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April 2008 | ifr special report | 15 NON-CORE BOND MARKETS ROUNDTABLE “

In a bullish market environment investors are happy to trade with anyone, issuers are happy to print with anyone, and then suddenly it goes wrong.

Paul Johnson: I agree with that, but I think it applies to other markets as well. I think it is core to this discussion. Sustainable price-making for investment bankers also has an awful lot to do with sustainable markets, larger markets’ in- frastructures.

Holger Kron: That is why I mentioned jumbo Pfandbriefe, because it was probably one of the most efficient European asset markets, and, suddenly, you saw this market being stressed so much that some of the market-makers pulled back. This just shows that liquidity is a question of timing: it is not a question of size of bonds or active market-makers, it really is a question of timing. Can the houses really cope with the stress? This basically goes back to the question of infrastructure.

Isabelle Laurent: Also, there is the question of whether it is an arbitrage play for an investment bank, or whether they have investors that are going into the market. Are they researching the market, are they doing business in the domestic market, where, if you pull out suddenly, the country itself is going to be very upset? I think those are aspects that really change. We used to see emerging markets as being something that a lot of people did on the side. They were doing it more for their own arbitrage books than being active in the sense of having a whole infrastructure. I think that has changed, partly because the investor base has changed and broadened. It is their investor base that is now looking at that, whereas historically they saw emerging market debt as being dollar debt with emerging market names on the top. Now, what they are seeing is emerging market debt as local currency debt and, therefore, their commitment to those markets has significantly increased, which is not to say that we might not see stresses if the market pulls back. But I think that that has changed things fundamentally.

Sjaak-Jan Baars: In the last few years, we have seen 10 or 12 banks trying to be active in those markets mostly for arbitrage reasons. Now we have moved to a situation where we have maybe one or two banks leaving the pack, with four or five others definitely committed to those markets. That is, from an issuer’s perspective, a healthily competitive environment, because too small a group is not healthy enough in terms of competition, but too large a group does not give enough critical mass or size to the banks to actually to be able to have that commitment to the markets. In that way, I think we are now in a healthy environment, where the banks have commitment and are able to help investors out in times of trouble.

IFR: As an issuer, would you reward one of these newcomers that you are not entirely convinced will be around if the market became stressed? Would you award them a mandate to lead manage one of your bonds because they are offering you a good deal, or does their commitment to the market have to go a little deeper than that?

Sjaak-Jan Baars: It is very dependent on the type of transaction, of course, but we would give them the benefit of the doubt and try to establish a new relationship to try to grow the market. On the other hand, we are cautious and we want the banks to commit and to be able to show liquidity to investors as well.

Horst Seissinger: For KfW, it is also important to have these banks that support us in the emerging markets, and who support our marketing and help us to diversify our investor base. They also become partners for other currencies, which therefore helps them to improve their overall reputation with issuers like KfW, which is definitely a benefit for them. That is also a reason why some of them are active in these markets.

IFR: So, it is possible to break into the underwriting world?

David Smith: I think it is possible to break into it, but investors could do more to police short-term new entrants in terms of how they spread their business. In a bullish market environment investors are happy to trade with anyone, issuers are happy to print with anyone, and then suddenly it goes wrong. If an investor comes and asks for liquidity on Lehman (led) deal or a Bear Stearns deal, then it is pretty hard for them to really expect Deutsche Bank to show them a quality price. They probably will, because of the

investor relationship, but, fundamental- ly, I think investors and issuers can all do more on both sides of the fence to figure out if somebody is really a short-term player, or what their plan is regarding emerging markets or non-core dollars. It is interesting that you see a lot of bonds being recycled from lead managers who are no longer involved in these kinds of markets. But you always want to question the investor and say, hopefully, you have learnt your lesson this time and you should be awarding your business to people who are a bit more credible and have a sustainable kind of business.

Holger Kron: Isn’t it funny that the investor seems to forget all the problems they’ve had with certain lead managers? Things pan out, markets go normal again and, suddenly, they pop up again and they have their investors lining up for new deals. So, investors are no elephants: all they remember is the loss but not why and how it developed.

IFR: How frustrating is it, being a house that will be there in good times and bad times?

Holger Kron: Sometimes we believe that clients really come back and reward you for liquidity given in bad times, but this

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