After a desperate 2011, 2012 got off to a flying start in the sovereign, supranational and agency arena, with successful issues being placed left, right and centre, most notably in euros and sterling. All of this has meant a busy couple of months of HSBC's debt capital markets team.

After the famine, the feast. The year kicked off with a riot of sovereign, supranational and agency (SSA) issuance as one segment of the market reopened after another. Even the mass downgrade of nine euro sovereigns failed to dampen spirits. HSBC was able to parade its SSA credentials and had its busiest week ever, managing 30 benchmark and tap transactions, including an unusual two-tranche deal for freshly downgraded Austria.

The chain of deals worked on by HSBC’s debt capital markets team was a graphic example of how issuers and their banks could chisel away at openings in the market. As each transaction revealed more about the location and strength of demand, it generated enough confidence to launch the next and, for as long as it lasts, 2011 seems like another era.

Good start

“It was a better start to the year than we had hoped,” says Bryan Pascoe, HSBC’s global head of DCM. ”The springboard was provided by the LTRO [the European Central Bank’s longer-term refinancing operation] in December, and the public sector opened very strongly.”

The macro headlines, in the shape of Greece’s troubles in particular, had not gone away. Yet investors seemed eager to look beyond Greece, and bankers persuaded their clients to take full advantage of the liquidity that quickly became apparent, and to print deals while they could. 

“In week one, we knew there was a lot of liquidity in the market at the front end, but we didn’t know how much there was across the curve or in different currency sectors,” says PJ Bye, HSBC’s global head of public sector debt syndicate. “And in those first days there was still a lot of perceived execution risk.”

It was a better start to the year than we had hoped... The springboard was provided by the LTRO [the European Central Bank’s longer-term refinancing operation] in December, and the public sector opened very strongly

Bryan Pascoe

The ice-breaker, for HSBC and the international market in general, was the Inter-American Development Bank (IADB), a well-perceived name which had the virtue of being a non-European supranational. With its order book comfortably covered, it raised $2.25bn in five-year money. Another slam-dunk on the same day was a £1.5bn ($2.45bn) three-year deal from the UK's Network Rail, which benefited from being a rare fixed-rate issuer without the spread volatility of other AAA credits.

This reopening of the sterling market was promptly followed by a £450m three-year transaction from the European Investment Bank (EIB), taking advantage of the sterling liquidity uncovered by Network Rail. “You start with a blank sheet, and begin to build confidence,” says Jean-Marc Mercier, HSBC global head of debt syndicate. “Each name is a building block that gradually puts the market back together and then you build the curve.” 

Kreditanstalt für Wiederaufbau (KfW) took its cue a few days later with an upsized £550m four-year issue, shortly before launching its annual 10-year euro deal, which raised a chunky €4bn, even though its coupon was 2.5% compared to last year’s 3.375%. “It’s so important to be in on the first round of trades,” says Kerr Finlayson, HSBC director in debt syndication. “The intelligence you get allows you to build out, as you sense what the market is looking for.”

One fact becoming clear was that euro and sterling were assuming a higher profile than usual. “On balance, they were more important relative to the US dollar than in the past,” says Mr Pascoe. “The dollar market is less flexible, more dogmatic about maturities, and more sensitive to names with less liquidity and less frequent issuance in dollars. The result is that many borrowers have become more reliant on their home markets.” 

Gaining momentum

By now the international market was in high spirits. There were technical drivers adding to momentum, in the shape of a wave of redemptions, including volumes of 2009 government-guaranteed issuance. There was also reawakened appetite from hitherto quiet corners of the globe. “Japanese investors had not been active for many months,” points out Ulrik Ross, HSBC global head of public sector DCM. “But they were now coming back in large numbers to take advantage of the spread environment.”

Feedback from the IADB transaction highlighted a growing appetite within the dollar market for top-rated SSA names removed from the turbulence of the eurozone. One such is the AAA rated African Development Bank, which is not known as an early mover and tends to wait until the end of the cycle before issuing. Furthermore, it did not have a pressing need for funding. But HSBC and joint bookrunners Daiwa, Goldman Sachs and JPMorgan advised that it would be to its advantage to move now, and it struck with a $1bn five-year trade priced only a couple of basis points over the IADB transaction and with the same 1.125% coupon.

The EIB now came back with its first euro benchmark of the year, a defensive three-year deal which raised €5bn – bigger and more tightly priced than the European Financial Stability Fund three-year that preceded it. 

Austria joins the charge

Now SSAs were lining up to get a head start on their funding and to take risk off the table. The Republic of Austria, often the first European sovereign to trade each year, needed no such encouragement. It had, however, been reviewing its options, waiting for its by now widely expected Standard & Poor’s rating downgrade to take place, thereby clarifying the situation. That duly happened on Friday January 13. Unlucky for some, the date did Austria little harm and the fact that the downgrade was only one notch instead of two was viewed as a positive.

There was evidence of demand for duration from a few, very big players and the first idea was to do a 30-year, together with something shorter. After the downgrade, some requests came in for an even longer-dated issue. A week later Austria sold €3bn in 10-year bonds and, after running a shadow order book with a completely different set of investors, another €2bn in 50-year paper, priced through France and at the tight end of guidance. The bond extends Austria’s curve by nearly 25 years. 

HSBC was joint lead manager, with Barclays Capital, Credit Suisse and Morgan Stanley, on the United Kingdom Debt Management Office’s (DMO) successful £4.75bn tap of its 2052 conventional gilt. It attracted more than £12bn of demand in the record time of less than one hour. 

“This provided a springboard for the next sterling trade, the EIB 25-year,” says Mr Bye. “Few issuers can go that long, and the DMO identified a window that the EIB could tap into.” This was the EIB’s longest syndicated benchmark issue in any currency since 2007, and it raised £600m.

Too good to last?

SSA issuers and their bankers have started 2012 in great shape, but no one is counting on primary market conditions remaining this buoyant all year long. The New Year halo effect will wear off, by definition, and issuers have already done so much funding that there will be less to do as the year unfolds. The EIB completed a third of its funding in January alone.

There may be more eurozone horrors in store and there are certainly danger zones to be navigated through, with macroeconomic challenges on both sides of the Atlantic. “We’re not out of the woods,” Mr Pascoe acknowledges, “but we’re in a better position than we were before Christmas. Perception creates its own reality, and the LTRO has helped how investors feel about making investments.” He adds that emerging market governments are on more of a rate-cutting path, making investors more comfortable with yield curves and the prospects of soft landings. 

“The market has seen a lot of shocks in the past five years,” says Mr Mercier. “But it is still open for SSA issuers to fund themselves in good size. Prices have moved, but things are getting done.”

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