Nordic Investment Bank is demonstrating that it is a quality AAA name with its search for funding diversity leading it to success in international pastures, and hungry bankers knocking on its door begging for short-term paper. Edward Russell-Walling reports.
When credit markets are as freaked out as they have been recently, even AAA names begin to divide into ‘quality’ and ‘hmmm’. Nordic Investment Bank (NIB) is undeniable quality, as it demonstrated more than once in September.
NIB is owned by the five Nordic states and, since 2005, the three Baltic states. They are lucky enough to receive dividends because, unlike most supranationals, the bank lends on a commercial basis with the intention of making profits. At the end of 2006, NIB had outstanding debt of about €13.6bn in 20 different currencies, having borrowed about €2.7bn during the calendar year.
In 2007, the bank plans to raise €4bn. It has almost hit its target, with funding of €3.8bn to date, slightly ahead of schedule for reasons that will become apparent. Diversity is the central theme of its funding strategy, in terms of both currencies and investor base. “Our market is global,” says Kari Kukka, NIB’s head of funding. “Diversity is the name of the game. We don’t want to be dependent on any single market so if the legs drop off one, we have got another.”
Moving into new territories
The search for diversity leads Mr Kukka and his colleagues into ever-new pastures. Last year, NIB issued its inaugural Kangaroo bond (Australian dollar denominated) and its first Mexican peso bond. This year, it has been particularly busy, with its first Maple bond (Canadian dollar denominated) and first rouble issue, its largest Norwegian krone fixed-rate issue to date and its biggest-ever Icelandic krona issue.
In early September, after talking about it for some time, NIB brought its inaugural Kauri (New Zealand dollar denominated) issue to market. The Kauri market received a boost in July when the Reserve Bank of New Zealand extended the range of securities acceptable for its overnight reverse repo facility (previously it would accept only domestic government bonds).
NIB’s Kauri, which was joint lead-managed by ANZ, Bank of New Zealand and RBC Capital Markets, was a three-year deal with a coupon of 7.75%. The original size was a tentative NZ$250m-NZ$350m (€130bn-€180bn). But investors were seduced by the name and the issue was increased to NZ$400m, tightly priced at 23 basis points (bp) through New Zealand dollar three-year swap rates.
International demand grows
It was demand from foreign accounts that helped make the difference: foreign investors typically subscribe to about 20% of Kauri issues but in this case they took 40%. “That’s good for the Kauri market going forward,” Mr Kukka says. “It enlarges the volume that is do-able. If you depend on domestic demand, you get the usual suspects. But when international demand grows, it gives the market more depth and makes it possible to do bigger benchmark issues.”
But there was better to come. On the heels of the Kauri came a dollar benchmark issue that set the market alight. NIB has visited the market once a year since 2002 with a $1bn global benchmark deal. Until this year, the issues had five-year maturities, but in January NIB transacted its first 10-year dollar issue.
Response to hunger
After the European Investment Bank (EIB) brought some life back to a nervous, post-summer holiday market with its successful $3bn three-year issue, bankers hammered on NIB’s door. NIB had been planning to launch its next dollar issue somewhat later in the year, but was persuaded that there was a real hunger for shortish-term paper from the very best credits. Rather than let the moment pass, it decided to step forward with another $1bn three-year deal, paying 4.5% and using HSBC, JPMorgan and Nomura as bookrunners.
The response was galvanic. Within three hours, there was nearly $2bn-worth of orders on the books, which had to be closed even before the US market had opened. “I have never seen anything like it in my life,” says Mr Kukka. “It was a blow-out, and we just had to say ‘stop selling’.”
The issue was increased to $1.5bn, if only to avoid upsetting too many of the classy accounts lining up to buy. Central banks made up an astonishing 92% of the distribution, the highest level that NIB has ever seen. Needless to say, a number of the most important North American accounts were accommodated somehow. Pricing moved in from initial guidance of mid-swaps less 20bp to less 21bp – tighter even than the EIB issue. And the paper was soon trading at less 25bp-26bp.
“People talk about a flight to quality,” Mr Kukka says. “I would rather call it a confidence issue. We are now seeing diversification even within the AAA family – between the best of AAAs and the lower AAAs. At the moment, investors want only the best of AAAs.”
