Investor engagement and persistence key in L-Bank’s 10-year Kauri

Deal sources in L-Bank’s third New Zealand dollar deal, and its first at a 10-year maturity, suggest its completion is the fruit of persistence and ongoing market engagement by the issuer. The transaction attracted robust domestic support, including one new investor to L-Bank’s bonds in any currency.

L-Bank printed NZ$60 million (US$44.1 million) in a new 10-year Kauri bond on 20 July via lead managers BNZ and Deutsche Bank. L-Bank joins a small group of supranational, sovereign and agency (SSA) issuers to print a 10-year Kauri deal according to KangaNews data (see table), becoming only the sixth SSA to do so and the first for nearly two years.

Pricing dateIssuerVolume (NZ$m)Maturity dateSpread (bp)
17-Dec-07 Rentenbank 50  15 Dec 17 -15/swap
14-Apr-08 Council of Europe Development Bank 100 30 Apr 18 -25/swap
10-Oct-08 Council of Europe Development Bank 50 30 Apr 18 -25/swap
26-May-11 Kommunalbanken Norway 100 26 May 21 70/BKBM
1-Jun-11 European Investment Bank 200 16 Jun 21 53/BKBM
6-Sep 11 Nordic Investment Bank 125 20 Sep 21 ND
5-Feb-14 Kommunalbanken Norway 75 14 Feb 24 66/swap
9-Apr-14 Rentenbank 175 23 Apr 24 43/swap
8-May-14 Rentenbank 125 23 Apr 24 38/swap
3-Sep-14 Rentenbank 100 23 Apr 24 34/swap
7-Aug-15 Kommunalbanken Norway 125 20 Aug 25 45/swap
18-Aug-15 Nordic Investment Bank 75 2 Sep 25 32/swap
1-Sep-15 Kommunalbanken Norway 50 20 Aug 36 46/swap
9-Sep-15 Nordic Investment Bank 50 2 Sep 25 32/swap
20 July 17 L-Bank 50 15 Apr 27 80/swap

Source: KangaNews data 24 July 2017

L-Bank’s transaction puts a third point on the agency’s Kauri curve, adding to a NZ$250 million May 2019 line issued in May 2015 and a NZ$125 million December 2017 bond from May 2016.

Sven Lautenschläger, international funding officer at L-Bank in Karlsruhe, says deal’s completion was the result of significant engagement with New Zealand investors, particularly in light of the transaction’s long-dated nature. Domestic accounts took two-thirds of the deal with the remainder being sold internationally.

“We decided to issue a 10-year Kauri as the result of conversations we had with investors during KangaNews conferences in Sydney and Wellington, and at investor meetings in Auckland, in March this year,” Lautenschläger reveals. “This was a transaction that we were very focused on bringing and so we weren’t prepared to let it go – particularly after all the hard work investors had put in.”

Investor engagement
Ross Hunt, ANZ Wealth’s Auckland-based portfolio manager, fixed interest and cash, says pricing adequately reflected the risk in L-Bank’s transaction – and as a first-time buyer of L-Bank bonds this drove the comfort to participate.

“We saw pricing at around 15-20 basis points back from where we would expect Rentenbank to price in 10 years and we see this spread differential as being about right based on the differences between L-Bank’s state-government guarantee and Rentenbank’s explicit federal guarantee,” Hunt tells KangaNews.

The quality of the L-Bank name and the spread pickup on offer negates some of the risks that ANZ Wealth has noted in relation to Europe more generally, Hunt continues. “The European Central Bank [ECB]’s bond purchase programme has led to the dislocation of the pricing of risk and this has given us some cause for concern. But the nature of L-Bank’s credit and the quality of the enhanced spread above other names in which we can invest lessens the potential adverse effects of the ECB tapering.”

Hunt also notes L-Bank’s ongoing engagement with investors as another key factor in gaining comfort with the credit. “We have met with L-Bank at KangaNews events past and present both in New Zealand and Australia. The issuer has done a very good job of courting New Zealand investors over a long period and its persistence and visibility in the market was key to getting this deal done. One of the issues I raise with new credits is their ability to demonstrate they are prepared to engage on a regular basis. L-Bank certainly does this.”

Strategically important
The deal’s maturity matches to the day the 15 April 2027 lines issued by the New Zealand Debt Management Office (NZDMO) and the New Zealand Local Government Funding Agency (LGFA). This was a deliberate strategy, Lautenschläger explains. The LGFA already matches NZDMO maturities across the curve because this provides an easy reference point for domestic investors.

L-Bank’s deal priced at 114.5 basis points over New Zealand government bonds (NZGB). Hunt says for a Kauri issuer that is less liquid – compared with the New Zealand sovereign – but globally supported, a pickup of around 110-115 basis points over NZGBs is adequate for the risk. “New Zealand sovereign bonds are our benchmark and so the decision we make is either to hold government stock or accept credit risk. We need to see good compensation for the less liquid and arguably more risky bonds.”

The transaction came at a cost to the issuer as Lautenschläger acknowledges pricing was a “significant concession” compared with L-Bank’s euro curve. But he adds that the issuer was prepared to bear this cost due to the deal’s strategic importance. “We see the Kauri market as a good add-on to the Kangaroo market and our overall funding strategy,” Lautenschläger tells KangaNews. “One investor was a first-time buyer of L-Bank bonds and several others already bought us in US, Australian and New Zealand dollars. We take the long-term view that we will be rewarded for the price concession in this transaction – not in a month or two but over a period of time.”

After issuing its third Kauri bond, Lautenschläger says the Kauri market is noticeably maturing to the extent that L-Bank’s call on the New Zealand market is robust. “The market is definitely moving in the right direction,” he says. “We had some good discussions around relative value generally and investors were spot on regarding relative value for our credit. We were able to get this transaction completed thanks to the hard work and dedication of our Kauri investors and lead managers.”

Hunt says ANZ Wealth has appetite to buy more L-Bank Kauri bonds and in the first instance would like to see the new line built out to around NZ$250 million. He tells KangaNews: “The initial volume of NZ$60 million is a good start especially in a 10-year line and it certainly opens up the tenor in investors’ minds. But given there isn’t a lot of natural buying from domestic investors, a larger line with the potential for global interest will give us comfort.”