In the current financial climate, five-year papers are considered a no-go area for US bond investors. This makes the $4m, five-year issue pulled off by Germany's Kreditanstalt für Wiederaufbau last month all the more remarkable. Writer Edward Russell-Walling

Ever since the banking industry began to implode last September, US bond investors have regarded five-year paper as a step too far into an uncertain future. But one of the world's classiest issuers has now tempted them back into this neglected part of the curve. Germany's Kreditanstalt für Wiederaufbau (KfW) comfortably pulled off a $4bn five-year issue in March, though it had to price the deal at the generous end of guidance, Bundesrepublik guarantee notwithstanding.

The agency has a well-publicised three-pillar funding strategy, consisting of global benchmark euro and US dollar capital market issues, other underwritten and targeted public transactions, and private placements. In recent years it has seen the benchmarks' share of the total increase, from 35% in 2004 to more than 50% last year. Other public transactions have shrunk from 45% to 37% and private placements from 20% to 12%.

"In 2008 in particular we have seen more investors looking for very liquid products," says KfW treasurer Dr Frank Czichowski. Heightened demand for liquidity has been accompanied by a taste for reduced complexity, and KfW has grown its benchmark programme accordingly.

"KfW paper is not as liquid as US Treasuries or Bunds but, because of the amounts outstanding and the number of dealers involved, ours is regarded as more liquid than other products," Mr Czichowski adds.

Dollar plan

Since 2002, when the agency issued its first such benchmark, the US dollar programme has been a key part of its issuance, and policy has been to issue in every year across the curve. Though it doesn't always issue in every maturity, the plan is to have annual dollar transactions in two, three, five and 10 years. Since inception, KfW has raised $94bn in 32 US dollar benchmarks.

"What is attractive for investors is that there is a global bid for these securities," says Mr Czichowski. "The average take-up is 29% out of the Americas, 33% from Asia and 32% from Europe."

KfW was able to broaden American appeal for its bonds in 2006, when it restarted its US MTN programme. This has since accounted for more than $8bn in funding via 36 issues. There have been three global benchmarks in US dollars so far this year – a $2bn two-year, a $5bn three-year and the enterprising $4bn five-year, the biggest sovereign, supranational and agency (SSA) bond in that maturity since September 2008.

KfW raised €75bn in funding last year and expects to do about the same in 2009. By mid-March it had raised €28bn or 37% of the total, which puts it slightly ahead of schedule but not unreasonably so. "Our funding is always somewhat front-loaded," says Mr Czichowski. "And the first quarter is quite good for longer maturities. Later in the year, investors have a preference for shorter-dated paper."

Long-term comfort

As a financier of long-term economic, social and ecological development projects, KfW prefers longer terms for its own funding. While this year's wave of issuance has concentrated on two and three-year maturities, by March KfW felt investors were more comfortable with the idea of longer terms, particularly with an accompanying yield pick-up.

It decided that if it offered a decent premium over the secondary curve, it could succeed with a highly liquid five-year US bond. So after soft sounding a number of investors and receiving encouragement, it launched the transaction with bookrunners Credit Suisse, JPMorgan and Morgan Stanley. The price guidance was mid-swaps plus 90 basis points (bps) area. KfW points out that, these days, "area" implies 5bps either way.

While the agency would have been happy to print $3bn, it received orders worth $4.9bn from 126 investors. US investors clearly wanted a little extra in the price, however, and the transaction was concluded at 95bps over, representing a new issue premium of 10bps over its secondary market curve.

Compared with the average American take-up of 29% for KfW dollar issues, this deal attracted a whopping 62%, with about 50% from the US itself. It also confirmed a trend of lower participation by central banks. "Central banks were very heavy investors, particularly in US dollars," Mr Czichowski observes. "But overall they have reduced their holdings, or have gone very short-term to defend their local banking systems or their currencies."

Central bank participation in KfW issues has averaged 45%, but in this deal it was down to 30%. The proportion of investment funds – many of them US-based – was correspondingly high, at 48%. Some 20% was taken by bank treasuries.

This was a particularly satisfying deal for KfW, which regards the US as an integral part of its funding strategy. "Converting the issue proceeds into euros currently enables us to achieve relatively favourable funding terms, which ultimately benefits our promotional business," notes Mr Czichowski.

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