Corporate Treasury hall of horrors

Prior to a corporate bond issue, the bond roadshow woud take place and often this would involve a media interview. These were often unexciting guarded affairs where the treasury team would wax lyrical about the strength of their balance sheet and blatantly ignore anything investors might want to know. Even more dull where visits from AAA rated supranationals (entities backed by multiple governments), who really had little to say about themselves.

Many of the delegates I interviewed would now find themselves in the corporate treasury hall of horrors - UK building society Bradford and Bingley went belly up, Icelandic bank Kaupthing virtually wiped out the economy of its entire nation, and the carcas of Wachovia, the once proud US bank was ripped apart by its ailing rivals.

***Kaupthing warms investors (18 July 2007)***

Representatives from the Iceland's Kaupthing Bank, rated Aa3/A by Moody's and Fitch, chose a frosty week in Sydney to visit domestic bond investors. ANZ and RBC Capital Markets are hosting the roadshow, the bank's first visit since 2005.

Kaupthing has assets of over EUR47.7 billion and is well capitalised with a tier I ratio of 9.6 per cent and a total capital ratio of 14 per cent. It is headquartered in Iceland but has a regional presence with over 70 per cent of income and assets in non-Icelandic markets. The largest geographic concentrations are in the UK, Denmark and Iceland.

While the regional focus remains in Northern Europe, Kaupthing sees growth opportunities outside of Iceland. It recently bought a small stake in an Indian bank, and has set up representative offices in Asia, The US, and The Middle East.

Kaupthing Group has an annual global funding requirement of EUR8.5 to 9 billion. This includes about EUR2 billion of funding for Danish subsidiary FIH. It aims to split the funding equally into three sources, the US bond market, the European market and other international bond markets (Japan, Canada, Australia and other markets). Kaupthing has already raised EUR6.5 billion, leaving about EUR2.5 billion still to issue in 2007.

Until 2004 the bank's borrowing programme consisted of Euro market issues but it has sought to diversify its funding sources. Kaupthing has become a well known Yankee bond issuer and has visited the Japanese market on multiple occasions. It recently completed its inaugural Canadian maple issue. The bank has issued in Australia before - a A$290 million private placement in September 2006. The issue was a five year notes issue, with a put option after two years.

Results for the bank have been good of late. It has been expanding into new regions and adding more services.

"We leverage on banking relations already existing to get more business out of the clients. Where we have the full service offering is where we drive the profitability within the bank," said Gudni Adalsteinsson, chief treasurer, Kaupthing Bank.

The bank has experienced both acquisitive and organic growth. Organic growth has been achieved through the growth of the bank's lending portfolio and setting up new businesses that generate commission and fee income, specifically in the UK and Denmark.

"We've been building these teams by taking extremely strong bankers from the competition. We have been acquiring talent. The salary costs have risen in line with commission and income generated, but we still have more expensive people than we have had before," said Eirikur Magnus Jensson, head of funding, group treasury, Kaupthing Bank.

Kaupthing did not give a firm indication of timing of a Kangaroo issue but like other issuers Kaupthing is exploring a three to five year maturity bond.

"We are keen to issue into the Australian market. There has been a softening of credit in recent weeks but we would very much like to do an issue. Our results are up next week so some time after that we will explore the opportunity," said Adalsteinsson.

Kaupthing was placed firmly in the spotlight earlier in the year following the controversy surrounding Moody's revisions to its JDA ratings methodology.

It was in the first set of banks to be reviewed and was upgraded to Aaa following Moody's assessment of implicit government support given to the bank.

Kaupthing were surprised with their newly acquired Aaa status but following the upgrade, Moody's announced it would review the changes. During that time Kaupthing's rating went into limbo and the bank decided it would not be appropriate to visit the market until the uncertainties were resolved.

Despite the saga, Kaupthing felt that Moody's have worked hard to resolve the issues relating to their amendments to the JDA methodology.

"For us the end result was positive being upgraded to Aa3, but the way we got there was certainly interesting," said Jensson.

***Bradford & Bingley touches base with domestic investors (5 October 2006)***

UK based lender, Bradford & Bingley, rated A/A1, is in town on a non-deal roadshow after a three year absence. The roadshow has been hosted by National Australia Bank and UBS.

The head of funding and capital markets, Mark Winter, is meeting investors to explain the profile of the bank borrower, which is quite different to traditional Australian bank borrowers, and indeed other UK and European borrowers.

"The modus operandi is to come down here first, give investors time to do the credit work, assist them through the process, so that come the new year, we will be able to take advantage of market opportunities and issue reasonably quickly," he said.

Bradford & Bingley has a diverse source of funding and tries to maintain a balance between retail funding, wholesale or secured funding, covered bonds, and securitisation.

This year it has raised about STG6 billion, across all asset classes. This included a EUR3.5 billion equivalent issue which included a Swiss Franc component, a EUR 1.25 billion senior transaction and a
EUR2.4 billion securitisation issued in US dollars, Euros and Sterling.

The borrower has also been active through reverse enquiry private placements raising about STG1billion.

Bradford & Bingley was one of the last of the UK building societies to demutualise and list on the stock exchange, in 2000, and becoming a public company forced it to revaluate its direction.

"We took a long hard look at the lending environment. What we concluded was that we couldn't compete with the mainstream mortgage lenders who could push large volumes of mortgage applications through automated processes, selling the loans at a discount. There was a move in the UK market as a result of the intense competition, the idea was sell cheap mortgages and look to cross sell other products to the customer," said Winter.

"We didn't have these other products so we had to make our money from the mortgage market."
The strategy was to concentrate it efforts on the specialist lending market through subsidiary, "Mortgage Express", and the bank exited the mainstream mortgage lending market.

Bradford & Bingly has three main products - Buy to let, which are loans to customers who buy property or raise a mortgage to let the property out to tenants; self---certification loans or 'low docs' as they are known in Australia which are loans to customers who don't fit the standard underwriting criteria of the mainstream mortgage market; and life time mortgages or 'reverse equity' loans.

Bradford & Bingley's key focus is on its buy to let product suite, which is being driven by customers who
see property investment as a way to reduce exposure to equities.

"Customers are already overexposed to equities through their pensions and this is a way to diversify into bricks and mortar. They are looking for a longer term investment, principally to provide for an alternative pension arrangement," Winter said.

Winter has spent the last 18 months travelling to markets around the world to discuss the credit and the market segments in which they operate. He has emphasised the 'buy to let' sector as it is an asset class which performs differently in the UK compared to continental Europe and The US.

"We have specific laws in the UK which mean that the control of property is largely in the hands of the landlords. In continental Europe there is protection of tenants where rents are set by formula which makes it an unattractive market to be in. In the UK the landlord has control and there are incentives to invest in the property so that he can get the best possible market rent. This means quality of the property is enhanced," said Winter

The company's last visit domestic market in late 2003 with a A$250 million floating rate issue, maturing in September 2007.


***AfDB on the right track (25 May 2007)***

The African Development Bank has made a return visit to Australia, providing fixed income investors with an update on the supranational's credit story and the progress of the continent. The visit by funding officials is part of a non-deal roadshow arranged by ANZ Investment Bank.

For over 30 years, The African Development Bank (AfDB) has sought to promote economic development by providing loans for development projects and other initiatives throughout Africa. "Our role is to raise cost effective resources and on-lend them to other countries with a mission to promote sustainable growth and reduce poverty in Africa," said Hassatou N'Sele, head of development finance, AfDB.

In 2006 the bank's borrowing programme reached US$1.2 billion. This included AfDB's debut Kangaroo issue - a A$300 million three year fixed rate notes offering priced at less seventeen basis points to swap. The issue has performed strongly in secondary markets, trading at issuance levels.

The AfDB stresses its relative conservatism and strong financial ratios, even amongst elite credits such as the World Bank, the Asian Development Bank and the IADB.

"We see the right price to be at par with our peer group because we view ourselves as the same credit," says Pierre van Peteghem, division director, funding AfDB.

The AfDB has not directly signalled an intention to issue a follow-up Kangaroo, but is keeping its options open if market conditions are right, and the price is right for investors.

While access to the domestic investor base is a key objective for issuing in Australia, van Peteghem views the offshore bid for Kangaroo bonds as a positive development. About 40 per cent of AfDB's debut Kangaroo bond issue was bought by offshore accounts.

"Obviously involvement from domestic investors is key but some allocation to Asia and Japan definitely helps in terms of price performance," he says.

In addition to public bond issues, the bank also accesses the uridashi and private placement markets. More recently the AfDB has undergone an initiative to issue bonds in African currencies or currency linked structured notes.

An enticement of a higher coupon in more stable African currencies such as the Botswanan Pula, The Tanzanian Shilling, The Ghanaian Cedi and the Nigerian Naira, has attracted a number of global and emerging market funds to buy bonds issued by the AfDB.

Emerging market currency bonds is set to grow with issuers such as the AfDB playing an important role. Global fund managers like PIMCO view emerging market currency bonds as one of the few sectors where fixed income investors can still achieve ‘equity like' returns.

"The best opportunities lie with still unexploited local currency fixed income markets and relatively liquid emerging market currencies which in effect allow bondholders to benefit from growth in these countries via a classically recognised yet not extensively used asset 'class' – its currency." said PIMCO’s Bill Gross in his investment outlook report.

"They (global funds) have a view on the stability of the currency and therefore they are willing to take an exposure to those markets because they get extra returns," says van Peteghem. In addition to diversifying its investor bases, African currency issues by the AfDB also play a role in the development of local capital markets.

"Our involvement in local capital is to contribute to the extensions of yield curves, to improving standards of documentation and to bring a new reference to the market. This helps to facilitate the process of pricing corporate credits and local capital markets issues to develop the private sector," he says.

Delegates from the bank recently assembled in Shanghai for its annual gathering to update members of its progress. After 40 years of pain there are signs that the continent is heading in the right direction.

The continent's GDP growth has exceeded five per cent for three consecutive years and is expected to reach six per cent in 2006.

Most countries are now growing at a rate greater than their population growth, a sign of real wealth creation. The number of conflicts in Africa has also decreased dramatically. The willingness of the donor community to provide debt relief to African states, coupled with the boom in demand for commodities has aided economies.

"The commodity boom obviously helps but there are countries not particularly endowed that are performing quite well," says van Peteghem.

Despite the more upbeat outlook, the AfDB is under no illusions as to the immense task it has at hand in its role of creating wealth in the continent.

The bank has identified two key areas that require attention to sustain economic growth - infrastructure and the private sector. "A lot of African countries trade with Europe when it would make more sense to trade with their neighbours, but there is no adequate network of roads. It is a source of developing regional integration which will bring economic sustainability," he says.

The AfDB is also focusing on facilitating private sector growth in line with the view of development economists that a functioning private sector is critical for sustainable development.

While globalisation has expanded the bank's funding options, Africa's stakeholders including the AfDB are desperate to ensure that it is not marginalised from the benefits of globalisation. "We are a AAA institution coming to global capital markets to issue at the same level of our peers on the other hand we are serving Africa with all the problems it has - for us there is quite a contrast," says N'Sele.


***Network Rail arrives on time (25 October 2006)***

Executives of Network Rail, rated AAA/Aaa, have arrived in Australia to meet fixed income investors, via Citigroup and UBS.

The owner and operator of Great Britain's rail infrastructure network is explicitly guaranteed by the UK Government and is reinforcing its strategy of global funding through mature debt markets.

Network Rail was conceived after its predecessor Railtrack went into administration. The transformation of the company, and the industry, in the last four years has been dramatic.

"Punctuality is up from 70 per cent to 90 per cent, asset condition, reliability and safety are at record levels, all at time when we have been cutting costs," said Fred Maroudas, director of funding, Network Rail - words many Sydney commuters dream of hearing every morning.

"The rail system is of critical importance, which is why we are guaranteed, and why we are no longer a shareholder corporation. Our members are drawn from government, industry stakeholders and the public."

Network Rail current net debt is about STG18 billion, which includes STG9 billion of short term funding. Since it launched its debt issuance programme in October 2004, it has issued STG10.4 billion of bonds in a number of currencies, and maturities of up to 40 years.

It is the only issuer funding in the international capital markets with a guarantee by the UK government and provides an opportunity for exposure to the UK outside of the Sterling and Gilt market.

In addition to its core US dollar and Sterling markets, Network Rail considers Australia a key strategic market, along with the Swiss Franc and the Maple market.

"Other currencies will play a bigger part, and the percentage of A$ in our funding will increase," said Maroudas.

Network Rail intends to execute sizeable issues in Australia, but will do so relatively infrequently and will avoid tapping smaller deals.

"The bonds will perform better; we want to deliver liquid transactions that perform," Maroudas said.

Despite its explicit government guarantee, the entity is looking at raising incremental funding from its own balance sheet in the future.

The cost of funding will be more expensive, but non-government funding has its benefits.

"The reason we have been able to transform the company is because we have been distant from government," said Maroudas.

"We are not a nationalised industry and we have operational freedom. If you are going to be genuinely independent you are going to need to raise money independently and we believe it will help to reinforce the solid practises that we have introduced."

Network Rail is in discussions with the ratings agencies and expects to receive an investment
grade rating of about A- or BBB+, for non guaranteed debt.

With the roadshow only just underway, Network Rail hopes to gather feedback from investors about the timing and format of a transaction.

"Investors are looking ever shorter, given where the curve is," said Maroudas. He did suggest that investors may also look for duration following an expected lengthening of the index, after November.

Network Rail's last visit, a A$850 million five year issue in July 2006, coincided with a big month for redemptions. With another big month of redemptions looming in November, the market might be ripe for an issue.

"It's a sensible time to look at coming to the market and to try match in our investor's aspirations, so it plays a part without any doubt," said Maroudas.

***Investec paves the way for debut issue (4 June 2007)***

Investec Bank (Australia) Ltd has kicked off an investor roadshow ahead of a proposed maiden domestic bond issue.

The bank's funding team met with Australian bond investors last week and jets off to meet Asian investors. Commonwealth Bank of Australia and nabCapital have arranged the meetings.

Depending on investor feedback and market conditions, an inaugural offering of A$200-300 million could be on the cards within one to two weeks.

Investec Bank (Australia) Ltd (Investec Australia) is a 100 per cent owned subsidiary of Investec Plc. Investec Group was set up 30 years ago in South Africa and has expanded into the UK and Australia.

While Investec Australia has close associations with its South African parent, its assets sit under UK listed Investec plc which is credit ring fenced from the African group assets listed in Johannesburg.

Investec set up shop in Australia in 1997. The business gained traction following the purchase of David Gonski's Wentworth and Associates, a premier corporate advisory firm in 2001. Investec then set about acquiring a formal banking license and gaining credit ratings which placed it in the position to acquire the local Rothschild's merchant banking business in 2006.

While Investec Australia is liquid and well capitalised, it is looking to access the debt markets for multiple reasons. "We like to run the business in that way and be conservative from a risk position and retain strong levels of liquidity. At the same time we are looking to grow the business, and consistent with that we want to issue to tap markets," said Peter Binetter, head of asset and liability management, Investec Australia.

Following the Rothschild acquisition, Investec Australia inherited existing debt programmes and capital markets instruments and has gone through a process of updating and issuing new programme documents.

"Its an opportunity to rekindle relationships with existing investors, tell our story, get recognition and develop a profile. Subject to asset growth we want to develop a curve and be a regular issuer," said Binetter.

The bank is rated A3 by Moody's and BBB (positive outlook) by Fitch Ratings and the team fielded questions on the roadshow about the absence of a Standard & Poor's rating.

"S&P can't really rate us until they have done a full group rating and the group doesn't have an S&P relationship on an international basis. This is more a function of where the group has come from," said Binetter.

Investec Australia has three key businesses - capital markets, investment banking and private client activities; and is growing its property activity business.

"We target carefully who our high net worth clients are, and partner with them to grow their wealth through a series of ways, including leverage. We lend money to people to grow their businesses," said Alan Chonowitz, chief financial officer, Investec Australia.

Investec also invites private banking clients to participate in investment opportunities which include buy-ins to its high performing private equity funds.

Investec sees growth in its capital markets business which is focused on commodity and resource and project and infrastructure finance. The business also specialises in green energy assets. It was behind the float of Viridis, the first ASX listed windfarm company and has significant interests in a US ethanol business.

Securitisation is the bank's next big push in the capital markets sector. Investec's London office has seen its securitisation team grow and Investec feels it has the expertise to offer similar services in Australia.

"The new business will be more focused on finding assets to securitise and putting them out into the market. We don't want to be in the home loan space where you are up against every bank - we look for niche's and that has always been our strength," said Chonowitz.

During the course of the Australian leg of the roadshow Investec made an offer to acquire Kensington Group plc for GBP283 million. Kensington is a specialist non-conforming residential mortgage lender.

“This acquisition is in line with the Group's strategy on bolt-on acquisition in the continued development of the principal Finance and securitisation activities within the Capital Markets division,” said a company statement.

Moody’s confirmed late on Friday that the acquisition will have no impact on Investec Australia's rating.

In terms of credit comparisons, Investec Australia is most similar to the regional banks, which fall in the BBB ratings band. Business comparisons are harder to find.

"There isn't anyone that has this blend of businesses," said Chonowitz.

"A lot of our income as a group is annuity income - which is our strategy. Our lending revolves around a strong credit and risk culture" he adds.

Investors quizzed Investec Australia on how they recruit and retain staff in a fiercely competitive industry.

"We are always looking for good people and this remains a constant challenge. People who do join us typically stay with us for a long time as they are treated well and performance is rewarded in cash and share options," said Chonowitz.

Chonowitz explains that the Rothschild staff who joined after the acquisition were initially sceptical of a new mob with no titles on their business cards, but have since been encouraged by an open and entrepreneurial culture.

The group is focused on its three core geographies (SA, UK and Australia) and has identified and invested heavily in Australia.

Its decision seems to be paying off with Australia returning an increase in operating profit of 80 per cent. The Australian entity now contributes 6 per cent to the group's overall earnings; up from 4 per cent in 2006 (The UK contributes 38 per cent to the group's earnings).