There is one group of issuers in the Euro-MTN market that never seems to go on holiday. While most market players took time off in August, the insurance companies of North America had their busiest month ever. These insurance companies, whose only entry into the Euro-MTN market is via their guaranteed investment contract-backed (gic) programmes, have issued $11.43 billion-worth of debt so far this year - over $2 billion of which was in August. But despite their recent success, many gic issuers have struggled in the past. And they feel there is a lot of work to be done before the market fully gets to grips with their credit. Victor Gallo, vice-president at Jackson National Life (Jackson), says: "There is still room for investors to understand our credit more fully. The gic sector is still a little crowded and some investors' resources are still spread a little thin." Jackson signed its $5 billion Euro-MTN programme at the beginning of last year and has become the most frequent gic-backed issuer in the market. But, along with many other gics, it has failed to impress in the yen market. Of the 22 notes it has sold this year none has been in yen. Gallo, at Jackson, explains: "We would like to issue more yen-denominated paper but the preponderance of short-dated paper in that market does make it difficult." Pacific Life Funding (PacLife) has managed to issue one ¥3 billion ($28.19 million) note this year but admits this is an area where work still needs to be done. Rick Garton, business development consultant at PacLife, says: "We would like to get more involved with Japanese investors. But many of their credit review processes are very laborious. We have to keep marketing our credit. We've been over there once and we'll probably need to do so again. I see it as a work in progress." But dealers agree that gic issuers have been more willing recently to reduce their tenors. Frair Appleby-Walker, Euro-MTN desk at Morgan Stanley Dean Witter, says: "Some gics have started to move down to the shorter end of the curve. This is mainly because of the feedback they have got from dealers who have been telling them there is plenty of enquiry at the short-end. Even if it is not their perfect maturity they know that to get their names known across Europe it makes sense." And getting their names and credit known is crucial for the gic issuers because they have a complicated issuing set-up. Though most of these issuers are just American and Canadian domestic life insurance companies, they all carry double- or even triple-A ratings. This is because the insurance companies have to set up a special purpose vehicle which then buys gics - a standard domestic investment for Americans. All the Euro-MTNs sold off these vehicles are then secured by the gics. This means that in an insolvency situation the MTNs are ranked pari passu with the life policies themselves and are therefore rated the same. This is a great way for American and Canadian life insurance companies to get a foothold on the European market without the need to register as a life insurer in London. It also means that they offer great value for investors. "Relative to their credit rating, gics tend to pay better than their fellow double-A financials or even corporates," says Appleby-Walker. But despite eight gics signing since the beginning of 1999, bringing the total number of issuers in the market to 12, it has taken a while for investors to feel comfortable with their paper. In August 1999 General American Life (General), a gic issuer, collapsed. Up to 15% of its paper had a seven-day put option in order to make it more attractive to investors. However, General was downgraded and the investors suddenly enforced the puts causing General's liquidity to run out. Simon Hill, head of Euro-MTNs, Credit Suisse First Boston says: "Investors got nervous after the General American Life collapse. But they calmed down the moment they realised the problem was a one-off and not generic to the sector." And it seems any effects of the collapse have fully worn off as gics continue to issue in a wide range of structures and currencies. One of the most noticeable is Swiss francs. Over $1.5 billion-worth of Swiss franc gic paper has been placed this year, making it the third-most popular currency within the sector. Simon Hill explains: "A lot of Swiss investors are ratings-driven and a lot of the big funds as well as the retail investors have a double-A requirement." Another area that some gics are looking at is Australia. Jackson has roadshowed there and sold four Australian dollar notes this year. And PacLife is exploring the possibility of setting up a kangaroo option that could be attached to its Euro-MTN programme. Garton, at PacLife, says: "It's not a very deep market but sometimes it offers very attractive funding and we want to be nimble enough to be able to jump in and take advantage of that." And it is gics' sense of adventure that singles them out. Anthony Wainer, Euro-MTN desk, Goldman Sachs, says: "Gic-backed issuers tend to be more flexible than many borrowers, especially when it comes to issuing structures." And most gic issuers have a very slick issuing team that can swiftly analyse structures. PacLife's Garton says: "We pride ourselves on our quick response time. For instance we turned around an equity-linked note within an hour this morning even though the size was not what we wanted."
September 01, 2000
