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

done, whereas being able to bring advice to the syndication process is one of the values that we can add in terms of what type of bond, what maturity, or what size that we think will go well, depending upon demand. So, on that basis, I think the syndication process works better: it offers a greater degree of flexibility.

Enrique Ezquerra Martin (Spanish Tesoro): But also auctions are becoming more like syndications, because, at least from our perspective, and from what I hear of auctions in other countries, there is a greater willingness to adapt ourselves and reopen off-the-run issues, for example. We also see more final investors coming into auctions, so the typical complaint – and no offence is intended here – that auctions were somewhere where primary dealers had to buy and hold their position, et cetera, is a bit outdated. We have seen a lot of direct bids at auctions, perhaps also due to the increasing presence, for example, of domestic Spanish investors, who are in- creasingly presenting bids enabling the reopening of old off-the-run bonds. So the small direct bid coming from final investors, which was one of the negative points previously made about the auction process – the notion that theoretically final investors could not participate – is evolving and changing.

IFR: Do you think that there is a reduced differentiation between the Dutch approach and that of Belgium which uses the syndication process?

Ezquerra Martin: To be frank, yes.

IFR: It is not very good news for bankers, I suppose, is it?

Ezquerra Martin:Well, yes and no, as usual. Syndication always gives you more flexibility. You can choose the timing of a transaction et cetera, whereas in auctions, we try to keep them as predictable as possible and so announce them on a quarterly basis to maintain that pre- dictability element. On the other hand we value the flexibility of syndications which has its own value. Our expectation is that interest rates are going up, and we are seeing a strong domestic bid from Spanish banks, bank treasurers, insurance companies et cetera. We see that they are coming directly to the auctions recently, which is something we have not seen in previous years. Related to this is the

reduction in the new issue premium at auctions.

Wilders: Has the auction new issue premium disappeared?

Ezquerra Martin:We think so.

Rivoire: Not yet fully disappeared, let's say it's reduced. Leclercq: It's diminished.

Wilders: As long as it's there, it is obviously a hurdle for investors to participate in the auctions, or in whatever. Unless you pay the same fees to investors.

Rivoire: I agree and I think that all the banks agree on the fact that what we have seen in the last few months is more interest from final investors in the auction process. That being said, I think that maybe in the past more than 95 % was bought by the banks. Now it is probably closer to 80% or something like that. As you said, it is probably due to the fact that you and other issuers have decided to re- open some off-the-run bonds, where the market was short. It is definitely easier to attract some lead orders from accounts where there are shorts than to issue when there is no specific interest. That's a part of the flexibility already mentioned. But I think it is a very good point to highlight. To come back to your point, Erik, in terms of the liquidity of bonds issued for the first time, obviously I think it's clear that in the last 12 months we have seen a few syndicated bonds issued on the relatively cheap side. It is clear that, for the banks, it is more challenging to offer some very good market-making practice, and especially on the offer side after pricing than it is when the bond has been issued by auction, because obviously there is still a long position in the street. A bank is in a better position to offer an efficient secondary market when they've got the bonds on their books, but particularly if the flows in the secondary market are on the buy side, because we don't want to do the opposite. If the interest is on the sell side, it is definitely easier when it is a syndicated bond than when it is an auction.

Wilders: In that situation surely being short is the preferable position?

Rivoire: I'm not sure I agree. That's the reason there has been some very good bid

to cover in some Spanish issues in particular, where the market was short. That being said, I think that to achieve the funding needs you have, you clearly not only have to tap this bond, but to open some new benchmarks. In terms of trans- parency and liquidity, I think that all the issuers want to continue to build their curve and to increase their benchmark presence.

All the issuers want to continue

to build their curve and to increase their benchmark presence. So while it is necessary to issue some benchmarks, it is also necessary to be more flexible, for example, to reopen some old benchmarks without impacting their transparency.

So while it is necessary to issue some benchmarks, it is also necessary to be more flexible, for example, to reopen some old benchmarks without impacting their transparency. As I said, the credibility of the issuers must be maintained because we consider that credibility and transparency are very important features of the market – especially when the market is more challenging now than it was previously.

Leclercq: I think you are right. We should, even if the market is very difficult and even if people are asking for a little bit more in advance, be careful. We need to make sure that the bulk of our plans and our borrowing programmes are stable and predictable. Additionally, we need to ensure that the issues which we are creating are ones which are large enough to maintain an appropriate level of liquidity. This remains paramount, even if the markets are difficult, and even if sometimes it looks slightly more attractive to do something else. We are there to stay, so we should remain predictable and stable.

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