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10 | ifr special report | April 2008 NON-CORE BOND MARKETS ROUNDTABLE

of this reason, because we want to protect them from not understanding the credit issues that are involved. We are also a bit afraid that they don’t always understand where the actual capital guarantee is in these kinds of products. For that reason, we have not so far issued NDF into retail. But institutional clients, of course,

should have the capability to understand where the risks are and what the possibil- ities are with this product. In that way, it is a great product to actually sell exposure on a specific currency to institu- tional clients.

IFR: They should understand the risks, but is that actually case? Or does it come as a nasty surprise when you point out to them that they effectively have another layer of credit in there?

Sjaak-Jan Baars: Well, I was aware of the point Holger made, so hopefully the insti- tutional clients are as well. It is part of their job, I have to say.

IFR: I guess we have to rely on responsible investment bankers.

Isabelle Laurent: A lot of it also lies with the lawyers and whether they do the correct due diligence at the time of putting out prospectuses, because many of the investment bankers rely on the lawyers to look into it. What we found with our synthetic

rouble bonds that were issued in 1997 was that, even though one of the top houses’ lawyers was working on it, they did not actually consult their domestic entity, and what they prescribed as a structure actually would not have worked in a market disruption. Their domestic entity knew very well that it would not have worked, but they had not consulted them: they were thinking about it purely in terms of the generalised market structure. So, we are now much more cautious

and we have quite a lengthy market disruption clause in all of our exotic currency bonds, because we have learned from experience that many of the things that we thought would work, even things like alerting investors during a crisis to trying to get them to make choices, are very difficult to do through Euroclear and Clearstream. Yes, you can put out notices, but it is not often to the end account.

And because of secrecy in banking, it makes it very difficult for them to know exactly who the end investors are. So, we spent about two months trying to locate all the investors to try to help them get money back on terms that would have actually been preferable to the terms that were originally described in the bond.

What they prescribed as a

structure actually would not have worked in a market disruption. Their domestic entity knew very well that it would not have worked, but they had not consulted them: they were thinking about it purely in terms of the generalised market structure.

IFR: And did you succeed?

Isabelle Laurent: Yes, we did. There was still a significant currency devaluation and you could not walk past that, but at least they did not have money trapped in Russia in S accounts that they could not get out. So yes, we were successful, but it also relied on the fact that EBRD was an issuer with preferred creditor status in that country and that that preferred creditor status was recognised at the time of the moratorium. I think it would have been much harder otherwise.

IFR: Are these points that you can really only learn from experience? Do you go in with what you think is a watertight structure, and then suddenly something does not work, so you tinker with it so it does next time; is that the way it works?

Isabelle Laurent: Probably, although one would hope that when you are employing a very large legal firm — and the investment bank would obviously be doing that for the drafting of the prospectus — they would, in fact, consult their local

office to check rules and regulations regarding any payments onshore and how it might operate. But now we know that we need to verify these things. It is difficult: I do not know what else we do not know that may not work, but we have taken advantage of the things that we have already discovered do not work.

IFR: Is it a case of shoot and hope: is there really not a lot of conviction? Are you sometimes surprised that more care is not taken?

Isabelle Laurent: No, I think it is very difficult, because one thing to say about exotic markets is that they are changing their regulations all the time. So, in the past, we spent three or four years working with governments to change regulations in one particular way and then they get changed back, actually, not deliberately, but quite often because they are changing them to address some other issue and they get reversed. One should not be too surprised that it is very difficult in those kinds of markets to understand what all the implications are. But we work very hard on domestic de- velopments, looking at market infrastruc- ture and things that are problematic to investors, and I know that KfW and other big issuers in the markets do as well. Because [investors] buy a Triple A bond

on the basis that they want to be able to get their money back, and if it is blocked for a certain number of days, or there is no secondary market, or the payments system fails, or the legislative environment has changed, it makes it very difficult. So, those are things that we are working on, but you cannot do it in all markets, particularly if you are issuing in a wide range of markets. You have to be aware that [jurisdictions] are changing their own regulations all the time for things that do not relate to inter- national capital market issuers at all.

Horst Seissinger: That is definitely true, and as issuers we do wear two hats. One is when we try to develop capital markets, which is normally the role of institutions like EBRD and the World Bank, and the other is when we want to do funding, which is normally the role of a Rabobank or KfW, where we do have a special focus. From time to time it is mixed. If we look back one or two years, one

major focus was to help to develop capital markets, but if we look back at

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