The European Central Bank has helped assuage fears of an imminent eurozone breakup, but sovereign, supranational and agency debt management officials must still contend with ratings downgrades and difficult political and fiscal situations in a number of countries. The Banker hears from a range of EU issuers both inside and outside the eurozone.

Ignacio Fernández-Palomero Morales, deputy director of public debt, Spanish treasury. Rated BBB- with 'negative' outlook (Standard & Poor’s)/Baa3 with 'negative' outlook (Moody’s)

David Franta, treasurer, Czech Export Bank. Rated AA- with 'stable' outlook/A1 with 'stable' outlook

Jens Hellerup, head of funding, Nordic Investment Bank. Rated AAA 'stable'/Aaa 'stable'

Anne Leclercq, director of treasury and capital markets, Belgian debt agency. Rated AA 'negative'/Aa3 'negative'

Martha Oberndorfer, managing director, Austrian federal financing agency. Rated AA+ 'stable/Aaa 'negative'

Diana Popescu, general director of treasury and public debt, Romanian Ministry of Public Finance. Rated BB+ 'stable'/Baa3 'negative'

Siegfried Ruhl, head of funding, European Stability Mechanism (ESM) and European Financial Stability Facility (EFSF). ESM rated AAA 'stable' (Fitch)/Aa1 'negative'; EFSF rated AAA (Fitch)/AA+ 'negative'/Aa1 'negative'

Horst Seissinger, head of capital markets, KfW. Rated AAA 'stable'/Aaa 'negative'

István Töröcskei, chief executive, Hungarian government debt management agency (AKK). Rated BB 'stable'/Ba1 'negative'

Q: What conditions in the sovereign, supranational and agency [SSA] funding markets do you anticipate during 2013?

Horst Seissinger: The SSA funding markets have started the year with a very positive, almost euphoric tone which is also reflected by the good demand we have seen for our KfW benchmark transactions in euros and US dollars. The outcome of the Italian elections, however, brought back some degree of uncertainty and volatility to the market and shows that risks remain; there still is some way to go until all the problems of the debt crisis are solved. In spite of this we are confident and optimistic that 2013 will be a successful year for the overall SSA market.

David Franta: It seems that heavier pre-funding last year and possibly a lower supply this year and slowing LTRO [European Central Bank long-term refinancing operations] payments may have positive impact on the bond markets. In addition, there has been empirical evidence that the market rewards every effort of state budget consolidation. We expect short-term rates to stay low and we would not be surprised if rates gradually rise on the long end of the curve; however, we believe that political themes will be the main factor driving the market mood. There is a Czech movie called 'It's Gonna Get Worse'. As a responsible bank, we keep this in mind.

István Töröcskei: We expect that ample liquidity and low benchmark rates will prevail due to economic recession and global monetary easing. That would enable issuers such as Hungary to maintain their access in the international and domestic markets. The success of the two-tranche US dollar bond Hungary issued in February 2013 was a clear indication of the positive attitude of international investors. However, windows will open from time to time, therefore we believe that flexibility and good timing will be even more important.

Diana Popescu: Fixed-income investors could be looking at a very challenging year in 2013.

It is widely discussed that bond yields have less room to fall since they are still at very low levels. But I believe that emerging bond markets can continue to provide good diversification and safe investments, although with some modest levels of income. The [emerging Europe] region continues to be supported by a number of positive factors: economic growth remains much more robust than it is in other developed countries, debt-to-GDP [gross domestic product] ratios are lower, and yields remain relatively attractive.

However, some risk factors are to be considered that could cause emerging market bonds to lose ground. In particular, there could be higher than expected inflation and some adverse policy developments in the eurozone and US.

Anne Leclercq: It was an exceptional year in 2012. The performance of Belgian sovereign bonds in particular was extraordinary, with an improvement of more than two percentage points on the yield of the 10-year bond, for example. By the end of the year this positive mood extended to peripheral countries and even to eurozone countries under the programme. This trend has continued throughout January. The change was driven by appetite from real money investors who renewed their confidence in the eurozone project. I expect the rate levels of core countries to remain low given subdued economic perspectives. At the same time I also expect that Belgian rates will continue to perform and will seek even further connection with the core countries.

Ignacio Fernández-Palomero Morales: I think 2013 will be another challenging year since the [Spanish] treasury has to issue amounts comparable to last year’s. However, this year we begin with fewer uncertainties than last year. The 2012 budget execution seems to be widely on track, so there will not be any major surprises and this year’s budget application has begun in January, providing a more stable framework from the fiscal standing point. Our financial system’s assets have been thoroughly analysed and stress-tested, and our weak banks recapitalised with the European Stability Mechanism [ESM] loan.

The euro system has addressed currency redenomination risk by setting up an effective policy framework for all eurozone members, and Europe is working towards a banking union. I believe that 2013 will be easier on SSA issuers than 2012.

Q: How has the composition and geography of your investor base changed over the past year, and was it affected by the general renewed appetite for eurozone bonds seen from mid-2012?

Mr Fernández-Palomero Morales: Spain’s non-resident investor base has seen important changes throughout 2011 and 2012, but in the past few months the tendency has somewhat reversed. At the end of 2011 and beginning of 2012, domestic investors took over our debt holdings as, for several reasons, non-resident investors withdrew. Since the ECB [European Central Bank] decided to address currency redenomination risk head on, international investors flocked back towards so-called 'peripheral' debt in search of yield. At the beginning of 2013, we were encouraged by new names, unseen in previous years, fighting to return to our market. Our 10-year syndication was immensely successful, both in size and in number of orders.

Mr Franta: We changed strategy from funding ourselves by mostly private placements tailored more for local investors to building our own benchmark curve through public placements for a broader investor base. We started with a successful public €250m EMTN [euro medium-term note] issue in [early] 2012. It attracted more than 90 accounts, almost all of them from outside the central and eastern Europe region, and has performed well in secondary markets.

Furthermore, we [sensed a] positive appetite when we issued private placements [later last year] at spreads just several basis points above Czech government bonds. We aim to follow this trend this year as well.

Siegfried Ruhl: The investor base for the European Financial Stability Facility's [EFSF’s] syndicated bonds is broken down as follows: Asia 22%; eurozone 50%; the rest of continental Europe 7%; UK 13%; and others 8%. For all bonds with maturities of 10 years or more, however, we see a much higher concentration of European demand. The breakdown has been relatively stable since the EFSF started issuing in 2011.

The EFSF has always received solid and consistent support from central banks in Asia and elsewhere. In terms of breakdown by investor type, central banks currently represent 30% of the total breakdown of EFSF syndicated bond issues. Banks make up 40% and asset managers 21%. The remainder comes from pension funds, insurance companies and corporates. This breakdown has been stable since the beginning. It mainly varies depending on the maturity of the bonds issued. The situation of the investor in terms of available liquidity is also an important factor.

Ms Popescu: Until 2012, European investors were the largest source of demand for our external bonds. But starting in January last year with a dollar transaction, we diversified to reach US investors, a large pool of investors interested in longer tenor papers. Also, for the first time we have seen increased interest coming from Asia. Fund managers remain the predominant investor type in the Romanian international bonds.

On the domestic market, the investor profile changed substantially. While in 2012 local banks’ share was more than 60% of the total outstanding Romanian lei-denominated government securities, non-residents’ holdings were fluctuating from 11% to 6% during 2012. Starting in December 2012, we have seen huge increased demand coming from international investors for lei-denominated papers as these instruments become eligible for inclusion in the regional indices, and non-resident holdings now account for 22% of the outstanding stock. This strengthening demand was in line with the state treasury strategy, bringing investor base diversification with new accounts and increasing the demand for lei treasury bills and bonds, so providing more liquidity for these instruments. 

Jens Hellerup: The main investor base for Nordic Investment Bank [NIB] has always been the central bank community and this remains to be the case. However, bank treasuries have become much more important to NIB. They are now the second single investor group for us (about 30%). We believe the reason for this is an increased need for AAA rated assets, while at the same time the number of issuers carrying the highest possible rating is decreasing.

Martha Oberndorfer: There were no substantial changes regarding Austria’s well-diversified investor base. Central banks, supranational organisations and other investors seeking instruments with the highest credit ratings continue to be the major holders of Austrian debt. The domestic home market for Austrian debt remains the eurozone, where about 80% of Austrian paper is placed. Given the share of Austria in eurozone sovereign bond indices of about 4%, the domestic market is three to four times overweight in Austrian sovereign paper.

Furthermore, we noted high demand from German insurance and pensions funds for very long-dated Austrian paper. Since the second half of 2012, demand from Asia increased substantially. Appetite for Austrian treasury bills was strong, as evidenced by negative rates and levels equal to Germany.

Q: What are your likely funding needs for 2013, and would you raise money beyond your needs if strong market conditions continue?

Mr Hellerup: We expect to fund about €4.5bn this year. NIB had a very strong start into the funding year and we have already completed more than 50% of our programme. However, we continue to fund in the market and would be able to do some limited pre-funding.

Mr Seissinger: For 2013, KfW’s long-term funding target is about €70bn to €75bn. As of the end of February we had raised about €21bn, which mirrors the usual pattern of the SSA market – namely, some degree of frontloading in the first quarter of the year. We closely adhere to our funding plans communicated to the market in December last year and we shall reassess them after the first half of this year. Our investors do rely on the transparency of our communication. This means that any sort of pre-funding so far has never been a realistic option for us and I doubt it will be, given it would compromise our communication strategy and, last but not least, create cost of carry.

Mr Ruhl: For the EFSF, the long-term funding requirements for 2013 are currently approximately €58bn. This is of course subject to changes in accordance with the requests for funding by the beneficiary member states. So far this year, we have already raised €16bn.

As this is quite a significant amount, I do not foresee the EFSF raising extra funding. Also, pre-funding for next year would entail extra costs for the beneficiary countries so it is probably not something that we would do.

Regarding the ESM, the funding objective is close to €9bn for 2013. To raise this amount, the ESM will start to issue in the capital markets in the second half of this year. We will in principle not raise any more than this unless there are more requests from member states.

Ms Leclercq: Planned issuance in 2013 is limited to €40bn. This is 13% less than in 2012. Last year we took advantage of a benign market in order to frontload and increase issuance so as to pre-fund 2013 and to refinance short-term certificates by longer term debt. This year the same strategy will be pursued: further lengthening of the debt portfolio – the average life is now 7.2 years – and reducing the refinancing risk to pre-crisis levels.

In line with this, OLO [Belgian government bond] issuance should be limited to maturities of five years and longer and depending on market demand the Belgian debt agency may issue a new 15- or 30-year benchmark. Two months into 2013 we had already funded 25% of this year’s funding targets. Positive markets and substantial frontloading could – if possible and advisable – potentially result in higher than planned issuance in 2013. However, market demand will be the driver for issuance in order not to negatively impact the performance of the OLO curve. 

Mr Töröcskei: With a budget deficit lower than 3% of GDP, the net financing needs are moderate and can be financed totally from the domestic market. Maturing foreign currency debt, dominated by loan redemptions to the International Monetary Fund, is €5.1bn. For refinancing the foreign exchange-denominated debt, we plan to use market sources (both local and international) plus project financing loans extended by multilateral financial institutions. More than 60% of the planned international issuance already took place in February 2013. The remainder (approximately €1.5bn) will be done when market conditions are appropriate. Given our strict debt rules, we do not plan any pre-financing at the moment.

Q: Do you aim to diversify your funding formats and currencies?

Mr Fernández-Palomero Morales: We are always open to diversifying our funding sources. We have an EMTN programme that affords us the chance of issuing several currencies; we have done dollars, yen and sterling in the past, and we are constantly exploring investor demand for issuance possibilities. We do not assume any currency risk, so the availability of affordable cross-currency swaps tends to determine whether the Spanish treasury finds foreign currency issuance attractive at any point in time. We can also do index-linked issuance in euros, and we have issued floating-rate notes linked to Euribor in 2009 and 2010. We remain flexible to explore other alternatives.

Ms Oberndorfer: The Republic of Austria is a well established issuer in the international capital markets. One of the cornerstones of Austria’s funding strategy is diversity in terms of funding formats and currencies. Flexibility to address specific investor demand is very important for us. In January 2012, Austria was the first sovereign to execute a dual-tranche syndication. This also allowed us to capitalise on strong simultaneous demand in different maturities.

As of 2013, the maximum legally permitted tenor of Austrian sovereign issuance was increased to 70 years from 50 years. These steps further increase the financial flexibility by broadening Austria’s funding kit.

Mr Hellerup: For NIB, diversified sources of funding have always been an important means of ensuring constant access to the capital markets. While the US dollar benchmark market is the single most important source of funding, other currencies, such as Australian and New Zealand dollars and some emerging market currencies, play an important role as well. We aim to diversify even more into Nordic currencies, since there is a natural need for these currencies in our lending book. We also believe that this is in line with investors' needs, as we see from our typical investor base that they diversify their portfolios more, and [do so] away from the main currencies.

Mr Seissinger: KfW’s approach in capital markets is based on a highly diversified funding strategy. The bulk of our funding comes from liquid benchmark transactions in global format in euros and US dollars which is accompanied by other public transactions in as many as 20 to 25 currencies under our note programme. Additionally, we offer private placements and structured notes. This funding strategy proved to be right and absolutely reliable during the worst of the crisis and the volatility seen in recent years. We strongly believe in this multi-currency and multi-format funding strategy, but at the same time we are absolutely open for new ideas and currencies, as KfW’s first transaction in Chinese renminbi in 2012 shows.

Mr Ruhl: Neither the EFSF nor the ESM have currency constraints, and both are able to issue in currencies other than euros. However, so far the EFSF has concentrated on building a curve in euros. We expect to do the same at the ESM, but once these curves have been fully established, and if it is considered useful, we could possibly look at other currencies.

In terms of funding formats, we already use a mix of syndicated transactions and taps and occasionally taps via auction. We intend to continue using this mix to obtain the best opportunities available. Our regular bill programme, which began under the EFSF and has now been taken over by the ESM, also provides our investors with good diversification opportunities in the short term.

Mr Franta: Czech Export Bank definitely aims to diversify its funding activities. We successfully launched a euro commercial paper programme in mid-2011 which proved to be very effective. We continued with preparation of schuldsheindarlehen [German law tradable loan] documentation in 2012 and believe [we will get] similar results. We are also ready to issue in different currencies and swap it to our target currencies if the conditions are favourable. We have done this in the past when we swapped our Czech koruna issues. Regarding other currencies and markets, we are open to reverse inquiries from investors but it is always a function of our current funding needs, investor demand and the actual pricing of the deal.

Ms Leclercq: The [Belgian] treasury already offers a whole range of different products, and novelties will hence be very limited. However, we will, hopefully, be able by the end of the first [half of 2013] to issue inflation-linked bonds under the EMTN programme. This is subject to the legislative work being finalised. We also plan to set up an additional EMTN programme that is 144A-compliant, geared towards US investors for our US dollar transactions.

Q: Do you feel that credit ratings play a useful role for informing investors, and have you been affected by rating changes or changes to ratings methodologies over the past year?

Mr Ruhl: Credit ratings are, of course, a useful reference for investors. However, over the past two years, there has been an element of downgrade fatigue. While the downgrade of an AAA sovereign obviously does not go unnoticed by the market, the consequential effect on its spreads is much less than would have been the case a few years ago. There is still a need to invest in the safest and most liquid assets with a minimum yield, so investors seem to be looking at new references now.

Of course, the EFSF has been affected by changes in credit ratings on itself but also on its shareholders, the 17 euro area member states. Despite the decision by Moody’s to downgrade France in November, we were able to successfully manage the situation due to our portfolio of instruments. In fact, we offered a very innovative solution through the issue of a 364-day bond which raised €7bn.

Ms Oberndorfer: Credit ratings remain an important source of information for sovereign debt investors. However, in the past years we have noticed that investors are increasingly doing their own research and due diligence while relying less on credit ratings. The successful launch of a new 50-year Republic of Austria government bonds in January 2012 – this bond is still the longest fixed maturity duration product in the euro government bond markets – was not only innovative but a very elegant and powerful answer to the rating action of one particular rating agency. Currently, there is an enormous amount of discussion on regulation changes for credit rating agencies in Europe and it remains to be seen what practical consequences this will have on investors and issuers.

Ms Popescu: Credit ratings are playing an increasing role, among other important factors, in creating high volatility in financial markets. I believe credit ratings often place a quality stamp on the investment decision and determine the cost of capital to be invested or raised for different financing purposes. Therefore, since the economic circumstances have frequently changed in the past several years, credit rating activity has played a useful and important role. But at the same time, the perception is that investors are becoming less dependent on the rating agencies' announcements in the current market conditions.

There has been discussion of some methodology revisions by some of the big credit rating agencies, but Romania’s standing has not been affected by any of them. Moreover, all ratings have been reaffirmed in 2012. The 'negative' outlook assigned by Moody’s, as the agency itself explained, was more related with the regional performance than with our country developments.

Ms Leclercq: One could question how, in the case of sovereigns, the complexity of a state can be expressed in a set of letters, and this is even more so given the lack of significant statistical data on country default. Credit ratings should thus be seen as a possible tool for the assessment of an investment, in addition to other analyses of the credit.

Rating changes always have an effect as they are an evaluation criterion in many investment or even official schemes. The shock effect resulting from a downgrade is often detrimental. However, the result of a negative rating action can sometimes also be beneficial as it can function as a loud, sharp-sounding alarm. The threat of a ratings downgrade could be a catalyst to initiate corrective action or policies: the rating change for Belgium in 2011 certainly helped in speeding up the formation of the government.

Mr Töröcskei: As credit rating agencies are not able to react to the changes in the market in a timely manner ratings, nowadays they play a less important role. Investors have to decide for themselves what they think is a good investment. Hungary suffered several downgrades during the crisis in spite of the good and reliable debt service records and the clear commitment of the government to keep the budget deficit under 3% and put the public debt ratio on a declining path. Investors have realised that, and this is the reason why we have a well-functioning government securities market with a diversified investor base.


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