The medium term note market is a useful and cheap funding source for many Western public sector and financial institution issuers, but their counterparts in central and eastern Europe, the Middle East and Africa are missing out.
A few CEEMEA issuers have used private debt placements to great effect this year, several of them using the product much more actively than before. Israel recently raised huge amounts in this market, while Romania and Hungary have increased their usage. However, it is still rare for a CEEMEA issuer to issue MTNs.
Market participants usually give two main reasons. For years, MTN bankers have said there was little demand from investors. Private placements are generally illiquid because of their small sizes, so it’s tough to raise interest from buyers when the issuer is a riskier one, such as an emerging market borrower, especially in volatile times.
Second, funding teams at EM issuers tend to be smaller and less experienced because they use the markets less frequently. They are therefore more geared up to issuing a private bond once or twice a year than once every few weeks.
But both of these things are changing, and there are solutions in the MTN market that make it easier than ever to use.
Sentiment towards emerging markets is improving. Investors are coming out of a couple of years during which there was barely any liquidity in EM bonds, even in benchmarks, at times of volatility.
Meanwhile, some issuers in CEEMEA are now thought of as safe havens, such as those from Saudi Arabia or Abu Dhabi. Many have investment grade ratings.
Funding teams in CEEMEA are also not the paper and sticky tape operations they are often stereotyped as. The more sophisticated — and typically higher rated — borrowers have MTN programmes in place. Increasingly they also have large teams that monitor markets and levels daily. Many have even hired former debt capital markets bankers from international banks.
The bureaucracy in some of these institutions is still an obstacle to using the MTN market. Management needs to accept that, due to the nature of the MTN market, not every $10m trade can be signed off by the same large number of people who have to approve benchmarks.
Bosses also need to accept that this funding channel is not about showboating. A bunch of small MTNs can save money compared with a benchmark deal raising the same amount, and provide a funding lifeline in times of volatility or when benchmark investors are grumbling about oversupply. But private placements do not give an easy vantage point from which to crow about the success of having raised the cash.
Some MTN dealers think structured products could even be possible now that many dealers use Spire, a standardised special purpose vehicle into which assets can be loaded from the primary or secondary markets, allowing issuers to place a bond in whatever currency they choose and investors to buy that issuer’s credit risk, but with a different currency risk attached.
Because Spire is a multi-dealer SPV, it’s easier for investors to get comfortable with the product. That takes the hard work of structuring out of the hands of the borrower and puts it on the dealer.
The most sophisticated of Western borrowers use the MTN market. It is natural that the most sophisticated CEEMEA borrowers should do the same.