Time to shine
For many supranational, sovereign and agency (SSA) borrowers, providing credit to aid economies through the COVID-19 crisis goes to the core of their purpose. Even those experiencing little impact on the lending side are now dealing with substantially changed capital markets.
Matt Zaunmayr Deputy Editor KANGANEWS
The global SSA sector is diverse, including multilateral development banks (MDBs), national, regional, provincial and local governments and their development banks, and specialised public-sector infrastructure agencies.
One thing these entities have in common is a purpose to facilitate supply of well-priced lending to their coverage areas. This has become a crucial function during the COVID-19 crisis as governments seek to stimulate economies battered by pandemic-caused shutdowns.
Some SSAs have experienced a substantial shift in lending focus and demand. For these, projects being supported to aid health and economic responses to COVID-19 are front and centre in their funding needs and investor relations.
For others, the pandemic has not changed the need for funding or client demand. The global ructions of the crisis affect their activities nonetheless as all are operating in capital markets where investment flows have been altered.
The impact of COVID-19 at an operational level has perhaps been most felt in the case of MDBs. While developed-economy sovereign borrowers have had largely unfettered access to historically cheap capital, the developing countries in which most MDBs operate are still facing difficult credit conditions. Their investment needs, meanwhile, have only grown.
Much of this growth has natural green, social and sustainability aspects. Lending for economically and socially beneficial outcomes is central to MDBs’ and other SSAs’ missions. The pandemic enhances the focus on needs and solutions in sectors such as health, employment and education.
As a result, the SSA sector has been largely responsible for the rise in global social-bond issuance in 2020, as well as the subset of COVID-19-themed bonds.
Andrea Dore, Washington-based head of funding at World Bank and International Development Association (IDA), says the impact of the pandemic on developing countries has been immense – as has the need for SSAs to respond.
She tells KangaNews: “World Bank and IDA’s initial focus was on a technical response to health challenges. We needed to ensure necessary equipment, training and workers were available in developing countries to help deal with the initial health challenges of COVID-19.”
To facilitate this, World Bank provided emergency funding to more than a hundred countries between March and June. The second part of the crisis is potentially more challenging still – and with a longer tail.
Dore explains that the lack of social safety nets in developing countries means a multiplier effect of industries being shut down. For example, a country that is dependent on tourism will see the downturn extend beyond the hotel sector to surrounding industries, from taxis to farmers.
Asian Development Bank (ADB) announced a US$20 billion package to address developing countries’ needs as they respond to the COVID-19 pandemic. These countries are typically less able to execute the kind of step-up in sovereign borrowing undertaken by developed countries in recent months.
Other names – even in the MDB space, including International Finance Corporation (IFC) – have not been confronted with a larger funding requirement but have revised their focus to some degree. “A lot of our lending has been redirected to meet COVID-19-related outcomes,” explains Marcin Bill, head of funding, Asia Pacific at IFC in Singapore.
The effect of COVID-19 on SSAs is evident even in countries where sovereign and state borrowers have maintained relatively consistent access to capital markets to fund their fiscal stimulus. Nathalie de Weert, head of funding, public markets at European Investment Bank (EIB) in Luxembourg, says the projects and sectors EIB funds have not necessarily changed but demand for disbursements has increased. “From early March, EIB was identifying programmes to support Europe’s SME sector and managing a pipeline of projects to ensure the health sectors of various countries could respond to the demands of the pandemic.”
EIB has expanded the eligible asset pool of its Sustainability Awareness Bonds to include outcomes related to health. But Dominika Rosolowska, sustainability funding officer at EIB in Luxembourg, says investors know the impact of its activities does not end there.
“EIB’s response has been multifaceted and all of this is to support employment and the economy, which has been funded through EIB’s vanilla bond programme,” she explains. “Health outcomes and Sustainability Awareness Bond issuance has been an important part of the response but is only one element.”
Some European MDBs are facilitating loans directly with governments, including Nordic Investment Bank (NIB) to the Baltic countries. Others, such as Germany’s development agencies, are responding by directing funds to local municipalities and directly to SMEs.
Petra Wehlert, first vice president and head of capital markets at KfW Bankengruppe in Frankfurt, says the agency is facilitating COVID-19 relief through two loan programmes – one direct and one via on-lending from banks and building societies. She reveals KfW received around 70,000 loan applications by the end of June. A final decision has been made on 99 per cent of these and €33.5 billion (US$39.4 billion) of loans has been committed.
Despite this, KfW’s call on global debt capital markets has actually decreased in 2020 – by around €10 billion to €65 billion – as it availed itself of SSA eligibility for the European Central Bank (ECB)’s targeted longer-term refinancing (TLTRO) operations.
Other European regional SSAs, such as Germany’s agricultural bank, Rentenbank, and Norway’s local-government lender, Kommunalbanken Norway (KBN), have seen little change on either side of their balance sheet. This is primarily the case in countries where central governments have assumed most responsibility for pandemic-related fiscal policy.
Evan Morgan, vice president, international funding at KBN in Oslo, says: “Our mandate to provide long-term, low-cost financing to the Norwegian local-government sector has not changed. In late March, KBN received an additional NOK750 million [US$83.2 million] in equity capital from the central government to ensure funding was available for local governments and to enable KBN to help refinance debt that was due to mature over the coming quarter while markets were stressed.”
Stefan Goebel, Frankfurt-based treasurer at Rentenbank, says: “Our funding task will not significantly rise because COVID-19-related additional lending activities are being offset by reduced demand for loans refinancing long-term investments. Most measures taken by Rentenbank through the crisis have been deferrals on payment of existing loans.”
Going long not a given
The monetary-policy response to COVID-19 has reinforced the expectation of an extended period of ultra-low rates, creating impetus for issuers and investors to go further along the curve. But not all supranational, sovereign and agency (SSA) borrowers are diving into long duration feet first.
Longer is not necessarily better for many SSA borrowers. Most still largely need to match the tenor of their lending with debt issuance. In a crisis, the loan book may actually shorten for some. In general, SSAs that primarily fund municipalities or local governments in developed countries are likely able to extend the tenor of their debt more than those financing frontline crisis response in developing countries.
BNG Bank’s manager, capital markets and investor relations, Mascha Ketting, says the tenor of the agency’s funding has been extended along with the duration of its assets to enable it to manage its liquidity-coverage and net stable-funding ratios.
By contrast, Jens Hellerup, head of funding and investor relations at Nordic Investment Bank, says its funding in response to the crisis has predominantly been at the short end and that demand for its bonds has also been slightly better in shorter tenors.
Where SSAs are implementing measures to support local and global economies through the pandemic, these often come accompanied by additional funding requirements. Most SSAs were able to sit out the most volatile period of late March and early April but had to enter the new-issuance market in size at the first signs of stability to begin providing lending to their constituents.
EIB reopened the euro market on 24 March and in the months since has actively sought to raise the bulk of what de Weert expects will be €65 billion by the end of calendar 2020.
World Bank raised a record US$75 billion equivalent in its 2020 financial year – US$15 billion of this in one week during April. Its funding requirement is likely to remain higher than average in the coming years as it continues to support developing economies through the pandemic fallout. IDA’s annual funding requirement has risen to US$10-15 billion in the 2021 financial year from US$5 billion in the 2020 financial year.
Funding increases are not limited to the biggest MDBs. NIB’s annual task increased to €8 billion from €6.5 billion, says Jens Hellerup, the MDB’s Helsinki-based head of funding and investor relations.
Meanwhile, NRW.BANK’s annual borrowing programme has risen by around €3 billion to support local municipalities, SMEs and social infrastructure such as hospitals, says Frank Richter, Düsseldorf-based head of investor relations at NRW.BANK.
Regardless of the magnitude of impact COVID-19 has had on each individual SSA, none has been immune to the market backdrop. Cross-border conditions are among the complicating technical factors.
Morgan says a US$1.25 billion five-year deal in early March allowed KBN to sit out of markets until volatility abated later in Q2. However, he adds that an unstable FX market has had a moderate effect on the size of KBN’s borrowing programme, given most of its debt is issued in foreign currencies while its lending is denominated in Norwegian krone. As a result, KBN will likely end up raising volume at the top end of its US$8-10 billion annual target.
Some funding pressure may be alleviated for European SSAs by access to alternative funding avenues. In April, the ECB lowered the interest rate applicable to TLTRO III, resulting in much greater impetus for eligible SSA participation. Wehlert says KfW availed itself of this funding to the tune of €13.4 billion in June.
Furthermore, the German government has set up its own economic stabilisation fund, from which KfW plans to draw up to €30 billion during the third quarter of 2020.
Any near-term concern around larger funding requirements has been abated by global market recovery since April. The combination of liquidity measures taken by governments and a pessimistic investment backdrop has facilitated a much more conducive issuance environment for high-quality SSAs.
Eurozone SSAs are eligible for the ECB’s €1.4 trillion pandemic emergency purchase programme, while the scale of the market intervention by central banks including the US Federal Reserve has driven demand for assets across the board. SSA issuers have taken advantage of hyper-liquid markets.
The rates environment is facilitating curve extension. However, adoption of a greater proportion of long-dated issuance is far from universal in the SSA sector (see box).
The US market has been particularly hot. It recorded a substantial increase in supranational issuance so far in 2020, with volume surpassing full-year totals for 2019 and 2018 by mid-Q3. Supranational volume in most other major markets is on track to either surpass or match previous years – with the notable exception of Australian dollars.
Anthony Ruschpler, senior treasury specialist at Asian Development Bank in Manila, tells KangaNews: “US dollars has consistently been the most cost-efficient market for ADB to raise funding since the pandemic took off. We remain keen to diversify our funding sources, but current after-swap levels back to US dollars make it more challenging to fund in noncore currencies.”
The US dollar has attracted significant European SSA deal flow. Goebel says 59 per cent of Rentenbank’s funding came in euros and 15 per cent in US dollars in 2019. In 2020, the figures have flipped to be 22 per cent and 64 per cent by September.
The impetus has been similar for US dollar issuers. World Bank executed its largest-ever US dollar deal in April, raising US$8 billion in Sustainable Development Bonds from more than 300 investors. The deal came in the same week in which the issuer raised its jumbo total of US$15 billion equivalent across markets to aid its COVID-19 response.
Meanwhile, Bill says IFC has undertaken more US dollar funding than it typically would, with US$4 billion raised from three benchmark US dollar deals in 2020. He adds, though, that the market was showing fresh signs of softness in early August.
The euro and sterling markets have also been strong for SSA demand, though the latter may have had some demand siphoned off by SSAs accessing TLTRO funding.
MONITORING THE PERIPHERY
The rapid response to the pandemic by many SSAs meant funding lasered in on core markets where liquidity and execution would be most reliable. This partially explains the lack of issuance in currencies such as Australian dollars, though other factors – including an unfavourable basis swap – have also been at play.
SSA issuers insist they are maintaining vigilance for opportunities in peripheral markets. Morgan says KBN it is constantly seeking opportunities to diversify its investor base as it completes more than half of its funding in US dollars. Through the rest of this year he says KBN will look for opportunities in Australian, New Zealand and Canadian dollars, sterling, and Scandinavian currencies.
Mascha Ketting, manager, capital markets and investor relations at BNG Bank in The Hague, says the need for diverse funding options remains critical even while US dollar and euro funding pools are deep. As such, BNG Bank has issued in Australian dollars, sterling and Swedish krona during 2020.
Other European SSAs, such as NRW.BANK, Rentenbank and NIB, also report that US dollars and euros have been favourable but that they have been able to take advantage of opportunities to stay active in other currencies as diverse as Norwegian krone, Australian and Hong Kong dollars, and Romanian leu.
The larger borrowers have greater capacity, and greater need, to tap bespoke currency demand. This is evident in the funding activity of SSAs such as KfW, which has executed deals in 12 currencies outside euros and US dollars so far in 2020.
Similarly, EIB has executed transactions in 15 currencies so far this year. De Weert says: “We want to be present in as many markets as possible. When one market closes another market opens. Core markets have been very strong during this year but we are beginning to see conducive conditions return in some emerging markets.”
Maintaining noncore funding options is often a function of deep investor relations – something made far more difficult during the COVID-19 crisis by restrictions on travel and physical meetings.
These remain largely in place around the world. Wehlert says maintaining contact with a global investor base is important regardless of how strong liquidity conditions are in core markets and, as such, KfW organised a global investor-update call on 10 September via four of its panel banks.
Goebel agrees, adding: “Without COVID-19 we would have stuck to our existing long-term approach that covers the most active markets and those that are typically more variable in demand. One could argue that less issuance means we need to do even more marketing to stay on the radar of these investors.”
The impetus to tap noncore market demand during the rest of 2020 may be minimal for a lot of SSA borrowers, though, given many have already raised the vast majority of their funding requirements for the year.
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