A $3bn global bond, a €5bn benchmark deal – and the year is barely half started. Edward Russell-Walling reports on KfW’s labours.

As perhaps the most admired of all agency borrowers, Germany’s Kreditanstalt für Wiederaufbau (KfW) has not failed to impress with its 2007 issuance so far. It has achieved its tightest-ever funding level in euros and a record volume in one of its dollar benchmarks, while continuing to blaze a trail in ever more exotic currencies.

Last year, the agency raised some €54bn in the capital markets and plans to do much the same (€55bn) this year. “Approximately 40% of that will be via dollar and euro benchmark issues,” says Horst Seissinger, KfW’s head of debt capital markets.

It got off to a flying start in January with a $3bn (€2.2bn), 10-year global bond. This was its largest-ever dollar issue over that term (though it achieved the same size with a three-year dollar bond in December, 2006). “It was a milestone,” Mr Seissinger says. “In the past, we have always issued $1bn in the 10-year segment. But because of substantial investor demand for 10-year paper at the beginning of the year, we decided to go for a higher volume.”

In fact, the issue was originally planned to raise $2bn. But with $3.2bn in orders from 82 investors, spread across Europe, the US and Asia, the size was increased to $3bn during the bookbuilding phase. A coupon of 4.875% at an issue price of 99.352 meant a spread over US Treasuries of 31 basis points (bps).

Billowing order book

Later the same month, with demand for longer-term AAA bonds remaining robust, KfW successfully placed €3bn-worth of 10-year bonds with a coupon of 4.125%, yielding 4.145% – or 13.5bps over German bunds. The order book bulged with €9bn of demand.

“There is a clear focus in the euro market on longer maturities,” Mr Seissinger observes. “But there is so much liquidity in this market that we are also seeing demand for shorter maturities.” That was especially the case in March, when the market was uncertain over the immediate direction of European and US interest rates. KfW felt it was the perfect time to strike with its second euro benchmark issue of the year.

Noting that there was very little competing supply in this part of the curve, KfW launched a three-year transaction with initial price guidance of mid swaps minus 13bps. Lead managers BNP Paribas, Citi and Credit Suisse hoovered in bids for €6bn from 120 accounts by the time the order book closed, with particularly strong demand, unsurprisingly, from Europe. The issue size was subsequently set at €5bn. With a coupon of 3.875% (yielding 3.991% at the reoffer price), this was the tightest funding level achieved by KfW since the start of its euro benchmark programme in 2001, representing a spread of 8.6bps over the comparable German bund. European accounts took 67% of the issue. As BNP Paribas points out, this included the highest-ever French participation in a KfW benchmark deal, at 18%. Asia bought 14% and the Americas 12%.

The year’s second dollar benchmark offering was launched in April, after KfW had identified an undersupply in the five-year segment. While the market remained hungry for 10-year paper, the agency had already issued in that maturity. It saw some overlap demand between five and 10 years, however, and so opted for a five as opposed to a three-year term. In spite of the fact that this is the most expensive part of the curve, there was strong demand totalling €3.2bn and the issue size was finalised at €3bn – though some investors would have preferred to see it set at €2bn.

With a coupon of 4.75%, the issue promised a yield pick-up of 29bps over Treasuries at the reoffer price. Europe took an unusually high 50% and, even though the pricing represented 2bps through US agencies, the US absorbed 17% of the issue.

KfW has already completed a little over half of this year’s funding – whose strategy traditionally has three pillars. Its benchmark programmes constitute one of them (usually 40%-45% of the total), and private placements (10%-20%) another. The third (a further 40%-45%) consists of more targeted public transactions, often in other currencies. KfW bonds in less mainstream currencies have long been popular with home country retail investors who buy them to hold. “But there is now strong demand from global institutional investors for exotic currency bonds,” says Mr Seissinger. “And they like to be provided with liquid bonds that can be traded after issue.”

This year has seen a string of issues targeted at this market, including the first global bond denominated in rand (R2bn – €210m), and a liquid 55m reais (€20m) bond. In May, KfW issued its first Icelandic krona bond with a 10-year maturity (IKr3bn – €35m). Expect the agency to be similarly inventive in the second half of its funding year.

Horst Seissinger: ‘investor demand’

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