4 | ifr special report | April 2008 NON-CORE BOND MARKETS ROUNDTABLE “
As far as international investors are concerned, I think certainly in the next 12 months no-one is going to buy credit in these markets, mainly because it is not really their role. Their role is to take on an emerging market risk and, frankly, they have no better sense than myself or anyone else at this table what will happen.
issuance. One has been there for a very long time since the 1990s, where we have been issuing in exotic markets, and even in the 1990s, sometimes it was more than 50% of the funding that we did. But certainly, in the last five or six years, we have been focusing more on local currency lending, and therefore borrowing against lending. That has changed the dynamic for us. So, we are still doing things in markets
that are exotic markets where we are not looking to use the end currency, but we are now doing a significant portion of lending in local currency, which I think will only become more important with this crisis going on and concerns about exchange rates. I think that we will be focusing more and more on that. We work not just on bond issuance, but capital market development as a whole, including the creation of yield curves. We are looking at it from the three-month point onwards.
David Smith: Another other point is that local investors in local markets will look at credit, but they are not going to pay an arbitrage premium, because it is a small deal. They will buy General Electric or Rabobank in Czech koruna, provided it is in line with where those credits trade in core markets. If they are going to treat it as a credit diversification, they want to see the full value of the credit as opposed to what has happened historically, where it has been more of an arbitrage vehicle where these issuers are swapping back into dollars or euros. As far as international investors are concerned, I think certainly in the next 12 months no-one is going to buy credit in these markets, mainly because it is not really their role. Their role is to take on an emerging market risk and, frankly, they have no better sense than myself or anyone else at this table what will happen.
IFR: The idea is not to get currency and interest rate risk and to compound them any further at the
moment by taking on credit risk. Those first elements of risk can in themselves be regarded as the main driving forces.
Isabelle Laurent: We like to see it as a precursor in that when people first start looking into the market, they are taking the currency and interest rate risk, and are looking to separate out the credit risk and buy maybe a KfW or an EBRD-type name. But we hope, particularly in the markets we are trying to help develop, that that is a precursor to international investors focusing on domestic credits and being able to develop the domestic bond market. So, we are hoping that it will not be crowded out by other issuers, but that this is a stepping stone.
Holger Kron, Deutsche Bank: If you look at Eastern Europe, especially Russia and Kazakhstan, as soon as international investors got interested in the currencies and in the currency risk, they preferred to take on domestic credit risk than in- ternational credit risk. A Single A bank, for example, is not going to pay the premium that a domestic financial would do to fund itself. So, in this case, if and when you take credit risk, you would rather go for the local credit risk itself and buy domestic banks. This is what we have seen on the one side, but on the other, if you look two or three years back, the activity of corporates and financials in these currencies was much higher than now. But we are now seeing the reverse of
this development. If you look at the older issuance of smaller German financials, they were very active in these currencies. But, for example, you do not see Austrian banks anymore because people would not take this credit risk on. They would rather go for the local financials in this sort of spectrum. The same is true for corporates: you would rather buy a local corporate than buy an international corporate, which has to go via the euro or dollar funding space and pay the basis.
So, if and when the market goes more
for credit, I expect it to go for local credit, especially as the institutional universe becomes more and more diversified in terms of research of local credits. We know much more about local banks and local corporates today than we knew five years ago. Today, if and when people want a credit play, they would rather go for the local banks, which might be supported by the local government and central banks in the case of a crisis. So you might have additional support for your credit risk going forward.
Horst Seissinger: Is this also true of Asia? Because, I think, in Asia, it is different. International corporates have big opportunities in these countries: look at the autos, for example. Therefore, I think, to answer this question, we have to look at different regions. What you have mentioned is, I would expect, true for the exotic European currencies, as well as for Africa, but I think the markets are more developed in Asia and the sensitivity of investors towards more complicated types of risk is much more developed than in other parts of the world.
Holger Kron: Quite possibly: for example, German car manufacturers are more well known in Asia than the other way round, better than we know Asian corporates.
Paul Johnson: I think the natural progression in the market is into domestic names. It is interesting what is going on at the moment. Frankly, we are trying to pick a turn-around in the market if we are going to push credit into local currency markets. What is going on in the euro market — the significant out- performing of cash versus CDS — in my mind is starting to present an opportunity where local credits can potentially access this market again. I think maybe it is one to three months off: we need to settle down, but the next stage of the market recovery is where domestic credits get back in.
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