6 Sep 2013
NIB’s funding this summer: focus on private placements
This summer, NIB has been busy with private placements. Let’s have a closer look at NIB’s private placement products and the rationale behind them.
Private placement transactions are tailor-made to the needs of a single investor or a specific investor group. In many cases, the notes feature complex pay-off structures based on interest rate or currency derivatives. Amounts vary from a few million to hundreds of millions in euro equivalent.
Emerging market currencies
Emerging market currencies are a very common underlying for private placements. Typically, investors want to take advantage of higher yields or take a view on the currency development. At the same time, they seek an issuer with very strong credit quality in order to mitigate credit risk. Investors only want risk stemming from the underlying instruments. Regular buyers are wealthy private investors and asset managers investing private money.
This summer, NIB issued in Brazilian Reais, Mexican Pesos and Hong Kong Dollars.
Higher yields present opportunities
Notes incorporating interest rate derivatives in the form of options are also popular among investors. These transactions typically have very long maturities; for example, NIB has issued notes with final maturities of 45 years. These notes have embedded options, which means that the notes can be called before final maturity. The attractiveness of these instruments, which do not cover high-yielding emerging-market currencies, depends a lot on the overall interest yield level and volatility.
Notes are often tailor-made for specific institutional investors who require a certain fixed return on an investment—very often these are life insurance companies.
The recent increase in euro and dollar yields gave NIB an opportunity to issue callable notes. The period until the first call option in the EUR markets tend to be very long—ten or even twenty years. In the USD market, they tend to be shorter, sometimes only one or two years.
European insurance companies are typical buyers of long EUR callable issues, while Asian life insurance companies dominate the USD callable market.
All proceeds from emerging market transactions and the notes incorporating interest rate derivatives are swapped back to a floating yield in EUR, USD or Nordic currencies for loan disbursement purposes. The total amount issued over the summer is the equivalent of EUR 250 million.
Why does NIB issue private placements?
Private placements can include fairly complex currency and yield structures and require resources for monitoring. Still, they produce a supplement to NIB’s public bond transactions.
Private placements allow NIB to address specific investor demands, thus, diversifying the investor base. Smaller transactions fit well into specific needs on the lending side. And finally, there is usually a cost advantage.
However, it also requires a higher degree of flexibility from NIB. The Bank has issued in 38 different currencies over the years. NIB’s risk and front office systems are able to handle most of the common structures and are being updated, once new products are introduced to the market. The Legal Department is able to handle less common documentation formats, like the German Schuldschein. Finally, the Funding Team reacts swiftly to requests and accommodates investors’ needs as accurately as possible.
Even without drawing much attention in the media, private placements remain an important part of NIB’s funding strategy and have kept the funding team busy over the summer.