In the world of sovereign issuers, the Republic of Finland is small but, as they say, perfectly formed. Such is the demand for its rare paper that it can now issue debt more cheaply than Germany.
It achieved that distinction for the first time last year, when it sold €5bn of five-year bonds with a coupon of 2.75%. And it recently did it again with €5bn worth of 11-year debt, paying 3.875%. After pricing, and on a curve-adjusted basis, that positioned Finland through the comparable trading levels of any other AAA euro sovereign you care to name. Joint bookrunners for the 11-year deal, which was increased from its original €4bn size, were Merrill Lynch, Barcap, BNP Paribas, Deutsche Bank and Nordea.
As those two issues suggest, Finland has a so-called ‘5/11’ strategy in euros, dictated by its funding needs and its own good sense. The notable thing about its economy, apart from it being relatively tiny, is how well it has been managed in recent years.
High growth levels
With growth of 3% or more forecast for the current year and a small population, Finland enjoys one of the highest per capita gross domestic product (GDP) levels in Europe. It has the eurozone’s largest public surplus as a percentage of GDP (2.6% in 2005), and one of its lowest ratios of debt to GDP (41.1%).
“So we have fairly limited funding needs,” explains Satu Huber, finance director at the State Treasury of Finland. “That’s a good thing for the country but, to get the attention of the market, we have to do big transactions. And if it is a big benchmark, we only need to issue one bond a year.”
In 1998 it was decided that, because funding took place so seldom, it was important for the benchmarks to stay liquid for as long as possible. By issuing an 11-year bond every two years, the issuer ensures it will have long benchmark status until the next one appears. “And there will always be an empty space every second year for a five-year deal,” Ms Huber says.
Part of the reasoning behind the biennial five-year issuance – which began in 2003 – was to widen the investor base, compared to the pre-euro era. “Asian and Middle Eastern central banks are very important to us, but 11 years is too long for them,” says Ms Huber. “Some have extended to 10-and-a-half years for Germany, but they won’t extend to 11 for Finland’s sake.”
The 5/11 strategy also has the virtue of being simple and clear. “We only have one benchmark maturing each year, so it’s a very easy market to follow. If it’s the 2003, there is only one and it’s never off the run.”
The State Treasury runs both a T-bill and a Euro MTN programme – the latter due to be relocated to London. It was also an early mover into the non-US sovereign dollar market, starting in 2002 with a $1.5bn issue 4.75% due 2007. The idea here was to appeal to Asian and Middle Eastern, as well as European, investors. The 2002 issue was also marketed with considerable success in the US itself (which took nearly 40%), since the spread was very flat to US benchmarks.
Targeting Asia
The underlying principle is to do the dollar deals, like the 5/11 issues, in alternate years, all else permitting. So Finland returned to market in 2004 with another five-year, $1.5bn issue, paying 3.25%. This time, US investors were not heavily targeted. “Asian investors bought more than 50% of the issue but, as it was priced tighter than the agencies, only 9% went to the US,” says Ms Huber.
A third dollar issue was pencilled in for February or March this year, but the market was poor and higher-than-expected Finnish tax revenues had turned an anticipated small budget deficit into a surplus. The issue was cancelled. “We are careful not to overfund,” explains Ms Huber, adding that the transaction might be reintroduced in the coming autumn, depending on funding needs and the market situation.
Funding needs and market situation are, of course, all in this business but, those aside, she doesn’t foresee any early changes in strategy. Investors have asked why Finland doesn’t do an inflation-linked dollar bond.
“Our funding needs are fairly small and we can’t do everything,” responds Ms Huber, “though if our funding requirements changed, we would have to reconsider our strategy.”
