Carefully does it for KfW

While a borrower of KfW’s credit quality — it benefits from a full and explicit guarantee from the German sovereign lest we forget — may not have had to worry about losing its market access, it does have a certain reputation to uphold and a hefty borrowing requirement of €65bn-€70bn. Renowned as an issuer of large and liquid benchmarks, the agency has been at pains to ensure no deal falls short of the high standard that investors expect of it.

“We’ve had to be very nimble in regards to timing our issuance this year,” says Frank Czichowski, KfW’s head of financial markets. “The challenge isn’t so much to sell the name or a specific maturity but what can be tricky is selling a big, well placed benchmark deal. Timing is of the essence, even for a well regarded issuer like KfW.”

These large liquid benchmarks, in both euros and dollars, form the crux of KfW’s funding programme. The issuer has a commitment to issue two, three, five and 10 year benchmarks in both currencies at least once a year. Even in less than ideal conditions, KfW has been able to take advantage of the brief windows of opportunity, wrapping up its minimum benchmark commitment with a 10 year euro deal at the end of August to complete the full suite of essential maturities.

Even with a solid set of benchmark deals behind it, KfW isn’t as far progressed in its funding programme as some other issuers — as of the start of August it had completed around 66% of its funding compared to the European Investment Bank’s 82%. Turbulent market conditions are at least partially responsible for the slower pace of KfW’s funding this year — the agency raised €37.1bn in the first six months of the year compared to €50.4bn in 2012. However, higher than expected unscheduled loan repayments from its debtors also encouraged KfW to take a leisurely pace in its borrowing this year.

Despite plans to sell up to five more benchmark trades in the closing months of 2013 the agency’s funding team are sanguine on the prospects for coming months. A reduced funding programme will help buoy confidence at the agency, with the aforementioned early loan repayments leading KfW to reduce its estimated funding programme of €70bn-€75bn to €65bn-€70bn in July. 

KfW has had to be similarly nimble in its niche currency borrowing. The Kangaroo market, one of the agency’s most frequently used alternatives to euros and dollars, has suffered this year from volatility engendered by the Bank of Japan’s increased quantitative easing, along with an Australian dollar that has devalued sharply since the start of May. 

“In some currencies the opportunities simply haven’t been there,” says Czichowski. “The Kangaroo market, for example, saw a few challenging patches in 2013. Relative value is also an important factor for us, with KfW benchmarking all issuance against six month Euribor, it has shifted somewhat in that both dollars and euros have provided a very favourable cost of funding.”

These difficulties have led the issuer to conduct a reduced portion of its funding in niche currencies: as of August 22 KfW had sold the equivalent of €6.8bn in niche markets compared to €11.9bn over the same period in 2012.

While niche currencies may have made up a reduced part of KfW’s funding pot this year, the issuer has been quick to seize on chances when they have arisen as shown by record breaking deals in the Kangaroo and Canadian dollar markets. 

The borrower was quick out of the gates as the year opened, selling a A$1bn 3.75% five year Kangaroo bond — its largest ever — on January 10. 

Canadian dollars — an infrequently tapped market in the post-crisis world — also proved hospitable for the issuer, with KfW selling two chunky deals in close succession this summer.

Indeed, on June 5 KfW was able to sell the largest ever Canadian dollar deal from an international SSA issuer: the C$1bn 1.875% June 2018 deal swelled beyond the issuer’s target size of C$500m. Niche currency syndicate bankers have suggested that a weakening Australian dollar and falling interest rates in the currency may lead investors to look to Canadian dollars as a replacement for, or at least a complement to, the Kangaroo market, something that KfW is keen to capitalise on.

“We’ve been very pleased with our Canadian dollar deals this year, in particular, and it’s certainly a market that we’re interested in developing further,” says Czichowski. “We’ve been involved in constant dialogue with lead managers and investors and there has been renewed interest in Canadian dollar debt among international investors.”