* Issuers look to longer maturities to meet yield hunt
* Two-way CSAs predicted to come to a head after UBS exit
* Markets more immune to ratings downgrade after wave of
By John Geddie
LONDON, Dec 20 (IFR) - Public sector issuers will have to
adopt a nimble funding strategy in 2013 as they navigate a
triple whammy of an investor flight to higher-yielding products,
potential rating downgrades and increased regulatory pressure on
Investors have made sizable returns this year as spreads
across the sector have consistently ground tighter, but at
current levels those returns will be near impossible to match in
As a result, public sector borrowers would prefer to issue
longer-dated bonds in benchmark currencies which offer more
yield rather than simply having to accept higher costs of
funding by paying hefty new issue premiums to entice investors.
"The low yield and spread environment is making it very
challenging for investors, and likewise for us to be able to
provide the right products," said Eila Kreivi, head of capital
markets at the European Investment Bank (EIB).
The key is flexibility, other issuers say, whether in
regards to timing, number of deals, issue size, maturity or
currency. Keeping a hand in every local currency market that
offers arbitrage opportunities will also be vital.
"I'd rather have a strong USD1bn deal than have to pay up
aggressively in order to generate a USD2-3bn book that could be
to the detriment of IFC's outstanding curve," said Ben Powell,
senior financial officer at the International Finance
The broad consensus in the market is that five-years will be
the maturity of choice in 2013 for SSA dollar bonds versus three
years in 2012. Similarly in euros, issuers may look to push out
to seven-years if there is too much congestion at the short-end.
For many issuers that will come at considerable cost given
the inherent steepness of their curves. For example, EIB's euro
credit curve has steepened around 20bp over the course of the
year between its five- and 10-year bonds.
Another potential headwind for issuers is further ratings
action, especially in Europe.
Triple A rated Dutch agencies Bank Nederlandse Gemeenten
(BNG) and Nederlandse Waterschapsbank (NWB) are just two of the
borrowers currently waiting on tenterhooks after they were
placed on CreditWatch negative by S&P in mid-November.
Both issuers remain uncertain about how the potential loss
of their coveted ratings - expected to be announced by
mid-February - will impact investor appetite for their debt,
especially as the sovereign is still likely to be rated Triple-A
at that time.
"The announcement was made when we were roadshowing in Asia,
and the initial feedback from central banks was very promising,"
said Bart van Dooren, head of funding and investor relations at
"However, we also understand some asset managers only have
the mandate to invest in credits with three Triple A ratings."
Most of Europe's few remaining Triple A rated sovereigns and
supranationals are now on negative outlook by at least one of
the ratings agencies. France was downgraded to Aa1 by Moody's in
November, prompting the same action on its government-backed
agencies, as well as eurozone bailout vehicles EFSF and ESM.
Fortunately for issuers, the market appears to have become
less sensitive to ratings cuts. France's long-term borrowing
costs even hit a record low at a December auction following the
downgrade as investors favoured its relative safety.
Banks - the sector's most loyal customers - have also
developed sophisticated risk assessment models which are only
partly focused on ratings.
SWEATING ON SWAPS
Although banks will underwrite lower-rated SSA deals, swaps
are another matter, and banks are piling more pressure on
issuers to rethink their asymmetric swap arrangements, following
the shock exit of UBS from the SSA business in October.
UBS's legacy swaps portfolio, and its diminishing returns,
are widely believed to be one of the reason for its decision.
When the news broke, syndicate desks across London
reportedly picked up the phone to warn issuers that if they did
not start to share the burden of swap costs then other banks
would also exit.
As things currently stand, the majority of SSA issuers have
one-way credit support annexes - contracts that require banks to
post collateral to these issuers when out-of-the-money on swaps,
while not receiving collateral when the situation is reversed.
"UBS was very much focused on growing market share, an
approach which other houses also took, but one that is not
followed anymore," said Petra Wehlert, vice-president and head
of new public bond issues at KfW.
"Every bank has to focus on making the business profitable;
market share or league table trades are no longer as important
as they once were."
Banks have inched up quotes on swaps for their clients,
hoping this will force issuers into two-way agreements. The UK's
Network Rail has moved to two-way CSAs, and a breakaway group of
Washington supras is also heard to be nearing a decision.
Issuers with the largest programmes, however, have not
budged, but this should come to a head in the next year.
Whether there will be more shock exits remains to be seen,
but UBS' departure has certainly reinforced one age-old adage -
always expect the unexpected.
"I don't foresee that other banks will pull out, but then
again UBS's departure came as a surprise to everyone and could
not have been predicted," said van Dooren at BNG.