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Asia-PacificMay 4 2011

European issuers look to Asia to boost deal demand

European sovereigns, supranationals and agencies supply is running at high levels, and with the market environment far from ideal, issuers are having to fine-tune their issuance procedures to broaden their investor base. Placement with Asian accounts is critical to the success of many deals.
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European issuers look to Asia to boost deal demandEuropean finance ministers show off the European Financial Stability Facility treaty

With supply of European sovereigns, supranationals and agencies (SSA) paper running at high levels, regular contact with key investors is more important than ever and, in addition to a strong investor relations effort, issuers are becoming more flexible in how they approach the bond markets.

Syndicated sovereign deals are more commonplace since the financial crisis, alongside regular auctions, making use of the distribution capabilities of the major global investment banks.

There are also more dollar deals from European sovereigns, partly aimed at Asian central bank investors, and, as of mid-April 2011, the Dutch State Treasury Agency was preparing for its first dollar-denominated transaction since the 1950s.

French social security debt management agency Cades has recently issued in the 144A market, as opposed to its traditional eurodollar offerings, in a move that will add more US investors, but is also designed to create the larger deal sizes favoured by central banks.

Asian central banks are currently also buying non-dollar assets in greater quantities, in a continuation of a shift that got seriously under way back in 2003. But although this annual incremental change gives a big boost to demand for euro offerings, most of their portfolios are still denominated in dollars.

Demand from Asia for European bonds is currently high, as economic growth remains strong and there are large amounts of cash to be deployed. In the fourth quarter of 2010, Asian accounts pulled back somewhat because of concerns about eurozone contagion, but they are now more likely to look at problems on a country-by-country basis and less likely to take the view that a crisis in Portugal will have a knock-on effect in Spain.

Market mechanisms

Fund-raising exercises for EU mechanisms to support troubled eurozone countries have met with huge demand from Asian accounts so far in 2011.

The inaugural European Financial Stabilisation Mechanism (EFSM) deal was announced well in advance of launch, on December 22, 2010, with the intention of going to market early in 2011. This gave global investors plenty of time to understand the deal, which raised funding to finance loans to Ireland as part of the EU rescue package for that country.

“Given supportive market conditions in the first trading sessions of the year, the decision was made to open the order book at 9am Central European Time on Wednesday January 5, making EFSM the first euro-denominated benchmark of the year," says Frederic Gabizon, head of sovereign debt capital markets at HSBC in London. HSBC was bookrunner on both the EFSM and subsequent European Financial Stability Facility (EFSF) transactions. 

The order book closed after 45 minutes with more than €20bn of orders and in excess of 300 accounts involved.

Asian interest

EFSM was able to price €5bn-worth of five-year bonds at mid-swaps plus 12 basis points at the tight end of initial guidance of 12bps to 15bps. Asian placement was substantial at 21.5%, mainly going to central banks.

“Asian investors are well informed about the latest developments in EU finances, as well as the situation in individual countries, and they want a lot of detail on the immediate debt reduction plans in Europe, as well as structural measures such as pension reform," says Mr Gabizon.

This deal was rapidly followed on January 25 by another EU-level transaction related to rescue packages, this time for the EFSF. The EFSF is guaranteed by the eurozone member states, but because some of these are not rated AAA, there is credit enhancement in the form of an over-guarantee of the amount borrowed, plus cash balances. EFSF is also allowed to issue in currencies other than euros.

"Across Asia we had one-on-one meetings with high-level officials both within governments and central banks, and it was clear that there was strong interest in buying EFSF bonds," says Christophe Frankel, chief financial officer at EFSF in Luxembourg.

"Asian investors are very well informed about developments in Europe, both for individual countries and at EU level," he says. "For the EFSM deal, which was launched a few weeks ahead of our first offering, investors are getting exposure to the 27 EU members, while for EFSF bonds, the exposure is to the 16 members of the euro area, though both are rated AAA and there is no difference in credit quality."

An EFSF yield curve will be put in place during 2011. "It is important for the whole market to establish a good pricing reference for EFSF bonds, not only for us as an issuer and for investors, but also for other AAA rated European issuers such as KfW or [the European Investment Bank], as we price versus each other as well as versus swaps," says Mr Frankel. "We need different maturities, so having started with a five-year bond the next benchmark transaction is likely to be seven or 10 years."

Global relations

“EFSF executives made a substantial global investor relations effort in the months ahead of issuance, including several trips to Asia," says Philip Brown, head of SSA origination at Citi in London. “Citi and the other bookrunners also made a number of one-on-one calls in the week leading up to the transaction."

This effort all came together with a large investor conference call on the Monday ahead of the order book being opened, with 419 investors dialing in. On that call, EFSF systematically responded to 36 questions that had been collated by the bookrunners from discussions with investors the week before.

The order book opened on the morning of Tuesday, January 25, and books closed after only 15 minutes as orders hit €44.5bn, the largest book for any bond offering. EFSF priced the €5bn-worth of five-year bonds at 6bps over mid-swaps after initial price guidance of 6bps to 8bps. A total of 500 accounts participated and Asian placement was 38%, boosted by the pre-commitment from Japan. Citi, Société Générale CIB and HSBC were joint bookrunners.

“Many investors have moved away from following a government bond index towards looking at individual credits and EFSF benefited from this trend," says Mr Brown. “Investors had also seen the tightening of the EU bonds in the secondary market and appreciated the attractive relative value in the EFSF deal."

"Investors were very comfortable with the EFSF structure, which had a large €44.5bn order book," says Zeina Bignier, head of debt capital markets origination, supra and agencies at Société Générale Corporate and Investment Banking in Paris. Société Générale was one of the three bookrunners on the inaugural EFSF deal.

"However, some investors prefer to see a single, permanent political entity, and this has now been announced in the form of the European Stability Mechanism, which will replace the EFSF in mid-2013," says Ms Bignier. "The ESM will be an intergovernmental entity validated by treaty, empowered to help support individual countries, but also to help put in place the pact of convergence and harmonised fiscal policy. It will act in a way similar to the [International Monetary Fund]."

Impressing in Asia

The year has also started strongly for a highly favoured issuer such as KfW, which typically has strong placement in Asia for both its euro- and dollar-denominated benchmark transactions.

In February this year, KfW launched a $4bn five-year benchmark, lead-managed by Barclays Capital, Deutsche Bank and Morgan Stanley, which priced at mid-swaps plus 7bps. It was 28.2% placed into Asia.

“KfW in dollars is a good diversification play," says Lee Cumbes, managing director, head of frequent borrower origination at Barclays Capital in London. “Asian central banks often have large holdings of US Treasuries, so KfW is giving them credit diversification with a top German name, while offering a yield pick-up versus the US Treasury alternative."

“Asian investors have been impressive versus some other geographies in the way they have got to grips with the European story, being well informed on the individual countries and the interplay between them," he says. "They are heavy buyers of sovereign bonds, both in euros and dollars, and below AAA."

In July 2010, Barclays Capital led a €6bn 10-year syndicated deal for AA rated Kingdom of Spain, launched at mid-swaps plus 195bps. Barclays saw throughout the June auctions that sentiment towards Spain was better than some commentators were suggesting.

Although spreads were highlighted by many as changeable, in fact the Spanish yields were holding in a range through a relatively busy supply month. Asian investors proved a clear support to the syndication in early July, eventually buying 13.3% of the deal.

More recently, on January 17, 2011, Kingdom of Spain was back in the market with a €6bn offering, with Barclays Capital, BBVA, BNP Paribas, Citi, Société Générale CIB and Santander as bookrunners. This had 4.1% placement with Asian accounts.

Going Dutch

Global investors will soon have the opportunity to buy a new name denominated in dollars, as the Dutch State Treasury Agency (DSTA) prepares its dollar-denominated offering. Dutch sovereign bonds are among the most favoured by global investors, trading between Germany and France.

The DSTA will use its well-established Dutch Direct Auction (DDA) process for dollar deals, which is already used for euro-denominated offerings as a supplement to conventional treasury auctions. The DDA combines elements of an auction and a syndicated transaction. Three of DSTA's 16 primary dealers will be chosen to assist with the preparation, promotion and execution of the first dollar DDA, though DSTA will be sole bookrunner.

"It is a rule-based auction where bids are placed and a single price is found for all investors, with no discrimination between large and small investors," says Erik Wilders, head of the DSTA. "But at the cut-off price we give priority to real money clients, and [as] we are the sole bookrunner, only we know the final composition of the book, which gives confidentiality to investors. We can see from our regular euro-denominated DDAs that Asian investors are important buyers of our bonds."

“The motivation for doing dollar deals is first and foremost to bring savings," says Mr Wilders. "A secondary aim is to diversify and broaden our investor base, but the bond yield and dollar euro basis swap rates will have to be favourable for us to proceed."

Size of the matter

Cades has been issuing in dollars for many years, but has recently tapped the 144A market to do the kind of larger deals that are favoured by major global investors.

"We have been doing eurodollar issues since 1996, but we recently priced our inaugural deal in the 144A market, which was a five-year $2.5bn transaction," says Patrice Ract Madoux, chairman of Cades.

"The motivation was to increase the size of our bond offerings, which have typically averaged $1bn on eurodollar deals," says Mr Ract Madoux. "We will be bringing more US investors into our 144A deals, but the increased size will also be attractive to central banks, including those in Asia and the Middle East, who prefer to buy larger and more liquid issues." The inaugural 144A deal was 31% placed into Asia.

A wide range of deals are finding significant placement in Asia. In March, a €1.5bn AA rated offering from Spanish agency Instituto de Crédito Oficial was 8% placed in the region. Also in March, a €2bn AAA rated covered bond from RBS had 8% Asian placement. And even going down below investment grade there is some Asian distribution getting done, often via private banks.

“For investment-grade corporate offerings there is some placement in Asia, but it is not hugely significant [as] investors generally prefer Asian names," says Peter Charles, head of syndicate Europe, Middle East and Africa at Citi in London. “However, for some of the higher-yielding issues, such as bank hybrids used to boost regulatory capital, there is significant demand from private banks in Asia for distribution to their high-net-worth individual clients."

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