,” he says.

None of this is to suggest that 10 year issu-ance in the dollar market is impossible or even prohibitively expensive, as Kfw demonstrated to stunning effect in January, when it drummed up an order book of almost $6bn for a 10 year dollar benchmark, extraordinarily high for the longer end of the dollar market. that allowed Kfw to print a $4bn benchmark at mid-swaps plus 26bp.

All about timing“Issuing successfully in 10 year dollars is all

says he has been delighted with Cades’s issuance this year in dollars, which has accounted for close to half of its funding in 2013, compared with 20%-30% in previous years. the strength of demand from central banks, says Noël, reflects the absence of the French government in the dollar market, meaning that Cades is the best available proxy for French sovereign risk in the market.

Demand from commercial banks has also been strong, says Noël. “Because we offer rel-atively high pick-up versus our agency peers

we are attractive on an asset-swap basis to bank treasuries as well as central banks,” he says. “Investors see good value in Cades at 10bp-20bp over the EIB or Kfw.”

Looking to the rest of this year, Noël says that Cades will be looking to issue again in the five year maturity and to do one or two further dollar transactions in maturities of between three and 10 years before year end.

“Rather than tap existing bonds, we pre-fer to generate sufficient demand to build a new on-the-run point in our curve,” Noël explains. ◗

<< continued from page 4

6 Overview


about timing,” says Eitel. “all the stars need to be aligned, in the sense that swap spreads have to be wide enough to give investors a decent pick-up over treasuries, while yields need to be stable and high enough to attract asian investors.”

when Kfw issued its 10 year benchmark, all these supportive elements had fallen into place — especially asian demand. “asian investors took 52% of our 10 year benchmark but only about 33% of our three year issue,” says Eitel. “as they are basing their investment decisions more on overall yield levels, they have been more active in the 10 year than in the three year part of the curve.”

Quebec, which only funds outside the very liquid Canadian dollar market when it can do so at a better after-swap cost, also demonstrated that 10 year dollar funding can be competitive. In February, it returned to the dollar market after an 18 month absence, printing a $1.25bn global via Bank of america Merrill Lynch, Deutsche, HsBC and RBC. Pricing was in line with guidance at 60bp over mid-swaps, and a $1.4bn book allowed for the size of the transac-tion to be increased from an originally planned minimum of $1bn.

alain Belanger, director general at the finance ministry in Quebec City, says that when the province’s funding team visited New York, in December, it became clear that there would be sufficient demand for a 10 year dollar deal. Indeed, he says that demand from some Us institutions even suggested Quebec could have printed a 30 year issue. Belanger adds that although a 10 year benchmark inevitably means that some official institutions are unable to participate, there was still healthy central bank demand for the Quebec issue, and that there was also plenty of orders from investors that would not normally have bought Quebec in a shorter maturity.

at Kfw, Eitel agrees that it is a fallacy to assume central banks are entirely absent from the 10 year part of the dollar curve. “we saw 39% central bank demand for our 10 year benchmark, so it does seem that there are

central banks that are prepared to go out to 10 years for yield purposes,” he says. “But it is true that the majority won’t go beyond five years.”

One notable longer dated transaction in the dollar market this year was the 10 year tranche of the two-part $5bn world Bank global bond led in February by BNP Paribas, Goldman, HsBC and JP Morgan. Response to the two tranches was very different. while demand for the three year bond followed the familiar pat-tern of 2013, needing to be increased by $250m in response to a flood of orders, the longer-dat-ed tranche attracted a book of just $850m.

George Richardson, head of capital markets at the world Bank in washington, is very open about the challenges the Bank faced in accessing the 10 year part of the dollar curve. “10 years is not a favoured maturity in dollars, and we had not issued in the market for a long time,” he says. “we wanted to refresh our presence in the market and we were prepared to be as flexible as possible to do so. the closest pricing bench-mark we could find was an old Freddie Mac bond with nine years left to maturity, which was not ideal, and we did not want to force-feed the market with a transaction at a certain price which would not work.”

Pricing vacuumagainst the backdrop of such a pricing vacu-um, Richardson says that widening the price by a few basis points would have done little to change the overall demand level for the 2023 tranche, which is why the Bank chose to issue just $750m in the 10 year maturity.

Richardson says that the challenges of issuing in 10 year dollars are not confined to the short-age of demand from central banks and official institutions. “It’s not just central banks that are reluctant to buy long-dated dollars at these yields,” he says. “with very little probability that yields can go any lower, you risk losing capital when they eventually come back up. that might not happen for a few years, which is fine if you’re buying three or five year bonds. But rates will have to go higher at some time in the future, so

Overview 7


YOU sELDOM encounter debut ssa bor-rowers in the Us dollar market these days, which is one reason why investors gave such an enthusiastic response to the $350m three year floating rate note (FRN) issue launched last November by the Inter-american Invest-ment Corporation (IIC).

Priced at 35bp over three-month Us dol-lar Libor, compared with initial price talk of 40bp over, the borrower's inaugural dollar issue was led by Daiwa Capital Markets, Deutsche Bank, JP Morgan and Mizuho securities. Healthy orders of close to $450m allowed IIC to increase the deal from an orig-inally targeted minimum of $300m.

set up in 1985 to provide lending to sMEs in Latin america and owned by 44 countries in the americas, asia and Europe, IIC is a legally autonomous multilateral exclusively dedicated to private sector lending. total net investments have risen from $823m in 2009 to a little over $1bn as of June 2012.

Orlando Ferreira, head of the finance and strategic planning division at the IIC in washington, says that its recent growth meant that a public dollar bond was the next natural step for its funding strategy. “Until recently, our relatively low funding needs meant that we were able to depend on bilat-eral loans from banks in the Us and Europe, and later in Japan,” he explains. “But by the start of 2012 we recognised that our growth had reached the point where we required a healthier diversification of our funding sources. so we started to set up our EMtN

programme last May and then began work on explaining our credit story to investors.”

Central to that story, says Ferreira, is that the IIC’s asset quality and the robustness of its risk manage-ment policies make it an attractive new ssa borrow-

er. Past-due loans accounted for just 1.4% of the total as of June 2012, equity to total assets had reached 49.8% by the same date and gross debt to shareholders’ equity is the third lowest among regional and global supranationals.

Investors obviously liked what they heard on a lengthy roadshow that took in asia, the Middle East and Europe. In spite of the issu-er’s hybrid rating — Fitch rates it aaa, while Moody’s rates it aa2, standard & Poor's at aa — the transaction, launched just after the Us election, was well supported by a range of investors. Central banks accounted for 42%, followed by fund managers (31%) and bank treasuries and private banks (27%).

the strongest indication of the strength of demand for the newest member of the ssa club, however, came when IIC tapped the issue in February. Ferreira says he was delighted when pricing on the $50m tap was set at 30bp over three-month Libor, 5bp inside the pricing on the original issue in November. “this gives us a lot of confidence that we can be a regular borrower over the next five years, although we won’t be a large, benchmark issuer,” says Ferreira. ◗

IIC makes its mark

Orlando Ferreira, IIC

The Inter-American Investment Corporation (IIC) has proved a popular addition to the SSA borrower club. Its debut bond deal went well, and the tap earlier this year was priced even tighter.

8 Overview


buying 10 year bonds at these yields does not make sense to many investors.”

Economists generally agree that there seems to be little on the immediate economic hori-zon to suggest that there is any imminent danger of inflationary pressures building to the point where they could prompt a rethink of monetary policy. “In the Us, the risk is that sequestration and fiscal tightening will lead to another year of disappointing growth,” says Grant Lewis, head of economic research

at Daiwa in London. “we are looking at a growth rate this year of about 2.5%, which is below trend and means there are no inflation-ary threats around the corner. Indeed, recent months have seen inflation fall. against that backdrop, the Fed’s commitment to keep rates effectively at zero continues to hold, although the pace of Fed purchases may slow later in the year if the labour market continues to improve.”

Nor, thinks Lewis, is there much reason to suppose that any serious medi-um-term alarm bells need to be ringing about inflation. “the global backdrop is still one of slow growth, high unemployment and the impact of multi-year fiscal consolidation in Europe and the UK, so I see little prospect of a return to seri-ously above-trend growth in the near term,” he says. “a recent IMF report supports the Ber-nanke view that the potential inflation-ary impact of loose monetary policy is much lower now than it was in the 1970s. all the evidence suggests that the idea that quantitative easing is going to unleash hyperinflation is inconceivable.” ◗

European US dollar denominated supranational and agency bond issuance ranking for plus-$1bn issuers

Source: Dealogic

2013 YTD1 EIB 21,167 5 28.62 KfW 16,473 6 22.33 Kommunalbanken 6,480 4 8.84 CADES 3,497 1 4.75 BNG 3,243 2 4.46 SEK) 2,541 2 3.47 CEB 2,490 2 3.48 Kommuninvest i Sverige 2,342 1 3.29 L-Bank 2,246 2 3.010 FMS Wertmanagement 1,999 1 2.7 Total 73,947 33 100.0Q1-4 20121 KfW 28,635 10 32.52 EIB 23,198 9 26.43 CADES 7,985 3 9.14 BNG 4,741 2 5.45 Network Rail Infrastructure 4,236 3 4.86 Kommunalbanken 3,986 3 4.57 Kommuninvest i Sverige 2,991 2 3.48 Landwirtschaftliche Rentenbank 2,740 2 3.19 EBRD 2,736 2 3.110 FMS Wertmanagement 2,000 1 2.3 Total 87,992 41 100.0Q1-4 20111 EIB 31,430 9 33.42 KfW 28,199 10 30.03 CADES 9,975 5 10.64 BNG 5,235 3 5.65 Landwirtschaftliche Rentenbank 2,986 2 3.26 L-Bank 2,743 2 2.97 EBRD 2,743 2 2.98 Nederlandse Waterschapsbank 1,996 1 2.19 Kommunalbanken 1,992 1 2.110 Municipality Finance 1,500 1 1.6 Total 94,038 40 100.0

Rank Issuer parents Amount No of Share $m issues %

The Daiwa Capital Markets/EuroWeek Dollar SSA Roundtable 9


SSAs in Europe are increasingly comfortable with US dollar funding, even more so as demand for their paper increases as the risk of a eurozone break-up recedes. Borrowers here discuss the appeal of the dollar, the rise of central bank investor appetite and other key issues, such as the withdrawal from the market of UBS. Participants in the Daiwa/EuroWeek roundtable, which took place in London in May, were:

Christopher Brown, managing director and head of fixed income, Daiwa Capital Markets, London

Stefan Goebel, managing director and head of treasury, Rentenbank, Frankfurt

Jens Hellerup, head of funding and investor rela-tions, Nordic Investment Bank (NIB), Helsinki

Isabelle Laurent, deputy treasurer and head of funding, European Bank for Reconstruction and Development (EBRD), London

Anne Leclercq, director, treasury and capital markets, Belgian Debt Agency, Brussels

Vince Purton, managing director and head of debt capital markets, Daiwa Capital Markets, London

Arturo Seco Presencio, deputy chief financial officer, Council of Europe Development Bank, Paris

EUROWEEK: The share of dollars in the funding programmes of many SSA borrowers appears to be rising. Is that true for the issuers here today? If so, why?

Jens Hellerup, NIB: The dollar market has always been important for us. We did our first dollar benchmark in 2002, since when we have done at least one transaction a year.

We did a $2bn two year benchmark at the start of this year, which was our biggest ever transaction in dollars. That has helped dollars to account for about 55% of our total funding so far this year. If we do another dollar benchmark this year it will mean that dollars account for more of our pro-gramme than in previous years, when they have typically accounted for just under 50%.

As we’re a relatively small issuer we need to keep a close eye on what we can achieve price-wise in dol-lars versus other markets. We are prepared to pay a small premium for the currency diversification, but there is a limit to how much we’re prepared to pay.

Arturo Seco Presencio, CEB: We have an annual borrowing ceiling of €4.5bn and are a very frequent borrower in US dollars, which is the most import-

ant currency for us in terms of our outstandings.We have a significant dollar investor base

among central banks, which we started to consol-idate 20 years ago.

We usually issue two or three global format benchmarks in dollars a year in maturities of three to five years. In 2012 we did not see much opportunity to diversify our currency mix, and we concentrated our issuance more in US dollars than in previous years, issuing two benchmarks in global format. Total US dollar issuance represented 79% of last year’s total funding volume.

Dollar still mighty for SSAs

Arturo Seco Presencio, CEB

10 The Daiwa Capital Markets/EuroWeek Dollar SSA Roundtable


In 2012, we issued a $1.25bn five year benchmark and we are preparing our second dollar global benchmark of the year.

Stefan Goebel, Rentenbank: The general picture for us hasn’t been too dissimilar from 2012. So far this year we have raised close to €5bn, or about 50% of our budgeted funding volume for the year. The average life of our new issuance has been just above six years, which is also similar to previous years.

What is different is the currency composition of our funding year to date. We have raised a lot of Australian dollars and very little in euros, with the US dollar our number one issuing currency. That pattern has been driven mainly by the opportu-nities we had to raise eight to 10 year funding in Australian dollars in the first quarter at attractive rates, whereas last year there were plenty of oppor-tunities to issue euros in the six to eight year space.

EUROWEEK: How much of Rentenbank’s issu-ance this year has been in dollars?

Goebel, Rentenbank: Year to date, US dollars have accounted for 40%, with Australian dollars a stag-gering 32%, the bulk of which has been in Kangaroo format. Euros year to date is only 11%, followed by sterling with about 10%.

In 2012, we raised 30% of our total in US dollars. The share is higher mainly because we have already successfully issued a $1.75bn five year benchmark in March, and a $500m floating rate note. We hav-en’t yet done a euro benchmark. We will certainly do so later in the year, but the US dollar is still likely to be our number one currency because we’ll do at least one more US dollar benchmark.

We have done little to no private placements in US dollars of late where there has not been much meaningful demand over the last couple of years. We still see demand for targeted transactions, but the preference among investors is to participate in highly liquid benchmark deals.

Isabelle Laurent, EBRD: The share of dollars in our programme is also not very different from last year. We’ve just issued our third dollar benchmark of the year, and while we’ve probably done roughly the same amount, by this time last year we had issued one large benchmark, which we tapped twice.

Although it is still modest compared with bor-rowers like EIB and KfW, our funding programme has been increasing and we are now borrowing €6bn-€8bn a year, rather than €2bn. We always issue in public benchmarks, because we believe it is very difficult to get the equivalent of $10bn done without using benchmarks for about 60% of the financing.

We lend a lot in dollars as well as euros, but we haven’t done a public euro deal more or less since the bank was founded. We’re unlikely to issue in euros until the basis swap works in our favour, given that we would want to swap 50%-100% of any transaction into dollars.

Anne Leclercq, Belgium: As a eurozone sovereign, we’re a bit of an outsider compared to the other borrowers around the table. That means our main funding instrument is euro benchmarks.

So the only reason for us to go to the dollar mar-ket is if the basis swap allows us to harness arbitrage opportunities. When we issue a transaction off our RegS MTN programme we generally try to do so in a benchmark size of $1bn-$2bn. But the size depends on how much demand there is to allow us to fund competitively relative to our euro curve.

The last time this happened was in September 2012, soon after the magical words from Draghi, which were the game-changer for Europe.

EUROWEEK: How have demand patterns been changing for European SSA credits in dollars?

Leclercq, Belgium: The real change happened in September. Before then, there had really been no demand for our name in dollars because tail risk

Isabelle Laurent, EBRD



was perceived to be so high in the eurozone.

Laurent, EBRD: One notable difference is that five years used to be the sweet spot. This year the bulk of demand has been in three years.

There has been a swap-spread compression between the level you can achieve in seven years compared with three and five years, which is why we did our first seven year dollar deal this year. I don’t think I’ve seen in the last 10 or 15 years the spread to swaps between seven and five years being so narrow.

Every three year dollar deal seems to have worked well this year, whereas five year deals have been harder and fewer.

EUROWEEK: What does that tell you? That cen-tral banks are pushing down the maturity curve?

Christopher Brown, Daiwa: It’s partly because of the shape of the yield curve. We’re in a very low yield environment and the curve has been much steeper in the first quarter than in the second half of 2012. So investors looking for yield have tended to look at seven years and there have also been some very successful 10 year transactions.

But it’s true that seven and 10 years is still gen-erally a more challenging space than three or five years. Longer dated deals won’t work at all times for all borrowers, but even those that have been more challenging have cleared well soon after launch and in some cases have tightened in quite dramatically.

The seven year and longer market tends to be more situational. Demand is not as constant as it has been for three years.

Hellerup, NIB: Bankers have been telling me that the spread between five and seven years has been flat on a Libor basis. They also say the spread between fives and 10s is quite flat, so there may be an opportunity there although it’s not something we’ll look at right away.

Laurent, EBRD: It’s also a thinner market, which is less dependent on central banks, which are the main source of demand for three and five year transac-tions in our asset class.

Goebel, Rentenbank: The US dollar market is certainly best suited to three to five year funding. When we need six to 10 year funding we’d typically look to currencies where it’s easier to find a bid for duration such as euros, Australian dollars and, if the numbers add up, Swiss francs, Japanese yen or sterling. Because there has been so much demand in the three to five year space, US dollars have been the most cost-effective funding currency.

EUROWEEK: So you wouldn’t even consider raising seven or 10 year dollars?

Goebel, Rentenbank: Once our explicit guarantee is in place we may gain approvals from a handful of important additional names at the longer end of the US dollar market. The number of investors who look at the seven and 10 year maturities narrows in the dollar market, and if one or two are missing it can make the difference between a successful deal and one that lacks the initial momentum you need.

Vince Purton, Daiwa: Volume is certainly more difficult to achieve in the longer dates because although it’s substantial enough to get $1bn trades done, the investor base is smaller. That makes $2bn or $3bn deals much more difficult than in shorter tenors.

Leclercq, Belgium: The same is true in euros. It’s much easier to do a five year euro benchmark than a 10, 15 or 30 year deal. The longer you go, the more limited your investor base will be.

Hellerup, NIB: Yes. But in euros the curve is much steeper.

Christopher Brown, Daiwa



Purton, Daiwa: Volumes of three year issuance in dollars are down on a year ago. In the dollar SSA market, in Q1 last year, three year deals accounted for 45% of the total. Now it’s 7%. Five year issuance is slightly up and there has been appetite for seven and 10 years on a selective basis.

Laurent, EBRD: There may have been fewer three year transactions, but the reception to them has been exceptional. The reception to five year deals has been less exceptional. Five year deals can look cheap relative to secondaries and yet not go as well as last year or the year before, whereas in three years, deals seem to fly irrespective of whether they’re priced flat or through.

EUROWEEK: Does that suggest there is less sensitivity to pricing? Aren’t investors always sensitive to pricing?

Brown, Daiwa: Yes and no. Most investors are very aware of relative value, but there will be differences of opinion on pricing.

It’s still rare for investors to leave limit orders during bookbuilding. The vast majority of orders tend not to be conditional. That is probably tes-tament to the fact that syndicate managers and borrowers have a very keen understanding of what is going to work. The majority of investors will be accounts that we have seen before, so borrowers will be well placed to anticipate any pricing sensitivity.

Laurent, EBRD: Where absolute levels and spread levels are make investors more price sensitive. So does the fact that we’re seeing much greater disparity between issuers, with triple-A issuers sometimes a long way apart in the levels at which they issue. There may be good reasons for this, but we used not to have such discrepancies and this can make it much harder for investors to decide where value is. But I agree that we almost never see order limits.

Purton, Daiwa: The other big change has been the return of stability for European credits. This has led to a wider variety of credits able tapping the market, with more southern European issuers returning.

Leclercq, Belgium: This return to stability is anoth-

er reason why there has been less demand for our name in three years and more in five years. I’m sure that if we were to come with a dollar transaction it would be easier to issue in five years than three years — always assuming the basis swap works. When we returned to the market in 2012 we chose three years because we recognised that our credit had to be retested by investors.

In terms of pricing, we also differ from the more established names. There is not a great deal of liquidity in our name, because we don’t have many dollar deals outstanding. The elements driving our pricing would be the few deals outstanding, com-parables, even if there aren’t many, some scarcity value, and the basis swap and the OLO curve.

Seco Presencio, CEB: I agree that investors are taking into account more than ever that we have

scarcity value given the limited size of our pro-gramme and the credit quality of our name. Each SSA issuer is being analysed much more intensively than pre-crisis.

Hellerup, NIB: Investors are more price sensi-tive, especially central banks. We did a transaction in February 3bp behind World Bank, which we thought was tight, but central banks liked it, which gave momentum to the rest of the investor base, which allowed us to build a book of $2.7bn.

Given how tight swap spreads are, it is under-standable that investors should be more price sensi-tive, because one basis point now means a lot more relative to Treasuries.

Purton, Daiwa: The tight swap spreads are also

Vince Purton, Daiwa



leading to some stretched tenors. We’re seeing more long five year deals, for example.

EUROWEEK: Are bank treasuries more import-ant in the SSA investor base?

Hellerup, NIB: They have become much more important, not just in dollars but in all currencies. In some currencies they are also important players in maturities beyond five years.

Seco Presencio, CEB: Last year we saw a notable increase in the participation by bank treasuries in our transactions. This year, we’ve been seeing more diversification among central banks. A number of central banks, which previously only invested up to three years, are extending to five years, and as we are a five year issuer we’re seeing newcomers to our deals. So although bank treasuries are very import-ant, their impact on our deals has stabilised because we have new investors from the central bank space.

Laurent, EBRD: Bank treasuries are certainly a driving force. What we haven’t yet seen is a global Basel III focus on liquid assets. Japanese, as well as Chinese and Hong Kong banks, are starting to do so, but most did not seize on it as early as the banks in Europe.

A lot of banks’ borrowing costs are above where the SSAs come, so they’re not going to move early because it creates a negative carry. Credits priced at Libor or Libor flat won’t be exciting when their borrowing costs are so much higher, but we will see them come to the market more.

Leclercq, Belgium: We’re not in the market very often, having issued once in 2010 and once in 2012. But we’ve seen a trend, in that in 2010 57% of our issue went to central banks and 16% went to banks and bank treasuries. In 2012, it was the opposite, with central banks taking 30% but bank treasuries were much more important.

There are two elements driving this. There are the regulatory changes. But it also has to do with the tail risk of a break-up of the European currency. While central banks were investing in the Belgian credit, they weren’t doing so at the longer end and certainly not in dollars. They were buying euros up to 12 months.

Now they’re buying us in dollars up to three years. So if we were to do a transaction now, the share of central banks would be much higher than in 2012. So to some extent we welcomed the fact that in 2012 that bank treasuries were so interested in our name and were able to take up the share that central banks were taking up before.

EUROWEEK: Has Rentenbank seen any changes in its US dollar investor base?

Goebel, Rentenbank: We have continued to build our US dollar investor base. We see some new central banks but the picture has not changed much over the last year or two. Central banks typ-ically account for more than 50% of our US dollar benchmark placement, while the size of the US real money bid always depends on maturity and relative value versus Treasuries and US agencies. We also see steady demand from asset managers throughout the world.

EUROWEEK: Are SSA borrowers seeing new central banks coming in to their dollar deals?

Laurent, EBRD: The central bank buying base has completely changed. We’re now seeing African, Latin American and eastern European central banks. It’s a healthy change and I think we’ll carry on seeing new entrants.

Leclerq, Belgium: Middle Eastern central banks have also become very important. They and North African central banks played a big role in our last transaction.

Anne Leclercq, Belgium



Brown, Daiwa: It’s also worth noting that some of the central banks who are now playing in the SSA space have traditionally been more, or even exclusively, involved in the US Treasury market and haven’t touched SSAs. Some of those accounts are buying SSA product for the first time which is a reflection of low absolute yields.

We’ve seen an uptick in US government bond yields, and if that continues they may move back to Treasuries because the relative value in the SSA product will diminish.

Hellerup, NIB: Central banks have also been say-ing that some SSA names are trading too close to US Treasuries. This is why many central banks have been buying into other currencies, notably Australian dollars.

EUROWEEK: There has been plenty of talk about a surge of Japanese liquidity into foreign bonds, but has this materialised yet?

Goebel, Rentenbank: There have been fewer flows than expected. We haven’t seen a massive increase in demand for our US dollar globals from Japanese real money investors. We have also been a little surprised not to have seen a pick-up in Japanese demand for Australian dollar product, but over the long term there is a good chance we’ll see a rise in Japanese demand.

Purton, Daiwa: We’re not yet seeing this wall of money. That has a lot to do with the Japanese psyche. Two days after the Bank of Japan’s policy announcement the EIB launched a $5bn deal and the media said a wall of Japanese liquidity was flow-ing into the issue. That’s not how Japanese institu-tions work. They don’t make major asset allocation shifts overnight.

There is a strong case to be made that they will be a more important factor. But it’s hard to point to any empirical evidence of this flow.

We’re seeing Japanese domestic yields increasing and that is going to create some more attractive alternatives to foreign bonds for Japanese investors. The first step for them will be to stay in yen but look at foreign credits in, for example, Samurai format. Step two will involve taking currency risk. It won’t be an avalanche, but nor will it be a trickle.

Brown, Daiwa: Another driver will be absolute yields. Japanese investors tend to be very focused on them and if they continue to tick up we may see more Japanese participation. If the uptick is reversed I suspect we’ll have to be patient for a little while longer.

Laurent, EBRD: We last roadshowed in Japan in December and I did not notice any change then. Things tend to move very gradually in Japan.

Leclercq, Belgium: True. But once Japanese inves-tor sentiment changes, they tend to remain very loyal. Even between 2008 and 2010, for example, they did not rush to step out of the Belgian credit. They stepped out at the end of 2011, but they came back very quickly in 2012 because of a renewed belief in Europe.

Hellerup, NIB: The other important point about the Japanese is that they buy so many products. They buy dollar benchmarks, they buy Uridashis and they buy non-dollar currencies. That’s one

reason why Japanese demand in general is pretty constant — there is always one market that works.

EUROWEEK: What are investors saying about Europe? Is the perception that the worst is over?

Leclercq, Belgium: There is a very positive feeling and it is hard to reverse sentiment once it has been established. It’s clear that the mood has changed, whereas the mood from 2008 to 2011 was negative. The fact that Italy was able to do a 30 year deal in such a big size illustrates how much of a change

Jens Hellerup, NIB



there has been. Initiatives such as the creation of the EFSF and

the ESM, accompanied by the strong messages from the ECB, have finally been taken by the market as the sign that the eurozone is here to stay. When we roadshow there are still plenty of questions about Europe, but people are focusing much more on the credit of Belgium itself rather than on the broader eurozone picture.

Goebel, Rentenbank: When investors ask us Rentenbank-specific questions these are mostly on the state of affairs regarding the refinancing guar-antee that has been in the pipeline for some time. We always explain that this has been delayed purely because the guarantee is part of the legal package that transforms the European Capital Requirement Directive and Regulation — which triggered the need for the refinancing guarantee into German law. The guarantee is now likely to become effective on January 1 2014.

Investors also ask us whether this will lead to a change in our mandate or to any meaningful increase in the size of our funding programme, and we reassure them that this will not be the case.

Brown, Daiwa: I agree that the sentiment is now completely different. Because of that change, if and when further bad news comes out about Europe the impact of negative headlines will be short-er-lived and more limited in terms of the volatility it prompts. We saw that during the Cyprus crisis.

Leclercq, Belgium: And during the Italian election, which was a real eye-opener. The market is now confident that if there are negative events, concerted corrective action will be taken — and taken quickly.

Purton, Daiwa: That’s not just a European view. Investors in Japan and the US are now confident that the situation in Europe is under control. Away from the dollar market we are working on some yen deals for European issuers which six months ago would not have been possible.

Seco Presencio, CEB: Investors’ main concern used to be whether European countries were going to default or not. Now, their main concern is about when growth is going to recover.

Goebel, Rentenbank: I agree that tail risk is reced-ing. What has driven the spreads over Bunds of 10 year peripheral government bonds from about 700bp to 300bp is that the redenomination risk is no longer priced in. Investors are now pricing those countries’ bonds based on the assumption that they will stay in the euro, which is very positive.

We also get plenty of questions about the German stance towards the euro and how we feel about it. We can only report that 95% of the population is fully aware of how positive the euro has been for Germany from an economic perspective.

EUROWEEK: What about the US economy? Is there anything to suggest that in the longer term inflationary concerns may start to rise in the US, putting pressure on yields?

Goebel, Rentenbank: No. Investors have become accustomed to the low yield environment. I don’t see many of them moving into riskier assets in search of higher returns. Nor from a macroeco-nomic perspective do I see any reason why dollar

yields should start ris-ing again soon.

Purton, Daiwa: In the long term, as Keynes said, we’re all dead. But in the short term things will remain positive. US mone-tary policy will likely remain very accom-modative for the com-ing months, although at some stage things will have to change.

Leclercq, Belgium: There are some signs of the economy improving. But the biggest question mark seems to be when QE will start to unwind in the US and how that will be conducted.

EUROWEEK: How is the market likely to be impacted by developments such as the discussion over two-way CSAs, the possible introduction of a financial turnover tax and the withdrawal from the SSA market of UBS?

Stefan Goebel, Rentenbank



Laurent, EBRD: We’ve been very resistant to two-way CSAs. Apart from the EIB, supranationals don’t have access to a lender of last resort, as banks do. In a two-way CSA, either with the banks or through a central clearing system, we would be asked to take credit as well as liquidity risk. I don’t think we’re set up to do this. It would mean we would end up with much larger borrowing programmes and much larger holdings of liquid assets, which would be unnecessarily risky for us.

On the financial transaction tax, it would be a game-changer if it went through in anything like the shape that is being proposed, because it would have an effect on the repo market and even on collateral. The tax seems to suggest that liquidity is a bad thing, whereas financial stability regulation says the exact opposite.

Much post-crisis regulation has been directed towards the need for collateralisation and even aims to promote it for derivatives purposes, so applying a financial transaction tax would undermine this.

It also makes very little sense for bank treasuries, which as we were discussing earlier are an import-ant source of demand for SSAs, if it makes liquid instruments illiquid.

If the tax goes through it will probably exclude repos and sovereign bonds in the secondary mar-ket, and supranational bonds are by definition excluded.

Leclercq, Belgium: Next to the credit consider-ations such as AA sovereign versus bank credit, one reason why we will not enter into a two-way CSA is that it would push up our debt to GDP ratio, which is already very close to 100%, at a time when we are under pressure from the European Commission to keep it under 100%.

Given that our debt to GDP ratio is such an important part of our credit metrics, two-way CSAs are out of the question.

That said, we have noticed that some banks, but certainly not all, are already charging us for not having a two-sided CSA.

Hellerup, NIB: Just to comment on UBS, every-one agrees that was a very sad story. But we are seeing new banks with ambitions in the dollar market and on the swaps side we’ve also seen new banks entering the market. So there is still plenty

of competition among the banks.

Goebel, Rentenbank: The UBS withdrawal seems to have been a one-off event. We’ve seen other banks building up their efforts on the SSA side since then and filling the void that UBS left.

We’ll need to monitor how derivatives legisla-tion develops. We are mindful of the issues that banks have with one-way CSAs. We are working on making our arrangement with the banks even more reasonable over the next couple of months. But independent of this, the latest Basel Committee consultation paper says that bilateral exposures have to be fully collateralised and may even trigger independent amounts. This may not be too helpful for derivatives pricing.

The issuance model of SSA borrowers may well be undermined by the financial transactions tax. I find it difficult to see how international investors would find it attractive to buy dollar agency bonds when liquidity is going to be massively reduced. It isn’t very conducive to the case for central banks to hold these bonds as liquid investments for their foreign currency reserves.

Seco Presencio, CEB: There have been new banks pitching for business on the DCM and the swaps side, which is a natural function of the evolution of the market. So far, we have been able to efficiently execute the hedging of our issuance transactions, even if the received range of swap quotations is quite wide.

Leclerq, Belgium: One of the aims of the financial transactions tax is to reduce market volumes, which I don’t think should be an aim per se. But there are two essential elements when speaking about liquid-ity. One is volume and the other is the bid-offer spread and because all brokers and counterparties will be subject to the financial transactions tax it will make this spread opaque and unpredictable. That alone would be enough to kill the secondary market, which would in turn undermine the health of the primary market.

It would also have an impact on the economy as a whole, given that sovereign bonds act as the benchmark for other products such as mortgages. So it will have an effect on us as issuers, as taxpayers and also as individuals. ◗

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18 Socially Responsible Investment


According to Evelyn Hartwick, capital markets financial officer in the treasury department at iFc in Washington, investor allocation on its $1bn green bond that was launched in February was perhaps the most difficult it has ever known.

The three year iFc bond, led by citib-ank, JP Morgan and Morgan Stanley, was a landmark for the Sri (socially responsible investment) sector because although iFc had issued $1.2bn of green bonds since its first deal in 2010, February’s transaction was the first benchmark bond of its kind. By injecting unprecedented liquidity into the primary market for green or Sri bonds, iFc achieved one of its stated objectives, which was to support the growth of this rel-atively under-developed market.

demand, says Hartwick, reached $1.8bn within two hours, with more than $1bn coming from dedicated Sri investors, meaning that the entire transaction could have been placed with so-called "green" accounts.

However, given that the bond was priced in line with where a conventional bench-mark with a comparable size and maturity would have been priced, it inevitably also generated strong demand among iFc’s investor base of central banks and official institutions. Hence iFc’s allocation head-ache. insofar as is possible or practical, should a “green” bond be placed exclusively with investors with a mandate to invest in

instruments where the proceeds are ring-fenced for a specific environ-mental purpose, which is what distinguishes an Sri issue from conventional or “brown” bond? or, should Sri bonds be placed with as many mainstream institutions as pos-sible?The answer prob-

ably lies somewhere in between. “central banks aren’t the main target for our green bonds,” says Hartwick. “our target investors are the dedicated Sri funds that have been set up specifically to invest in bonds such as our recent green bond benchmark.”

However, she adds: “We are trying to encourage large mainstream institutions to support green development. So the crowd-ing-in of investors should be an integral part of the promotion of this market.”

Although so-called “themed bonds” have been a feature of the Uridashi market in Japan for a number of years, until recently they had yet to gain traction in the global institutional market.

That is changing, thanks in no small measure to dedicated institutions such

Socially responsible investment is offering returns beyond simply making investors feel better and it is rising in popularity as a result. Earlier this year the market had its first benchmark bond. With the SRI investor base growing, it is unlikely to be the SSA market's last.

Investors look for greener pastures

Vince Purton, Daiwa Capital Markets

Socially Responsible Investment 19


as the international Finance Facility for immunisation (iFFim), a financing vehi-cle created in 2006 to fund immunisation programmes — meaning that all its bond issuance is, by definition, themed. “iFFim was the first true Sri-type entity, with a very direct and clearly-stated mission,” says george richardson, head of capital markets at the World Bank, which acts as treasury manager for iFFim.

“We have funded in a combination of benchmarks, targeted issuance and Uri-dashi,” says rené Karsenti, president of the international capital Market Association (icMA) and chairman of iFFim. “our inaugural issue was a $1bn benchmark, and the dollar market is a natural source of funding for us. This is because it allows us to reach the widest possible investor base, and because our expenditure is generally dollar-denominated, so all our non-dollar issuance usually has to be swapped back into US dollars.”

Karsenti is encouraged by the expansion of the investor base for Sri bonds. “Socially responsible investment has always made up a part of the portfolios of pension funds, but from my discussions with institutional investors, i have the impression that their exposure is increasing,” he says. “However, i also believe that it is our responsibility as issuers to reach out to mainstream inves-tors and demonstrate to them that they can couple earning market-based returns with supporting noble causes.”

At the World Bank, which since 2008 has issued $3.5bn of its green bonds in 55 trans-actions across 17 currencies, richardson agrees that the growth of the Sri investor base has been encouraging. “The evolution since 2006 has been significant,” he says. “Although the financial crisis put it on the back burner for a while, we are now seeing a resurgence in interest. A couple of large fund managers are now creating Sri indi-ces, while we are receiving more and more

mandates from traditional fund managers and insurance companies whose clients are asking for more green or Sri investment opportunities. none of this existed in 2006 when the whole Sri world was more or less restricted to equity markets.”

The size and geographical scope of the investor base for Sri bonds was strengthened when, days after the launch of the iFc green benchmark, Export-import Bank of Korea (Kexim) launched its debut climate-friendly bond. This was a $500m five year issue pay-ing a coupon of 1.75%. Aside from being the first emerging market Sri issue, the Kexim transaction was regarded as a big develop-ment for the asset class as it was the first bond of its kind from an issuer outside the spectrum of multilateral development banks.

Institutional demandThe success of the Kexim transaction, led by Bank of America Merrill Lynch and SEB, was further proof of the strength of institu-tional demand for Sri exposure. Like iFc’s benchmark, the issue was healthily over-subscribed, with the order book reaching $1.8bn. That allowed for pricing to come 5bp inside guidance, at 95bp over Treasur-ies. it also allowed for very well diversified placement, with 47% going to the US, 32% to Europe and 21% to Asia. Asset manag-ers bought just over half of the Kexim Sri bond, with banks taking 31% and insurance companies and pension funds 5%.

Hee-Sung Yoon, head of internation-al finance at Kexim in Seoul, says that almost 70% of the bond was placed with Sri investors. “it was a very different order book from what we see in our convention-al bonds, and we were very excited about the spectrum of investors we were able to attract,” he says.

Yoon says that Kexim intends to be a regular issuer in the Sri market. “We have a pipeline of assets to be financed with green aspects, such as wind and solar

20 Socially Responsible Investment


power projects and carbon-capture developments,” he says. “And as a number of investors emailed us after the transaction to say they would welcome further opportunities to buy green bonds from Kexim, we are sure there would be plenty of demand.”

Vince Purton, head of debt capital markets at daiwa capital Markets in London, says the Kex-im issue was highly encouraging for the Sri market because it has supported the further diversification of the asset class beyond the multilateral development banks. “The development banks have a natural advantage insofar as their explicit mandates are to finance projects and developments that protect the environment or support improvements in areas such as public health and education,” he says. “But in the Uridashi market we have seen other types of borrowers issuing themed bonds. For example, rabobank recently issued in South African rand and some other Fig borrowers are also looking at the market. As long as a borrower can make a credible case for being able to ring-fence the proceeds for a specific theme there is absolutely not a restriction on the type of issuer that can access the Sri market.”

Perhaps. But as borrowers explain, in the institutional dollar market for Sri bonds, it is not simply a case of pledging that pro-ceeds will be used for a specific "green" theme. As Hartwick says, unlike in the Uridashi market, institutionally targeted Sri bonds are subjected to vigorous due dil-igence. “investors need to understand iFc’s inclusion criteria for green investments

and take note of the third party opinion provided by external specialists such as the oslo-based centre for international climate and Environmental research,” she says.

Green bond red tapeThe most active borrowers in the Sri mar-ket insist that the extra red tape associated with issuing green bonds is worthwhile, because capital markets can save lives. That is Karsenti’s firm conviction, and iFFim’s track record appears to prove his point. its funding has allowed gAVi (global Alliance for Vaccinations and immunisation) to vac-cinate more than 325m children, helping to save an estimated 5.5m lives and about $21bn in healthcare costs since 2000.

That being the case, should investors not be asked to pay a modest concession as a contribution to the good causes they are supporting? That may sound an absurd proposition, but in today’s market investors in Sri bonds can scarcely believe their luck. on the one hand, many of the institutions buying into these issues in the primary market are identified as good environmental citizens on issuers’ websites, which can do no harm to their public relations. on the other, they are offered the chance to buy a bond that provides exactly the same yield as a conventional bond. if there is such a thing as a win-win proposition for investors in the capital market, Sri bonds appear to come close.

At iFc, Hartwick sees no alternative to pricing of Sri bonds at the same level as conventional issues. She says that especially in this low interest rate environment, charg-ing a premium to investors with a fiduciary responsibility to maximise returns to their stakeholders is a non-starter. “We don’t think we should effectively be penalising investors for supporting green development, which is why we decided to price our Sri benchmark flat to our vanilla curve.”

Kexim also priced its Sri bond in line

George Richardson, World Bank

Socially Responsible Investment 21


with the levels it would expect in the conventional market, resisting calls from investors to offer the bond at a discount due to the perceived potential illiquidity of the issue in the secondary market. “We persuaded investors that there would be no problem with liquidity and that pricing should therefore be the same as in our con-ventional bonds,” says Yoon.

others are not so sure. “There has to be a price difference,” says richardson at the World Bank. “That means we are left with a smaller universe of investors who are pre-pared to pay for the extra value that a green bond delivers. There isn’t yet sufficient demand to do large $1bn-sized green bonds unless there is a price incentive to attract the crossover investors. So it will mean that our bond issue sizes are likely to be small-er until there is a further development in demand that values the extra components that green bonds offer.”

iFFim’s Karsenti says it also issues at market rates. “At the same time, i believe we could also be looking at developing structures where investors can either accept lower returns, or reinvest their returns in our activities. We want to demonstrate that we are a solid and viable issuer with low gearing and a strong financial profile, but at the same time i think we can reach out to pockets of investors that are prepared to give up some of their returns.”

Secondary performanceTo date, investors in iFFim’s benchmarks have been well rewarded by their per-formance in the secondary market. As richardson says, on each of its benchmarks to date, in sterling and Australian dollars as well as US dollars, iFFim has beaten its peer group in terms of pricing, sometimes by a wide margin. That is impressive, because as Fitch observes in a recent report on supra-nationals, iFFim’s rating is “credit-linked to France and the UK sovereign ratings”.

in its most recent ratings review, Moody’s said that iFFim’s spreads tightened during the calam-itous autumn of 2011. “This com-pared favourably to other European supranationals and can be largely attributed to the reputational ben-efits of having the

World Bank as its treasury manager,” Moody’s noted.

This secondary market performance may also reflect the relative scarcity of iFFim issuance. As Karsenti says, this year its like-ly issuance volume will be around $800m and taking into account current pledges it will probably settle at about $500m a year, which clearly limits the potential for issuing liquid benchmarks.

The strong performance of iFFim’s bonds may also be a by-product of the growing Sri investor base in the fixed income world. According to the latest Eurosif survey of asset allocation in Europe, bonds account-ed for 51% of all Sri exposure in 2011. Although this is down slightly from 2009, when fixed income accounted for 53%, this share needs to be seen in the context of a much larger total market for Sri. According to Eurosif, in 2012: “All responsible invest-ment strategies surveyed have outgrown the market, and four out of six have grown by 35% a year since 2009. The combined growth of all strategies at European level continues to outpace the overall investment market, demonstrating the continuous appetite by investors to take into account environmental, social and governance fac-tors, despite (or maybe due to) the ongoing economic and market turmoil.” ◗

René Karsenti, ICMA

Serving the world in SRI bonds




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