Germany’s KfW is once again breaking new ground, this time with an uridashi exchangeable bond. Edward Russell-Walling explains.
The word ‘unique’ is often used less than scrupulously. Yet as banks go, Germany’s state-owned Kreditanstalt für Wiederaufbau (KfW) really is one of a kind. As a vehicle for the country’s economic and social policy, it has become the largest financial issuer in Europe.
Denied access to retail funding, it is a regular pioneer in the capital markets, and has again blazed a trail with the first-ever uridashi exchangeable bond.
A uridashi is a foreign currency bond sold by a non-Japanese issuer to Japanese retail investors. KfW has issued seven of them since 2002 but the latest one, the eighth, is the first with an equity link. With a five-year term and a coupon of 0.5% – one obvious attraction of the Japanese market – the bonds are exchangeable into Deutsche Post shares at a premium of 12% to the reference price. By the time the order book closed, the share price had already risen by 5%.
KfW was fulfilling its brief to act as a wholesale distributor of German privatisation stocks without ruffling the market. It has acquired large chunks of both Deutsche Telekom and Deutsche Post from the federal government, which it then sells on with what it hopes are optimum methods and timing.
Ideal combination
“We are always looking for ways to innovate,” explains KfW treasurer Frank Czichowski. “This was an opportunity to privatise Deutsche Post shares efficiently to long-term investors, in a market where there is a good bid for both Post and KfW paper right now. It was an ideal combination.”
KfW had originally planned to issue €500m of this paper, which was offered over two weeks to investors by sole bookrunner Nomura International via its Japanese branch network. When about 32,000 individuals applied, reflecting the high level of name recognition that KfW enjoys in this market, the transaction size was raised to a satisfying €1.1bn.
Unusual it may be, but the uridashi is a mere drop in the ocean in the context of KfW’s total funding programme. This has raised an annual €50bn-€55bn via the capital markets for each of the past three years.
KfW is unique because it was started that way. It was established in 1948, even before the present federal republic, as a conduit for post-war Marshall Plan reconstruction funding. Its modern role remains broadly to promote the German and European economy. Much of its lending is long-term, low-interest, with a focus on small and medium-sized enterprises.
It is not, however, allowed to take deposits and has always had to look elsewhere for funding. That originally meant seeking public funds, which have now shrunk to a single-figure percentage, usually for specific programmes. For a time, non-negotiable loan certificates or schuldscheine played an important role but this, too, has dwindled.
“Virtually all our funding today is in securities, and that basically means long-term securities,” Dr Czichowski says. The bank runs short-term commercial paper programmes with a volume of only €12bn and $10bn, within an end-2004 balance sheet of €329bn.
The world is happy to lend to KfW, whose credit (thanks to a government guarantee) equals that of the federal republic, and nearly as liquid, with some spread. The bank is now the fifth-largest European issuer of securities, after the sovereign credits of Italy, Germany, France and the UK.
Three-pillar programme
KfW’s funding programme has what it likes to call “three pillars”. The first consists of large euro and US dollar benchmark programmes, with regular issuance of very liquid securities in large tranches. These are the principal proxies for German government debt and they typically account for 35%-40% of total funding.
The benchmark issues have a target size of €3-5bn or $1-3bn, depending on market circumstances and maturity. The next pillar involves more targeted transactions in different currencies. “These are smaller public deals, perhaps €100m-€1.5bn equivalent, normally underwritten by one or two banks for targeted groups – retail European, say, or the Australian market,” says Dr Czichowski.
The recent uridashi falls into this category, which accounts for another 35%-45% of overall funding. The balance – pillar number three – is made up of private placements in different structures and currencies, usually bought by one investor and issued on a hedged basis. Demand for these is strong in Asia, particularly in Japan. Total funding in 2005 is likely to remain within the €50bn-€55bn band of recent years, according to Dr Czichowski. He is not adding much more detail, but if KfW’s funding levels are sustained, sustained levels of ingenuity can also be expected.
