Investor appetite for Dutch paper is strong but getting a slice of action can be tricky with the low level of offerings. Michael Marray reports.

With the current low level of issuance from corporates, it is financial institutions that have made the majority of recent offerings out of The Netherlands. These issuances have met with a strong reception from investors in the US and Asia, as well as the rest of Europe.

The appetite in the US was illustrated in November last year, when Rabobank sold $1.75bn worth of Trust Preferred Securities, helping raise its Tier 1 capital adequacy ratio to a healthy 10.8%. The rarity of a Triple A rated bank coming to the market helped the issue come in 2.5 times oversubscribed.

“We have issued Tier 1 capital in the Dutch market in recent years, and from a diversification point of view we were looking to other regions in the world, and based upon research done by ourselves and lead manager Merrill Lynch we came to the conclusion that the US market was the best market at that moment,” explains Bert Bruggink, head of Group Treasury at Rabobank Group.

“There was an enormous appetite for this issue, because this was the highest rated Tier 1 structure currently in the US marketplace, so it was of great interest to US investors, including pensions funds and insurance companies,” says Mr Bruggink. “The pricing that we realised, which was 60bps over US Treasuries, was by far the lowest ever related to a Tier 1 offering.”

Asian popularity

In addition to the US, Asian demand for Dutch offerings is also on the increase. Dutch banks have a well earned reputation for financial strength and conservative lending policies, and their paper is particularly popular with Asian central banks.

In 2003 SNS Bank did its first public Floating Rate Note targeted at the Far East. Around 35% of this $1bn offering was sold to Asian accounts, and the bank expects to place an increasing amount of paper in the region. “We currently fund ourselves quite heavily in Europe, so our dependence on external markets is growing,” explains Bart Toering, head of capital markets at SNS Bank. “Asia is where the money is, so we believe that the future for a part of our funding is the Far East. In addition, the rating agencies like to see diversification of funding, and for a single A bank such as ourselves that is quite important.”

Issuance is also being planned in the US, though this is likely to be in the form of dollar tranches from the bank’s residential mortgage-backed securities (RMBS) programme, Hermes. “I don’t see any advantage at the moment in raising senior debt in the US for our name, because spreads are not really favourable for us, and maturities would be relatively short,” says Mr Toering. “We were actively looking at an RMBS offering in the US, though so far this year conditions in the European market have been so good that we have concentrated upon euro issuance.”

Australian attraction

As part of its diversification process SNS Bank is also setting up a medium-term note (MTN) programme under Australian law, which will probably be tapped later this year. One reason that Australian dollar funding is attractive is connected with the basis swap. Australian banks cannot fund themselves completely in their own region, so they issue heavily in other currencies, and then swap back into Australian dollars. This means that an issuer such as SNS Bank can get attractive rates being on the other side of the transaction.

BNG, the specialist public sector lender, is already well established in the Australian ‘Kangaroo’ market. Since 2002 BNG has tapped the Kangaroo market three times for a total of A$700m. “Our policy is to keep our investor base as broad as possible, so we established the Kangaroo programme because we can reach a very different type of investor – the local Australian investor – which you don’t see in other issues,” says Willem Littel, senior manager, capital markets, at BNG.

“We issue E12bn to E14bn a year, so we don’t want to be dependent upon one investor base or one region, and we also have very good follow up in Asia,” Mr Littel adds. “This year up to end of March, we did E5.5bn worth of issuance in total, and around one-third of that was taken up by Asian investors.”

Corporates missed

Dutch corporates are well known as irregular and opportunistic issuers in the capital markets, but even so the absence of any public bond offerings up to mid-April 2004 probably came as a surprise for investors hungry for paper.

Last year was also quiet. Once non-Dutch names such as Telefonica and the defence and aerospace group EADS (which issues out of Netherlands-based finance subsidiaries) are stripped out, total public issuance from Dutch corporates stood at around E6.5bn, with the most high profile offerings coming from names such as utilities Essent and Nuon, and brewing company Heineken. Added to that is an estimated couple of billion dollars of issuance in 2003 in the US private placement market.

“Many Dutch corporates who are eligible to come to the public markets have been strengthening and re-shaping their balance sheets, but as the economy continues to recover in 2005, and as we see increased M&A activity, there will be more public issuance,” explains Xavier Werner, head of Dutch origination at ABN AMRO.

“The current buzzword for banks is liability management,” Mr Werner says. “We are offering a wide range of products that provide all-inclusive financing solutions, so, for example, we have been busy arranging syndicated loans for corporate borrowers, as well as bond buybacks, and US private placements for both unrated and rated companies looking for long term 10-15 year financing.

Finance source

Jan Hendrik de Graaff, vice president, debt capital markets origination at ING Group says: “For a lot of Dutch corporate issuers, there is an

opportunity to raise financing in the US private placement market. It has been a very welcome source of financing either for companies that had a need for smaller transactions or were not rated, or had a need for longer maturities than other markets were providing,”.

He continues: “Investors in general have a need for yield, so in 2003 there was a very strong demand for corporate debt in general, and we have seen that investors are more comfortable in going down the credit curve and are comfortable going down the maturity curve. We have seen a move towards extension of duration, and also a move towards a buying of credit in the triple B area rather than the single A area.”

Treasury bonds

At the triple A end of the market investors continue to have a strong appetite for Dutch treasury bonds, and the Dutch State Treasury Agency (DSTA) has recently been taking steps to strengthen its relationship with buy and hold investors.

The DSTA holds TAP auctions twice a month, where it posts bonds at a given price, and the 13 primary dealers decide whether to lift bonds at that price, but now a Dutch Direct Auction (DDA) has also been introduced several times a year.

Under the DDA, bids will still be put in by the 13 primary dealers. But they must declare who they are bidding on behalf of, for example; their own trading book, a hedge fund client or real money accounts.

Priority trading

The key is that real money accounts will get priority allocation, as follows. Take an example where E6bn worth of bonds are being offered, and there are E2bn worth of offers each from trading accounts and real money accounts at 10.5bps over Bunds, and another E2bn each at 11bps. Under the Dutch auction rules all buyers get their bonds at the same 11bp clearing price. Under the new priority system both the trading accounts and real money accounts who bid 10.5bps get their full E2bn allocation. But at the clearing price of 11bps, buy and hold investors get priority treatment, so in this case they will be allotted their E2bn worth of bonds, while the trading accounts who bid at this price will receive no allocation.

“The primary dealers have created a very liquid secondary market, but nonetheless we wanted to get end investors involved in primary issuance,” explains Erik Wilders, head of money and capital markets at the DSTA. “We want to have more communication with end investors, and the DDA creates a link between us and these end investors.”

Using the contact information provided by the primary dealers, the DSTA sends out letters to the buyers, and may later invite them to investor meetings, either one on one or in groups.

There was a pilot transaction in June 2003, but the first official DDA was completed in March of this year. Total issuance of Dutch treasury bonds will be around E32bn in 2004.

Like many other countries, tighter control of the budget has led to a lower quantity of paper, and the high level of investors demand has pushed down spreads. The offering of E5bn worth of bonds was very heavily oversubscribed, with bonds allocated at a clearing price of 11bp over German Bunds.

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