Edward Russell-Walling reports on how Belgium kept its nerve despite increasing market instability.

As the Kingdom of Belgium kicked off its 2008 benchmark programme with a 10-year bond issue, the markets chose that week to turn violently choppy. The sovereign held its nerve, however, even though it felt obliged to reduce the size and widen the spread on offer.

The Belgian Debt Agency (BDA), which manages the nation’s public debt programme, plans to raise a little less than €30bn in medium- and long-term funding this year. Some €27bn of that will be in the form of the bilingually named ‘obligation linéaire/lineaire obligatie’ (OLO), its standard, liquid benchmark bond.

This year’s debut offering was syndicated – Belgium was the first eurozone sovereign to syndicate euro-denominated bond issues, back in 1999, instead of auctioning off the paper to primary dealers.

“Syndication is the only way for us to create diversity and liquidity, and it gives us the ability to choose timing,” explains Anne Leclercq, BDA deputy director of treasury and capital markets.

Investor involvement

The direct participation of investors in the syndication process has been particularly important for Belgian issuance, Ms Leclercq believes.

“In the past, we did not have wide distribution, with 90% of issuance typically staying inside Belgium,” she says. Since they began syndication, however, that share has fallen to between 25% and 30%.

“It also allows us to steer diversity in terms of types of account,” Ms Leclercq continues. “We like 75% of an issue to go to real money accounts, with 25% going to trading accounts. This distribution enhances performance afterwards.”

In late January, the BDA launched what turned out to be one of its most challenging transactions, as equity markets started to head south. Lead managers Citi, Fortis, HSBC and UBS opened the books on the Monday, with initial price guidance of 26bps to 29bps over the comparable German Bund.

“There has been an undeniable flight to quality – to Germany,” Ms Leclercq notes. “Though we are an AA+ credit, our spreads had earlier behaved more like an AAA. Now, however, the markets are more cautious.”

As European equity markets fell that day, investors grew more cautious still and European government spreads widened further. Price guidance was refined 28bps to 29bps. Asian markets fell overnight and on Tuesday morning the market remained volatile.

“We decided to stay in the market,” says Ms Leclercq. “But we felt the price should reflect real market conditions and so we printed the deal at plus 30bps.”

One thing that did not directly affect the issue’s pricing was the political situation in Belgium: the country has been without a government since last summer. This has probably cost the sovereign a couple of basis points, but it was reflected in spreads before this particular deal.

By mid-morning on the Tuesday, the order book had built to a total of €6.9bn. While the original intention was to raise €5bn, the size of the issue (which carried a 4% coupon) was cut to €4bn.

Keeping it off the streets

“This was so that investors who remained in the book could have the possibility of performance after the transaction,” explains Ms Leclercq. “If we had issued €5bn, there was a possibility that the bonds would end up on the street right away and the issue would underperform.”

They made the right call, as it turned out. In trading, the bonds subsequently tightened by two basis points. Real money investors accounted for 79% of the issue, the way the BDA likes it, and only 27% went to Belgian investors. Europe as a whole took 81% overall, with 16% going to Asia and a mere 3% to the Americas.

This year, the BDA will probably stage three benchmarks. It will also roll out its new EMTN programme, using it to raise €2bn in foreign currency and structured products.

“We have established good name recognition and shown we are a predictable, reliable sovereign issuer,” says Ms Leclercq. “Now we can do something different and be a bit more flexible.”

Choice of platforms

Belgian bond dealers will be getting used to something different from March onwards, when they will be able to choose which bond trading platform they use to comply with their market-making obligations: the existing MTS platform, ICAP’s Brokertec or the BCG Partners platform.

“It is important that the new system works well,” says Ms Leclercq. “That will require three things. One is that price transparency remains the same as before. Another is that we have the same market depth as on a single platform. And the third is that we must be able to monitor compliance.”


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