The eurozone sovereign debt crisis has not just affected national treasuries, but also European supranationals and government-related entities. Philip Alexander hears from a range of larger and smaller borrowers across the eurozone and beyond.

Christopher Best, treasurer, Black Sea Trade and Development Bank (BSTDB)
Rated A with 'stable' outlook (Standard & Poor’s)/A3 with 'stable' outlook (Moody’s)

Antonio Cordero, deputy director of financial markets, Instituto de Credito Oficial (ICO), Spain
Rated A 'negative'/A3 'negative'

Ignacio Fernández-Palomero Morales, deputy director of public debt, Spanish Treasury
Rated A 'negative'/A3 'negative'

Jens Hellerup, head of funding, Nordic Investment Bank (NIB)
Rated AAA 'stable'/Aaa 'stable'

Mitja Jarc, director of treasury, Slovenian Export and Development (SID) Banka, Slovenia
Rated A2 'negative'

Eila Kreivi, head of capital markets, European Investment Bank (EIB)
Rated AAA 'negative'/Aaa 'stable'

Horst Seissinger, head of capital markets, KfW Bankengruppe, Germany
Rated AAA 'stable'/Aaa 'stable'

Monika Seitelberger, director of international finance, Oesterreichische Kontrollbank (OKB), Austria
Rated AA+ 'negative'/Aaa 'negative'

Job van ‘t Veer, treasurer, Netherlands Development Finance Company (FMO) 
Rated AAA 'negative'

Q: What mix of formats do you consider best to achieve your funding needs: bond or loan, public or private placements?

Ignacio Fernández-Palomero Morales: As a large eurozone sovereign issuer, our preference is clearly to issue liquid bonds through public auctions or syndications. We have a regular public auction calendar for letras del tesoro (short-term zero coupon instruments) and for medium- and long-term coupon bonds, that amounts to almost 90% of our total issuance programme. On top of this, we have some flexibility to complement our funding with alternative instruments. We have issued floating-rate bonds in the past; our euro medium-term note [EMTN] programme can be used for occasional private placements of bonds, and we have issued small amounts of schuldscheine [German law tradable loans], but this naturally constitutes a very small part of our funding structure.

Horst Seissinger: Given its large funding programme of €80bn, KfW offers its investors a broad range of formats to serve their needs, including global bonds in euros and US dollars, public bonds in many different currencies issued under various note programmes, private placements and schuldscheine. In 2011, more than 50% of the funds were raised with global bonds, which is a result of the strong preference of investors for very large and liquid bonds. More than 30% were funded via the various note programmes as public bonds. KfW also issued nearly 100 bonds as private placements and close to 50 bonds in registered securities; for example, schuldscheine and namensschuldverschreibung [German law registered bond]. However, the average volume of the latter is typically much smaller and accounts only for a small portion of the entire funding.

As a relative newcomer to the capital markets, the bank will seek to establish a benchmark issue while also assessing private placement opportunities and regional markets for advantageous pricing

Christopher Best

Mitja Jarc: Before 2008 and the Lehman Brothers collapse we were mainly active in syndicated loan and schuldschein markets. In the past three years we have orientated ourselves into the bond market, domestic as well as international. In 2010 we realised our inaugural public bond issue in the international capital markets with benchmark size of €750m and one year later made a successful tap with an additional €350m. For 2012 our funding needs are much lower so we plan to issue two or three private placements in the amounts of €100m each.

Christopher Best: The BSTDB currently has outstanding syndicated and bilateral loans and a public bond issue. For the immediate future, although limited additional bilateral borrowing is expected, the majority of new funding is expected to come from bond issuance; public or private placement. The recently awarded long-term credit ratings of ‘A’ from Standard & Poor’s [S&P] and the upgrade from Moody's to ‘A3’ should assist in accessing bond investors. As a relative newcomer to the capital markets, the bank will seek to establish a benchmark issue while also assessing private placement opportunities and regional markets for advantageous pricing.

Antonio Cordero: We have no restrictions as regards the format of the funding, be it a bond or a loan. The fact is that we find more competitive pricing, flexibility and depth in the bond market, hence our loan activity is quite marginal within our funding activity. At the same time, it is fair to underline that ICO has experienced increased activity with the EIB for the past two or three years, in arranging [EIB-backed] loan transactions.

Concerning public or private placement, we understand that an issuer with a sizeable funding programme has to maintain a presence in both markets because there is two-way feedback. Over the past few years, we have been having somewhere around 60% in public markets and 40% private markets, and we are quite satisfied with the result. Nevertheless, this mix has not been stated as a goal beforehand. It has been the consequence of our strategy of flexibility and quick response to market opportunities.

Q: What currencies do you consider using for funding?

Eila Kreivi: In principle, we can fund in any freely convertible currency. In practice, the core of EIB funding activity is issuance in the bank’s three core currencies: euros, US dollars and sterling. In 2011 they accounted for 88% of volume, which is at the higher end of historical levels and especially reflects demand for liquid benchmarks in those currencies. It also reflects the EIB’s strategy of maintaining a liquid yield curve in these deep markets, to ensure diversified, flexible access to major markets.

EIB’s core currency issuance is complemented by funding in numerous other currencies. In 2011, EIB raised funds in 16 non-core currencies. The Australian dollar  continued to be EIB’s fourth largest currency of issuance (€3.2bn raised). Nordic currencies gained in importance, with Norwegian krone (€2.3bn) and Swedish krona (€1.3bn) being the next largest issuance currencies. This shift in 2011 was in particular due to growing demand from Asian accounts as well as local investors. Other significant currencies in 2011 were Swiss francs and Turkish lira.

We find more competitive pricing, flexibility and depth in the bond market, hence our loan activity is quite marginal within our funding activity

Antonio Cordero

We also issued in Russian rouble, New Zealand dollar and Japanese yen. The Japanese yen has historically been more prominent, but funding levels were relatively unattractive in 2011. The EIB was also able to maintain its developmental approach in emerging currencies, with inaugural bonds in synthetic Indian rupee and in Argentine pesos. These two currencies, together with issues in Ghanaian cedi, Indonesian rupiah and Zambian kwacha, raised a total of €84m.

Melchior de Bruijne: FMO can issue notes in many different currencies under the bond programmes. Our asset base is largely denominated in US dollars, therefore we swap all proceeds to US dollar. Issue opportunities are driven by the all-in cost of funds after swaps. In order to limit the impact of cross-currency swap rates, FMO will focus more on the US dollar market in the years to come.

Monika Seitelberger: OKB can fund in core and niche currencies to fulfil its funding requirement. The liquid benchmarks are usually done in the US dollar or euro market. In 2011, OKB issued a total of €3.2 billion. Access to the US dollar global market in combination with a favourable basis swap into euros has been the much more attractive funding alternative versus issuing in euros directly or in other core currencies, such as sterling or Japanese yen. OKB will continue to look at other currencies, such as Swiss francs, a market we have accessed regularly since the 1970s, sterling and Japanese yen depending on market conditions. After an extensive roadshow to Australia in 2010, we issued our inaugural Kangaroo [Australian dollar] bond in 2011, which gave us the opportunity to enter a new market segment and attract new investors. OKB also entered the Norwegian krone public and private placement market for the first time last year.

Jens Hellerup: NIB has done US-registered dollar benchmark bonds every year since 2002 and is committed to this market. For this reason the US dollar has been the most important currency for NIB and we expect this to be the case in the future as well. To match NIB’s lending transactions, we need the Scandinavian currencies, and for this reason we expect to do some funding in Scandinavian currencies and we see demand here as well. 

Mr Fernández: Like all other eurozone sovereigns, the bulk of our funding is in euros. Besides that, we have an EMTN programme that allows us to issue in all kinds of currencies. In the past we have done deals in US dollars, sterling and yen in 2009 and 2010. In this respect, it is important to note that the Kingdom of Spain does not take on any currency risk, and so we swap everything back into euros, managing any potential risk through one-way collateral standard agreements. In the past couple of years, these two factors have dissuaded us from issuing actively in US dollars.

Like all other eurozone sovereigns, the bulk of our funding is in euros. Besides that, we have an EMTN programme that allows us to issue in all kinds of currencies

Ignacio Fernández-Palomero Morales

Mr Best: To date the bank has generally funded itself in euros and US dollars. This funding mix is reflective of a loan portfolio comprising approximately 55% US dollars and 45% euros. In the future the bank expects to see more demand for local currency funding from its member state clients (Albania, Armenia, Azerbaijan, Bulgaria, Georgia, Greece, Moldova, Romania, Russia, Turkey and Ukraine) and will respond by accessing local currency funding. Indeed, the bank would welcome such activity as it would contribute to the development and deepening of regional financial markets, and would thus contribute to the fulfilment of its mandate.

Mr Seissinger: Clearly the domestic currency – the euro – dominates our funding, and in 2011 more than 50% of our programme was raised in euros. The US dollar also plays a very important role, as we do have natural needs for dollars on our asset side. This enables KfW to show the commitment to issuing large and liquid dollar global bonds with a volume of $3bn to $5bn for each issuance. Maturities are up to 10 years in both core currencies.

Given our broad investor base across the globe we do also serve investor needs in other currencies with public trades on a regular basis in Australian dollars, sterling, Norwegian krone and Swedish krona. In 2011 we issued 11 different currencies, this year already nine. However, since our business on the asset side is mainly denominated in euros and we do not take currency risks, a precondition is that the currency can be converted into euro.

Q: Has your organisation increased its funding programme to allow greater lending activities to compensate for lower private sector credit activity?

Mr Cordero: This is precisely what ICO has been doing for the past three years. We have, to a certain extent, been offsetting the diminishing credit flow to the real economy as a consequence of the tighter lending criteria applied by commercial banks in a context of a general deleveraging process. Thus, ICO has come from a funding programme of €14bn in 2009 to €27bn in 2011, from which about €5bn corresponds to pre-funding. For the current year, preliminary estimations point to a volume close to €25bn. So clearly, ICO, following a countercyclical approach, is playing a more relevant role when fostering the Spanish economy.

Mr Seissinger: In 2011, the overall promotional business volume of KfW reached €70.4bn, more than the originally expected €66bn. After €63.9bn in 2009 and an augmented business volume of €81.4bn resulting from the economic stimulus programmes in 2010, KfW's promotional business is now returning to a path of moderate and long-term qualitative growth. The funding volume increased only slightly over the past five years from €75bn to €80bn.

Ms Kreivi: In late 2008 through 2010, in support of the EU Recovery Plan, the EIB significantly stepped up its lending volumes. Lending activity was in particular focused on supporting the fight against climate change, financing for small and medium-sized enterprises, corporates and economic convergence – sectors which suffered from the scarcity of capital in the banking industry. In order to cater for the augmented lending activity of EIB, funding expanded, reaching as much as €79bn in 2009. However, funding volume and lending commitments have meanwhile trended lower and are expected to go down further in the future. In 2012, EIB funding and lending volumes are expected to decline towards the pre-crisis levels. EIB plans to raise up to €60bn this year.

In 2011, the overall promotional business volume of KfW reached €70.4bn, more than the originally expected €66bn. After €63.9bn in 2009 and an augmented business volume of €81.4bn resulting from the economic stimulus programmes in 2010, KfW's promotional business is now returning to a path of moderate and long-term qualitative growth

Horst Seissinger

Mr Hellerup: NIB has been different from other supranationals or local agencies during the whole crises, and it has not been used as a macroeconomic or political tool. New lending has been very stable and within NIB’s strategy to support competitiveness and the environment. Our funding programme has therefore been stable, between €2.8bn and €4bn, over recent years and the size of the funding programme has been driven by redemptions on lending and funding transactions. We expect new lending to be stable in the future as well.

Mr Jarc: Our business model is based on lending through the domestic banking system. More than three-quarters of our loans have been granted via domestic commercial banks. As their lending activities in the past three years were not sufficient, we have increased our activities and offered directly or indirectly to domestic corporates almost €3.7bn in loans and almost €3.6bn in export credit insurance services. We have more than doubled our total balance sheet in the past three years. We are acting also as an agent for the government of the Republic of Slovenia in three different guarantee schemes which provide risk-sharing and state guarantees for loans to corporates and individuals.

Mr Best: The bank has targeted a 10% annual increase in its loan portfolio and plans to see a matching increase in its yearly funding programme. It is committed to managed growth in a way which will not risk overextending the institution and leaving it vulnerable to adverse shocks.

BSTDB faces increased demand for its financing, in part because it has become better established in its market of operations, but also due to current financial market conditions. While it would like to play a ‘counter-cyclical’ role as other international financial institutions do in times of difficulty and uncertainty, BSTDB has a lower credit rating than the AAA enjoyed by other IFIs, and has therefore consciously opted for a more prudent approach which certainly tries to be responsive to clients and their needs, but also safeguards the institution and the quality of its assets.

Q: How have events in the eurozone and sovereign rating downgrades affected the market for your issues?

Mr de Bruijne: FMO enjoys the status of safe haven in these turbulent times. Especially in the money markets, the number of funding opportunities are exceeding our needs, at very attractive rates. Nonetheless, FMO will try as much as possible to match the tenors of the funding with our assets.

Mr Fernández: Obviously, these events affect large European sovereigns like us a great deal. There is simply no way to avoid the fact that when investors buy a Spanish bond, they are implicitly making a bet on the eurozone. Events in other eurozone countries affect Spain, and it is very likely that events in Spain affect other eurozone countries in no small measure. The market as a whole becomes less liquid, more risk averse, and every primary market auction becomes much more of an event than it should. Ratings downgrades are also relevant market events, but less and less so: investors are becoming less dependent on these opinions and are developing their own risk-assessment skills when facing an investment decision. Nevertheless, it is important to highlight the role that rating agencies should play in bridging the information gap between issuers and investors.

Credit spreads of highly rated sovereign, supranationals and agencies bonds, with the exception of Germany, have widened sharply due to the volatility in the markets and the reluctance of some core investors to buy European names

Monika Seitelberger

Ms Seitelberger: Despite the events in the eurozone, OKB had no problems accessing its strategic markets during 2010 and the first half of 2011. With the European debt crisis continuing, risk diversification has increased, especially from Asian and US investors. Furthermore, credit spreads of highly rated sovereign, supranationals and agencies [SSA] bonds, with the exception of Germany, have widened sharply due to the volatility in the markets and the reluctance of some core investors to buy European names. Spreads between Austria and Germany widened in the second half of last year and reached a peak in November 2011.

The downgrade by S&P in mid-January of the Austrian government, and subsequently OKB, from AAA to AA+ had been widely anticipated by the market, reflected in the dramatic widening of spreads in the months leading to the rating agency’s move. After the downgrade, spreads generally tightened, although they remained at historically elevated levels.

One positive aspect so far is that OKB’s access to the short-term money markets remains unchanged, with central banks being the major investors. Tight and attractive funding levels are still achievable. Issuing benchmark transactions could be more challenging going forward since many investors are more sceptical with regards to the eurozone. We expect investors to continue to look for liquid benchmarks and at some point they may be reassured and return to an asset class that they have been familiar with.

Mr Jarc: From September last year to February this year, the Republic of Slovenia was downgraded several times by all three major rating agencies [S&P, Fitch Ratings and Moody’s]. SID Banka is 100% state-owned and fully guaranteed by the republic, and is therefore rated at the same level as the Republic of Slovenia. At the moment, the bank is rated A2 by Moody’s. It is of course a big difference for the issuer if you had an AA rating before, but only an A rating now. In addition, the negative outlook on our rating could signal further downgrades in the future. In general we could see that we have lost some of the most conservative investors who could only invest in AA and AAA rated issuers.

Ms Kreivi: In 2011, global capital markets remained volatile, amid recurring negative market sentiment towards Europe. However, up to end October 2011, EIB’s spreads were relatively stable. Market conditions deteriorated in November due to heightened scepticism about a resolution to European sovereign debt and economic problems. Downgrades and rating reviews for sovereigns were of course part of the picture.

Along with many other European issuers, EIB’s spreads experienced an exceptional level of stress and widening at the end of the year, before stabilising near year end – EIB’s reiteration that it does not conduct bailouts was ultimately well absorbed. Having completed its 2011 funding programme by the end of October, in the last two months of the year EIB had no real need to access the market and did so selectively. This year spreads have tightened substantially and demand has been very strong. This was supported by investor recognition for EIB’s strong fundamentals, the historically attractive valuations available for liquid EIB products, S&P’s affirmation of EIB’s AAA rating in January, as well as a wider strengthening of sentiment towards Europe.

Mr Best: The events in the eurozone have negatively affected markets for all but the very strongest Europe-based financial sector issuers. For BSTDB, a relatively unknown issuer, the eurozone problems and resulting volatility have made price discovery particularly difficult. In addition, despite the bank’s supranational status and improving credit ratings, investors have tended to view eastern Europe and the institutions which operate there as being vulnerable to contagion.

Q: Have you seen change or stability in the composition of your investor base over the past year?

Mr Hellerup: The Asian investor base is still about one-third of NIB’s total investor base, but we have seen a more diversified geographical investor base, with European and American investors becoming more important. Central banks and public institutions remain NIB’s most important investor base, but we have also seen growing interest from bank treasury portfolios. The main reason is due to regulations. The Basel rules have an influence on banks’ investment policies, and NIB bonds are categorised as level one liquidity under Basel.

Central banks and public institutions remain NIB’s most important investor base, but we have also seen growing interest from bank treasury portfolios

Jens Hellerup

Ms Kreivi: In 2011, Europe remained the largest source of demand (54%). Within Europe, the UK investor base has gained importance over the past year. European demand remained central to euro funding. The distribution of dollar benchmark issues involved sizable European demand, although the majority of orders, and large orders in particular, came from a combination of Asia and the Americas. The strengthening of demand from key central bank investors in 2011 was an important feature underpinning increased benchmark issuance, especially in dollars. Asian central banks were the driving force, with South American and Middle Eastern peers also making a substantial contribution. However, bank treasuries remained the leading investor type last year – their demand proved stable in absolute terms.

Mr Best: Funding for the bank in its early years [2000 to 2008] came predominantly from the commercial banking sector in the form of syndicated loans. This source of funding is no longer readily available. The appetites of bond investors for the bank’s issues remain largely untested, though regional interest is expected to have remained stable.

Mr Fernández: In the past year, non-resident holdings have decreased, although less than what one might expect, from 55% to 50% of the total outstanding debt stock. This is a phenomenon that is common in other European countries; it is a worrying sign for the European internal market, and I believe the authorities should be aware that it is happening. 

In the past few months, banks have taken a larger proportion of debt issuance, and so have central banks and official institutions, at the expense of pension and insurance funds. This trend was partially reversed recently with our 10-year syndicated tap of the January 2022 benchmark on February 8, 2012, where the amount allotted to non-European accounts reached 30% of the total amount.

Mr Jarc: Our traditional investors are mainly coming from Germany and Austria. They know Slovenia, our companies and banks very well as they are our main trade partners in Europe. Our opinion is that they still believe in our quality and are still interested in co-operating with us – perhaps they just reduce their limits for us a little bit. In the past year we also attracted some new investors from the Czech and Slovak republics and we are looking for this year to tap the Polish capital market.

Mr Cordero: Our investor profile has witnessed a gradual change over recent years. On the one hand, central banks have been gradually reducing their purchases of peripheral European debt. This move has been more than offset by higher participation of fund managers, pension and insurance funds and banks. On the other hand, we have seen domestic bid grow to levels close to 30% to 40%, while the rest of Europe constitutes almost all the remainder. Flexibility and agility are crucial in the current volatile environment.


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