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Asia-PacificMay 4 2010

European issuers flourish in Asia

Fast and effective: KfW's January 10-year dollar deal had a healthy placement in AsiaDespite concerns about government budget deficits, Asian central banks continue to show strong demand for European sovereign bonds. But sovereign, supranational and agency issuers all need to focus much more on the careful execution of deals, and the syndication process has been speeded up because of volatile market conditions. Writer Michael Marray
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European issuers flourish in Asia

During the global financial crisis, many Asian central banks took shelter in shorter maturities such as six-month or one-year Treasury bills. But since the second half of 2009, they have returned to more conventional buying patterns, which typically means heavy demand for three- and five-year paper, and more selective buying at the 10-year segment of the yield curve.

Asian central banks no longer dominate European sovereign, supranational and agency sovereign, supranational and agency (SSA) deals the way they did during the huge build-up in reserves between 2003 and 2007, but they still make up a significant part of the globally diversified investor base.

For the better quality European credits, appetite is very strong. Germany stands out ahead of the pack as the capital markets re-align themselves in the wake of the financial crisis. But France is also in favour, as is the Netherlands.

These are the core holdings with the tightest pricing. But everyone has to pitch their story, and strong investor relations and timely execution are more important then ever. This is illustrated by the growing use of syndicated offerings alongside Treasury auctions by European sovereigns, bringing the big investment banks more closely into the timing and pricing of issues, and utilising their distribution capabilities. Even the UK government has syndicated deals during the past year.

Budget deficits

"There clearly are concerns about budget deficits and the potential volume of European debt that will come to market over the next few years," says Guy Reid, managing director and head of SSA for Europe, the Middle East and Africa at UBS in London.

"Some accounts may now be restricted to buying AAA paper, where pre-crisis they may have bought below AAA sovereign debt," says Mr Reid. "Some accounts are not as active as before, so Asian demand is down compared to 2006 or 2007, but those accounts that are participating are doing so in size and some ticket sizes are back to pre-crisis levels."

Mr Reid says that the number of Asian central banks that buy 10-year paper is more limited than in the shorter-dated maturities, but that they tend to be some of the larger central banks across the region. Therefore an offering such as the January 10-year dollar deal from KfW, where UBS was lead manager along with JPMorgan and Goldman Sachs, had a healthy 34% placement in Asia.

The orderbook was opened early on Tuesday January 19 and strong participation out of Asia resulted in an orderbook of $3bn after only a few hours. Strong demand from within Europe was soon joined by orders from US investors and KfW narrowed the spread talk from mid-swaps plus 30 basis points (bps) area to a 28bps to 30bps range.

KfW decided to accelerate the close of books to noon, New York time, and the final orderbook reached $6.33bn. It was able to price a $4bn transaction at a 28bps margin. A total of 130 accounts bought bonds, with 34% placed in Asia, 42% in the Americas and 21% in Europe. Central banks, many of them Asian, took up 34% of the offering.

Good timing

"International capital markets are still quite volatile, so offerings must be timely and well executed," says Horst Seissinger, head of capital markets at KfW. "Long lead times, where a transaction was announced on a Friday and priced the following Wednesday, are definitively over."

"However, order books do need to be open for a session where all the important investors in different time zones have an opportunity to buy. That means opening the books early in the morning in Europe, but perhaps leaving them open for a few hours the next trading day in Europe so that Asian accounts have enough time to look at the deal," he adds.

Although KfW issues in a wide range of currencies, Mr Seissinger says that sizeable regular benchmark offerings in different maturities in the core funding currencies of the euro and US dollar remains the top priority. The current split is about 40% euros, 35% dollars and 25% other currencies, including offerings in yen, sterling, Australian dollar and Norwegian krone.

"Our major investors appreciate the fact that we make regular offerings in our euro and dollar benchmark programmes, and create a yield curve at three, five and 10 years - even in difficult market conditions," says Mr Seissinger. KfW was the first agency to issue 10-year bonds in 2010, with deals denominated both in euros and dollars.

With regard to other currencies, KfW has to swap the proceeds back into euros or dollars, so has to look at the additional cost of the cross-currency swap to see if it can achieve funding levels in line with what can be achieved in its two core currencies.

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Patrice Ract Madoux, Cades chairman

Social security debt

Another issuer getting good execution is Caisse d'Amortissement de la Dette Sociale (Cades), which funds French social security debt. It issued €27bn in 2009 and is schedule to issue €15bn in 2010.

"In the current environment, France and Germany are the two European sovereigns which are getting the best financing conditions, so Cades is also in a very favourable position," says Cades chairman Patrice Ract Madoux.

In February, Cades sold a $1bn eurodollar deal with a five-year maturity. The spread was 10bps over mid-swaps, and 44.4bps over comparable US Treasuries. The lead managers were Bank of America Merrill Lynch, Daiwa and JPMorgan.

There was heavy buying-out of Asia, taking up 36% of the deal versus 31% for Europe, 24% for the Americas and 9% for the Middle East. Asian central banks and other investors are also buying euro-denominated issues. Last December, a €3bn five-year benchmark was launched, which attracted 108 orders from 23 different countries. Asian participation on this deal was lower at 17%.

"Investors receive a small spread over French sovereign bonds and we are also able to offer them dollar-denominated bonds, which are popular with Asian accounts such as central banks," says Mr Ract Madoux. Cades also does deals including private placements in currencies such as the Australian dollar and Hong Kong dollar, in order to diversify its investor base within Asia.

Netherlands thrives

The Netherlands is also benefiting from its AAA status and reputation for keeping its state finances under control, and public sector agency Bank Nederlandse Gemeenten (BNG) has worked hard to steadily build up an Asian investor base.

"We have to swap everything back into euros, given that our balance sheet is 100% euro-denominated, so we depend heavily on basis swaps for our foreign currency transactions," says Bart van Dooren, head of funding at BNG, which is 50% owned by the Dutch state and 50% by public sector entities such as municipalities.

"We issue regular benchmark deals with a minimum size of €1bn or $1bn, and try to offer investors a curve from two to 10 years," he says. "In recent years, the BNG name has established itself with more central banks in Latin America, the Middle East and Africa, [but] has slightly reduced placement in Asia, though Asian investors are still very significant and in 2009 took 16% of our long-term bond offerings," adds Mr van Dooren.

"Asian investors are still most active in our US dollar transactions, but in addition to buying more euro-denominated paper, they are also increasingly participating in our offerings in currencies such as sterling and Canadian dollars. We also issue regularly in Australian dollars, which have heavy placement across Asia."

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Zeina Bignier, head of debt capital markets origination, SSA, at SGCIB in Paris

Further afield

Down below the AAA level, funding conditions are clearly more difficult, but issuers such as Belgium are getting good Asian placement, with the help of more use of syndicated deals. This has become much more common since the crisis. The UK did a syndicated offering, and Spain and Portugal have also heavily used syndicated markets.

After a lot of sovereign volatility in February, markets had calmed down enough by early March for Belgium to proceed with a €4bn benchmark OLO, which was priced close to the five-year part of the curve but had slightly longer maturity of six years.

In keeping with the fast-execution trend, the deal was announced at noon, Greenwich Mean Time, on Monday March 8, and with an orderbook having grown to €5bn by Tuesday morning, the books were closed by 2.00pm. It was priced at mid swaps plus 8bps, which represented a 38.1bps spread over comparable Bunds. A total of 140 institutions participated. Joint leads were Barclays Capital, ING, Société Générale Corporate & Investment Banking (SGCIB) and UBS.

"We spend a lot of time meeting with Asian investors such as central banks, and Asian placement on the recent five-year €4bn benchmark was the heaviest ever at 22.4%," says Jean Deboutte, director of strategy at the Belgian Debt Agency.

"Investors are well informed about the budget deficit situation in different eurozone countries and they are also looking closely at the maturity schedule to see that a lot of paper does not have to be refinanced over a short period of time," says Mr Deboutte. "Investors such as Asian central banks do their own analysis and make relative value decisions about which sovereign bonds they are buying, whether they are AAA, or AA+, as is the case for Belgium," he adds.

Euro reserves

"The long-term trend of buying more non-dollar assets has continued through the financial crisis, with central banks all over the world having a similar strategy of increasing their reserves in euros and other currencies," says Zeina Bignier, head of debt capital markets origination, SSA, at SGCIB in Paris.

Asian accounts are most active at the short end of the curve, but Ms Bignier says that there was heavy demand from Asia for the nine-year €1.5bn EU deal in early March, which was announced on the Monday afternoon in order to give Asian investors sufficient time to consider the transaction overnight.

When the books opened at 9.00am, Central European Time, on the Tuesday, €1.5bn-worth of orders were received within 10 minutes and the books closed in excess of €4.5bn-worth of orders after only 45 minutes. Asian accounts received 8.5% of the final placement.

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