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4 | ifr special report | June 2008 SOVEREIGN BOND MARKETS ROUNDTABLE

months, all the value at risk with the same risk has more than doubled. It has meant that for banks to keep the same position as a year ago, it is definitely more costly in terms of value at risk, and the capital needed to cover the position in terms of liquidity, and liquidity in terms of refinancing.

Refinancing is the key point. In this market, and as long as there is some tension in the money market, refinancing is going to be the key element for these two reasons. Syndication and auctions are indeed different. Obviously there are some pros and cons to both in terms of efficiency, but a mixture is probably a good compromise, as is the case with a lot of issuers now.

IFR: Because of the heightened level of money market rates and general risk aversion resulting in a reluctance to run long term inventory, do you think that there's perhaps a tendency to try and sell positions more quickly through the secondary market, where sales haven't been made through a syndicated process?

Rivoire: I think we can say that for the banks, obviously, the cost of the balance sheet is higher than it was and as we have said, liquidity is a bigger concern than it was. That being said, the banks are still ready to take positions onto their books. Some of them may be in a more challenging position, but on average the banks are still ready to take some positions on their books. But they won't take it due to the fact that if they do, it will be more costly in terms of value at risk, refinancing, et cetera. They want to take it at a level which may have been as attractive as it was a year ago, but it is now less attractive due to the fact that the costs associated with that are now more expensive. But I think you disagree, Erik?

Erik Wilders (DTSA): What you are saying is that you want to be back in a situation where the issuer was in a very comfortable position and the banks obviously thought that their time had come and I think the time for the investor has now come. So you may have to wait for a few years for a return to that situation in all probability.

Leclercq: Yes, but I would add that if you are talking about the time of the investor having come, you have to look to the changes that have taken place in the

syndication process compared to last year; just look at the range, the spectrum of investment which we now have available. It is clear that it has increased. Although for the different types of investments which you find on offer to investors there is a lower rate of return and that, as Christophe rightly pointed out, is due to the high volatility and the high swings in the money markets. Some houses cannot put inventory on to their books anymore, certainly those who don't want to have them for a long time, and those who prefer to park them for some time, take the profit and go away. But they cannot necessarily go away, because there is not enough liquidity in the market to make sure they can offload positions at a later stage, or because the bid offer spreads are now too wide.

What you are saying is that you want to be back in a situation where the issuer was in a very comfortable position and the banks obviously thought that their time had come and I think the time for the investor has now come.

The second change in the syndication process is in the pricing. The pricing process has changed: we used to have a discovery process which previously relied on a smooth secondary market. It was possible to interpolate between two of the outstanding issues and look if they have the same value in benchmark terms and liquidity terms. Based on that you then had to try to find a price. But if you look through the pricing process now, it is quite different. There are different elements in the pricing process which all move in different directions. You have the asset swap valuation on one side, as well as the curve, your own secondary curve, on the other side. They all

move in different directions, because the different points in the curves are influenced by specific flows around these points. This may mean, in fact, that at a given moment in time they move in very diverse directions. So it is necessary to try to find a suitable range which is attractive enough for investors which look at asset swap valuations. In our case our bonds are based upon a bond spread reference. So it is not so easy to try to find an equilibrium between these two. There have also been some changes in the syndication process and in getting out into the market. It is necessary to try to find the right price, so an issue doesn't look too cheap, or too expensive. Really it is important to find the right price at the moment when you come out and to make sure it doesn't crash afterwards, because that's not very good for the bond either. We have to make sure that there is sufficient appetite for a bond. So there's quite a difference from that point of view. It can’t be that different in the DDA process. It probably is the same way of thinking which you have to go through when you start the process. So from that point of view there's some risk. We are going about it in more or less the same way with the syndicated process as in the method of issuance used in the Netherlands.

Wilders: I think the big difference is not between syndication and an auction by DDA, but between syndication or a DDA and an auction.

Leclercq: Absolutely.

Wilders: Looking at the banks, I wonder whether you see a difference in the secondary market performance of bonds sold by these different methods. Is it easier to trade a bond which was syndicated or issued via DDA, or a bond that is auctioned? Is there a difference attributa- ble to the fact that the street – including investors – has a long position? Do you see a difference?

Simon Maisey (JPMorgan): I think that one of the differences in syndication is that hopefully we can provide some more of that kind of feedback and advice before the bond gets issued, so we can help. So therefore it should trade better in the secondary market, rather than an auction which is a slightly more brutal kind of a process. You see how it goes once it is

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