April 4, 2014 / 2:36 PM / 4 years ago

Arbitrage to drive SSA euro issuance shift

LONDON, April 4 (IFR) - A ramp up in agency and supranational issuance in euros in the first quarter is unlikely to mark a permanent shift in market dynamics, and supply will continue to be driven by arbitrage opportunities, market participants said this week.

Kommunalbanken priced a debut euro transaction this week, the latest in a string of borrowers that have accessed the single currency in recent months.

Typically, agencies and supranationals have relied heavily on the dollar market for funding as it tends to offer better borrowing costs. But that advantage has been eroded by a much less negative euro/dollar basis swap, and now in some cases euro funding levels are on a par with costs in dollars. This has allowed borrowers to access a different investor base without having to pay up for the privilege.

According to Thomson Reuters data, agency and supranational issuance in euros has grown from US$80.4bn-equivalent in the first quarter of last year to US$100.8bn in Q1 2014. Meanwhile, US dollar volumes have dropped to US$101.3bn versus US$102.9bn in the first quarter of last year.

But whether the pick-up in issuance follows the pattern seen in corporates remains to be seen. The share of non-European corporates euro issuance has risen to 22% this year versus 14% in 2013, and 9% in both 2011 and 2010.

“These are niche opportunities” said a banker who worked on the KBN bond, echoing another banker who said she didn’t see a great influx of new debut euro deals.


But while arbitrage is likely to remain the key driver, there is real depth of demand waiting to be accessed in euros.

“The euro market is so large that it can envelope quite a lot more supply,” said a syndicate banker who worked on two of the debut deals seen recently. He added that increased issuance by normally dollar funders won’t make a dent in euro markets.

“Investor demand for the household names like KfW will stay the same, but these new euro issuers offer eurozone investors a type of asset they have not been able to access before,” he said.

For Kommunalbanken, this was a real impetus to do the trade.

“The euro deal was a strategic move, we decided last year to expand into euros in 2014. We now feel our funding program is large enough to build curves in both US dollar and euros,” said Thomas Moller, head of funding and IR at Kommunalbanken.

He added that the order book for the bond had a range of investors the issuer would not normally see in the dollar market, including European banks, official institutions and asset managers, while the deal also saw more interest from Benelux and UK accounts. (Reporting By Sarka Halas, Editing by Helene Durand and Julian Baker)

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