Nomura's expertise in the SSA sector saw it play a key role in issuances by Iceland, Italy and Austria, to notable effect. Edward Russell-Walling reports.

Team of month 0819

From left: Spencer Dove, Sook Leen Seah, Samantha Cook, Malik Menzer

As it exits or reduces its international presence in products such as equities and G10FX – foreign exchange coverage of the G10 currencies – Nomura is no longer trying to be all things to all people. But it remains committed to debt capital markets (DCM), where it focuses strongly on the sovereign, supranational and agency (SSA) sector.

As bookrunners, the firm ranked seventh in global SSA volumes (and third by number of deals) in the first half of 2019, according to Dealogic. That put it ahead of the likes of Goldman Sachs, Bank of America Merrill Lynch and BNP Paribas.

One of Nomura's more recent sovereign outings was for Iceland, now back in favour with investors after its banking and economic crisis. Others have included issues for Austria and Italy.

Product-specific focus

Nomura has maintained its strengths in leveraged finance and client solutions, as well as in capital securities and liability management. In DCM, it is a player in SSA and financial institution groups (FIG), though its involvement in corporate bond issuance outside Japan is more limited.

The firm is, of course, a securities house, and not a lending bank. Given the way these things work, institutions need a significant presence in the corporate loan market if they want the same in corporate bond issuance.

"The SSA business is built on five currency pillars – US dollar, euro, yen, Australian dollar and sterling business," says Spencer Dove, Nomura's head of SSA origination. Internationally, the firm rose to number one in Australian dollar bond rankings, after a legislative quirk made this the currency of choice for Japanese insurance companies.

The SSA team is small and tightly knit, according to Mr Spencer. "Syndicate and DCM sit together, allowing a close and constructive dialogue," he says. "And we have a product-specific rather than a client-specific focus. It's not one particular person for one client – everyone is encouraged to build relationships with the whole client base, focused on specific products."

A thawing in Iceland

In the same way as corporate lending opens the way to corporate bond business, primary dealerships help to secure SSA mandates. Nomura has been a primary dealer in Austrian and Italian government bonds for more than a decade, for example, and is Italy's only Asian primary dealer. Other European primary dealerships include Germany, France, the Netherlands, Spain and the UK.

In Iceland, only Icelandic banks are primary dealers in domestic government securities. But Nomura has had a relationship with the sovereign since at least 1994, when it led modest five-year deals in US dollar and yen. It maintained its relationship with the central bank and, in 2004, worked on a $200m 10-year 4.375% trade.

As a sovereign, Iceland was fiscally very sound, had reserves and could meet its funding requirements from the domestic market. But the assets of the country's three largest banks, who had borrowed with ease in the international market, totalled 10 times national gross domestic product. And in 2008, as the international financial crisis worsened, they collapsed.

The central bank was unable to bail them out and the banks were, to all intents and purposes, taken over by the government, which borrowed $2.1bn from the International Monetary Fund.

The sovereign's funding needs increased, and it came to market with two successive $1bn deals in 2011 and 2012, with five-year and 10-year maturities, paying 4.875% and 5.875%, respectively. It used the proceeds to repay bilateral Nordic loans. As it continued to rebuild the public finances, in 2014 it was able to raise €750m for six years at 2.5%.

Maintaining a presence

The Icelandic currency, the króna, had been shattered and the currency controls then imposed were only lifted in 2017. It was at the end of 2017 that Iceland, upgraded to A3/A/A, issued its first international bonds since 2014, alongside a liability management exercise. The deal was led by Barclays, Citi, Deutsche Bank and Nomura.

"It didn't need the money, but it wanted to maintain a presence in the international capital markets," says Mr Dove. "It also wanted to create a reference benchmark for the Icelandic banks and power companies who need hard currency."

Holders of the outstanding €750m 2.5% 2020 notes were invited to tender them for cash, and a new five-year euro Reg S benchmark was launched with initial price thoughts of mid-swaps plus 55 basis points (bps). The issue was eventually sized at €500m, and priced at mid-swaps plus 35bps. The coupon was 0.5%, which suggested comprehensive rehabilitation, as did the fact that the deal was some eight times oversubscribed.

In June 2019, Iceland was back in the international markets with a similar transaction, led this time by Barclays, JPMorgan, Morgan Stanley and Nomura. A new five-year €500m no-grow deal was launched with initial price thoughts of mid-swaps plus mid/high 30bps area. It was accompanied by an any-and-all tender offer for the outstanding 2.5% 2020 notes.

"The tender was announced one week before the new issue was launched," says Sook Leen Seah, an executive director in Nomura's capital solutions business. "That meant we knew how many holders would tender before we opened the books."

Repair complete

The marketing pitch was that Iceland was a young, prosperous, educated country that had repaired its balance sheet over the past decade. "It was a sought-after name, with limited issuance, because it doesn't need the money," says Malik Menzer, an executive director in Nomura's SSA syndicate. "And the liability management exercise meant that it could maintain low debt levels while issuing new benchmarks."

Investors did not need much persuading. "We had €1.8bn of interest in the first 30 minutes," says Samantha Cook, a vice-president in Nomura's SSA syndicate. "Little fast money materialised, and ultimately the quality in the book was second to none – allowing us to refine pricing."

With the book nearly five times oversubscribed, the reoffer price was set at mid-swaps plus 28bps. The annual coupon was 0.1%.

Over in Italy

Only a day earlier, Nomura had acted as joint bookrunner on a new 20-year bond for the Republic of Italy, rated Baa3/BBB/BBB. Other bookrunners were Morgan Stanley, Banca Monte dei Paschi di Siena, NatWest Markets and Société Générale.

While the market had been somewhat challenging in early June, the week had started well. "Just before we launched, Spain appeared with a 10-year deal," says Mr Menzer. "Should we go ahead? We decided that the market was strong enough."

As it turned out, having Spain in the market simultaneously did not affect Italy's success. "There was enough depth for both transactions to come at the same time," says Mr Menzer.

The deal attracted a €23.5bn order book and was sized at €6bn, with a 3.1% coupon and 3.149% reoffer yield. "Italy has had some issues but is still a core European name," says Mr Menzer. "People were happy to buy something that gives a positive return."

Austrian double

Later, towards the end of June, Austria announced a new five-year benchmark, adding that it would also test the water for a 100-year tranche. The lead managers were Bank of America Merrill Lynch, Goldman Sachs, JPMorgan, Nomura and UniCredit.

"It was unusual for Austria to come out with its second syndication of the year so soon," says Mr Dove. "But comments by [European Central Bank president Mario] Draghi made it clear that rates would be lower for longer, and that motivated people to buy."

With orders of more than €18bn for the five-year issue, this was sized at €3.25bn, with a zero coupon and priced at mid-swaps minus 23bps. That made it the first ever syndicated euro government bond to price below the European Central Bank deposit rate.

After investors exhibited a preference for a tap of Austria's existing 2.1% due 2117 issue, for liquidity reasons, a book of more than €5bn was built for the 100-year tranche. It was sized at €1.25bn and priced at benchmark plus 48bps.

"Sovereigns are still a very sought-after credit," concludes Mr Menzer, "and we are seeing a flight to quality trend."

Ms Seah adds that lower rates promote the case for liability management. "Sovereigns, financials and corporates now have an opportunity to think about buying back debt and reissuing at lower yields," she says. "It's not clear when we will be in this historically low-interest-rate environment again."

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