The Dutch State Treasury Agency triumphed when it brought its 10-year bond to market with a coupon of 4%: the book closed within just four hours with most of the allocation going to real money accounts of international investors. Writer Edward Russell-Walling.

 

After 170 years in Amsterdam, the Dutch State Treasury Agency (DSTA) recently relocated to The Hague, to a renovated ministry of finance structure made of concrete and glass. The DSTA likes to think of the building as a metaphor for Dutch issuance – solid and transparent. That is not entirely fanciful, as the recent 10-year Dutch bond issue once again demonstrated.

The DSTA publishes its funding calendar at the start of each year and, although it is not always possible, tries to stick to it. It also uses the unique Dutch Direct Auction (DDA) to auction new issues, essentially treating all real money investors in the same way. Of that, more later.

The Netherlands’ funding needs for the current year, like those of most other sovereigns, have leapt up. Paying for the takeover of the Dutch operations of Fortis, together with capital injections for a number of other Dutch banks, will require an additional €80.5bn ($102.8bn) in 2009, creating a total funding need of €120bn.

Of that, €34bn is expected to be repaid by Fortis before the end of the year. The money markets should provide €38bn (plus anything that is required to balance the budget), leaving €48bn to come from the capital markets.

Paper run

The upsurge in funding requirements may be substantial, but the DSTA does not believe that meeting them will be an impossible exercise. “There is a run on AAA sovereign paper,” says Peter Nijsse, DSTA head of trading and issuance. “So it is relatively easy to increase our borrowing.”

Traditionally, the DSTA launches a new three-year and 10-year bond every year, with a 30-year deal “every couple of years” (although not in 2009). This year will, however, see a five-year transaction. The 2009 three-year bond was launched in January and raised €3.275bn. The 10-year was launched in the second week of February.

Investors have always been prepared to give away more for the large eurozone sovereigns of Germany and France, not least because the market for their bonds is highly liquid. Recently, however, gaps between the smaller nations themselves have widened, with the recent ratings downgrades of Greece, Ireland, Portugal and Spain. That only served to emphasise that, while the economic outlook remains uncertain across Europe, the Dutch economy is in better shape than many others. Gross domestic product (GDP) growth, for example, is falling more slowly than Germany’s and, although inflation is on the high side, Dutch unemployment is well below the eurozone average. The government’s budget has been in surplus for the past three years and its debt-to-GDP ratio is less than Germany’s and that of the euro area as a whole.

Reason to be hopeful

So the DSTA had reason to be hopeful when it brought its new 10-year offering to market, with a coupon of 4%. The DDA system turns on the fact that the DSTA is the sole bookrunner, and the only party to have sight of all the orders – although bids have to be placed via one or more primary dealers.

Allocation takes place according to a clear set of rules, with no special treatment, though the system does distinguish between real money and other accounts. “This means that the investor sets the price,” says Mr Nijsse. “It also provides confidentiality for investors.”

Mr Nijsse admits that it was not easy to decide where to set indicative spreads, but the auction kicked off with guidance of between 77 basis points (bps) and 82bps over the German reference bond. The book built very quickly indeed.

“We felt that the spread guidance had been very generous, so we narrowed it to 75bps to 77bps,” says Mr Nijsse. The order book closed after four hours with bids of nearly €16bn. The spread was fixed at 75bps and the total allocation was €6.5bn.

It was something of a triumph, generating far more investor interest than the recent auction for a new 10-year German Bund. The main aim of the DDA process is to reach the end investor, so the DSTA was particularly pleased that 85% of the allocation went to real money accounts – fund managers, central banks, insurance companies, pension funds and private banks.

While many other recent sovereign issues have depended heavily on the domestic bid for their success, this one harked back to the old days when international investors invariably took the lion’s share. Dutch investors accounted for 10% of the allocation, but France took 20%, the UK 18% and Germany 15%. Most of the remainder went to other parts of Europe.

“We knew that the Netherlands was a very strong core euro area country, which was attractive in the current climate,” says Mr Nijsse. “But we were especially pleased that we were able to tighten the guidance price.”

PLEASE ENTER YOUR DETAILS TO WATCH THIS VIDEO

All fields are mandatory

The Banker is a service from the Financial Times. The Financial Times Ltd takes your privacy seriously.

Choose how you want us to contact you.

Invites and Offers from The Banker

Receive exclusive personalised event invitations, carefully curated offers and promotions from The Banker



For more information about how we use your data, please refer to our privacy and cookie policies.

Terms and conditions

Join our community

The Banker on Twitter