LONDON, Dec 7 (IFR) - Some of the richest names in the SSA
sector may have to swallow the bitter pill of higher funding
costs for their dollar issuance in the new year or turn instead
to other currencies, as market participants predict a prolonged
period of compressed swap spreads.
For the first half of 2012, Washington-based supranationals
enjoyed attractive sub-Libor funding levels. However, since the
Federal Reserve announced that it would extend Operation Twist
at the end of June, five-year swap spreads have been on a
relentless tightening path, moving from the high 30s to as low
as 9.5bp. Since November, they have widened back out, but are
still in the mid teens.
As a result, issuing in this most benchmark of maturities
has become more costly for supranationals, as pricing brings
barely sub-Libor funding and deals offer only a marginal pick-up
over US Treasuries, making them less attractive for investors
looking for yield.
Some of the transactions that have come in the latter part
of the year highlight this change. A USD2bn five-year issue for
the IFC back in April priced at mid-swaps minus 12bp, or 20bp
over Treasuries, and attracted USD2.5bn of orders.
When it returned to market in November with a trade in the
same maturity, the mid-swaps minus 4bp reoffer gave a mere 10bp
pick up to Treasuries and the USD1bn deal only attracted
USD1.4bn of demand.
A USD1bn five-year for the Nordic Investment Bank which
priced flat to mid-swaps - equivalent to 17.05bp over Treasuries
- struggled even more, coming short of full subscription.
FISCAL CLIFF RELIEF
Some SSA bankers hope that a resolution to the fiscal cliff
could offer enough relief to even stave off the tightening
effects of increased issuance in January.
"Macro forces like the fiscal cliff and uncertainty around
US sovereign ratings are likely to have a greater impact on the
swaps market than the technicals caused by the seasonal increase
in new issue supply," said Dan Shane, head of SSA syndicate at
Issuers with the most aggressive funding targets in the
segment will obviously be following these events with some
interest, but at the moment do not seem too panic-stricken.
"We think that, because absolute rates are so low, even
tight spreads have an appeal to investors. In a higher rate
environment, where the pick-up may be a negligible percentage of
the return, this may not be so," said Isabelle Laurent, head of
funding at EBRD.
Meanwhile, rating agencies demand that these institutions
keep solid cash buffers to maintain their credit ratings .
"Pretty much every supranational you talk to has a very
strong liquidity position right now, a lot have seen lower
disbursements than they were forecasting, and are certainly in
no urgency or rush to issue," a syndicate official said.
"They can look across markets to see if there are better
opportunities in euros or sterling, but ultimately when that
pressure mounts they will just have to pay the price," he added.
Should dollar swap spreads stay as tight as they currently
are, it could lead heavy users of the dollar market to look more
closely at alternative currencies.
The EUR/USD basis swap has narrowed dramatically with
improving market sentiment around the eurozone, meaning it is
not as expensive to issue in euros and swap back into dollars.
Since early June, the five-year cross currency basis has
moved from minus 65bp to minus 34.75bp.
"We are not at that place yet, but you could conceivably get
to a place where euros may become as attractive a funding tool
as dollars," said Shane.
World Bank is the only Washington supranational with an
outstanding euro bond - a 3.875% 10-year issued back in 2009.
However, other supranationals are heard to be paying much more
attention to the euro as a potential arbitrage currency.