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Trading in the third quarter of 1999 couldn't fail to shine compared to that of last year, when market turbulence silenced trading floors. Despite a summer lull, non-syndicated issuance topped the level recorded in the second quarter of 1999, making it the most active three months in over a year. But the stampede of trades predicted for September never materialised. Dealers are reassessing what opportunity might be out there. Henry Nevstad, senior associate director at Deutsche Bank (Deutsche), says: "The summer quarter has been relatively good, even though September turned out to be a little slower than generally expected. Many issuers seemed to have done quite a lot of pre-funding earlier this year to lessen their dependence on favourable market conditions towards year-end." And Gavin Eddy, head of Euro-MTNs, at Warburg Dillon Read (WDR) shares this view. He says: "In Europe banks and corporates have taken on the fact that the year will be short and have been keen to get business done early. Many issuers had such a large volume to do before year-end that they haven't had the luxury of waiting for the best opportunity." Total issuance of non-syndicated debt between July 1 and September 30 1999 was $103.31 billion, a marginal increase on the $102.11 billion sold in the second quarter and the $76.55 billion in the first, according to MTNWare. But this is a considerable amount more than the $65.04 billion traded in the third quarter in 1998. Last quarter saw 34 new issuers sign programmes, 22 of which arrived in the market in July, the busiest month for new signings in 1999. At the start of the year investors were cautious of risk and lower credits suffered. Confidence has returned, but a little slower than dealers hoped. Jens Nielsen, head of Euro-MTNs, at Barclays Capital (Barclays), says: "The beginning of the year was triple-A-land following the crisis in late 1998. It's noticeable how quickly people move on after a crisis in the market. The majority of investors are still looking a single-A or better, but they are generally much less risk adverse now." And Jon Saunders, head of Euro-MTNs, at Dresdner Bank, says: "There's definitely been a progression towards a credit market. A strong shift by investors from double-A banks towards single-A corporates has been seen as they go in search of yield." But progress is slow. Growth of a strong credit market was expected in January (see MTNWeek, 112), but issuance by triple-B borrowers never picked up in 1999. Fears that double-A's would lose out as investors rode down the credit curve have been calmed. Non-syndicated issuance by double-A borrowers last quarter was $43.86 billion - double that done by single-A's. Nevstad, at Deutsche, says: "The double-A sector looks set to remain the biggest and most active part of the market. Even though more and more investors are increasingly going down the credit curve for an additional yield pick-up, the majority of European investors still prefer double-A compared to all other rating categories." Though many dealers express disappointment at the performance of the euro, it has shown steady growth in 1999. In the last quarter non-syndicated issuance in euros stood above dollars and yen with $38.54 billion-worth traded. German and UK borrowers issued the most while US borrowers fell away from the sector. Nielsen, at Barclays, blames the Financial Accounting Standards Board for US issuers' lack of interest in the euro (see MTNWeek, issue 150). But US borrowers were quiet in other currencies too. And while Japan struggles to regain its hold in the market, European issuers are grabbing chances. German and UK issuers showed the greatest increase in activity in the third quarter. Saunders, at Dresdner Bank, says: "There have been a lot more UK and German issuers signing programmes so there's a lot more choice out there. There's been a lot of corporate activity in the UK and Germany." And dealers predicted that 1999 would be the year of corporates in the market. Non-syndicated issuance by private corporates has grown steadily since the first quarter from $3.42 billion to $5.92 billion in the third. But Fergus Kiely, head of Euro-MTNS at HSBC, says: "In terms of private placement opportunities, corporates' expectations have not been managed. Dealers have been advising corporate issuers to post levels too tightly and they have struggled to get paper away." In the last quarter appetite for structured trades fell. Dealers suggest concerns about the end of the year and market volatility are driving investors back to the safety of plain vanilla notes. But others highlight the constant maturity swap rate-linked note (CMS) as the darling of structures. Nevstad, at Deutsche Bank, says: "CMS is the one single mainstream structure which has seen the greatest demand so far this year. This structure, combining a guaranteed minimum coupon with a potential upside depending on the development of the yield curve, has proven to be very successful with retail investors." Kiely, at HSBC, thinks more originality is required. He says: "There's nothing new in structures. The same old ideas are just coming around again and tweaked when conditions are suitable. A bit like my dinner jacket being dusted down for an appearance at the right invitation."

Salomon Smith Barney Holdings has increased its Euro-MTN shelf from $2.5 billion to $6 billion.

Scottish & Newcastle's assistant group treasurer, Alan Dick, answers questions on the MTN market... Q. How has your borrowing strategy changed as the market has become more credit aware? A. Scottish & Newcastle is new to the market so our strategy has not changed. As a single-A, we are helped by investors moving away from triple-A names and going down the credit curve. Q. How do you reassure investors about your credit? A. We haven't done a public bond so there has not really been the need to specifically go out and sell our credit. When we have done long-dated trades we have chatted with investors, but banks tend to do their own research. Q. How important is it to be a pan-European household name in selling your story? A. Some of our brand names, such as Center Parcs, are known in Europe, but Scottish & Newcastle itself is not. So banks do have to go out and sell our name. But we concentrate on brewing and the beer market is something everyone understands. Q. Is competition increasing among corporate credits in Europe? A. There is a certain level of demand and only so much supply to fit, so competition is increasing. Luckily we are happy to supply the short-end. At the longer-end there is only one investor for every three to four issuers. Q. What percentage of your investors are non-domestic? And how does this compare to a year ago? A. A lot of our issues are denominated in yen. Of our 16 issues to date only three or four have been sold into the UK. The fact we can sell into Japan is encouraging. If we can sell there we can sell anywhere. Q. What sort of structures are investors interested in buying from you? A. We are not allowed to do equity-linked trades. But we have been looking at some callables and JGB exchangeables. But we prefer plain vanilla on the whole. Q. How important is it for you to be a frequent borrower, able to build your own yield curve as triple-As can? A. Our strategy is to mainly do private deals, though we could do a public deal in the future. We are building a yield curve at the short-end but we hope to extend that to three years, 10 years and even out to 25 years. But we will do this step by step. A public issue might be needed to get investors interested in our longer paper. Q. How do you feel about the market going online? Are you happy for your levels to be posted on a screen that everyone can access? A. Our levels are not posted. But it would help us to look at other people's levels and see if we are way out of line with our competitors. Q. Do you think borrowers' relationships with their dealers will suffer as a result of online trading? A. If trading becomes mechanical and investors are purely buying off levels rather than your name it would be difficult to get a feel for the market. Q. How do you see the market developing in 2000? A. More corporates will try to access the market. But the market is getting tighter. Investors are moving down the credit curve and getting more sophisticated. Let's hope this increase in supply will be matched by demand.

Finland The Eu1.7bn acquisition facility for Metsa-Serla Oy was signed on Monday after a strong performance in syndication.

SNS Bank (SNS) has a lot to smile about. Not only has it raised $3.84 billion this year in difficult market conditions, but it has also been voted issuer making best use of its MTN programme by dealers in MTNWeek's annual survey. SNS was named above market veterans Abbey National and SEK in the category and also came joint second as issuer most responsive to structures. SNS prides itself on its flexibility and investor-friendly attitude. Now that's paying off. Bas Snijders, director of funding at SNS, says: "It is our marketing goal to have dealers think of our name first. To view us as the number one option. In a competitive market the only way to achieve that is to be as flexible and realistic with levels as possible." SNS must be doing something right with its pricing - investors can't get enough of its paper. It signed a euro2 billion ($1.91 billion) facility in June 1998, which was raised to euro5 billion a year later. In February of this year when outstandings hit $5.48 billion the ceiling was doubled to euro10 billion. On June 8 there was $7.85 billion outstanding. Richard Proudlove, Euro-MTN desk, at Salomon Smith Barney (Salomon), sums up why SNS is such an easy issuer to work for. He says: "SNS does everything we want from an issuer. It gives us levels frequently and they are consistent. It doesn't move levels to be opportunistic. There is always someone on the desk and all the dealers can give us a level or the go-ahead for a trade, so there is always a speedy response. And ultimately SNS is flexible on structures and tenor which opens up a large arena of products it will look at." Dutch SNS is a commerical and investment bank and part of SNS Reaal Group. One of its main activities is mortgage lending and it has a 12 ket share of new mortgages in the Netherlands. Snijders says targets for debt raised in the Euromarket are driven by the growth in the mortgage market. As a sophisticated bank borrower SNS has the luxury of a four-strong trading team, plus Snijders, working off the programme. It has traded $816.41 million off three self-led deals. Dealers put SNS' success down to the fact that its team is alert to where the market is. Bart Toering, head of debt capital markets at SNS, is part of that team. He says: "For structured deals we subtract up to five basis points, compared to vanilla levels, depending on the complexity of the structure. Our levels are realistic. It's very rare that we miss a trade over dispute of a few basis points." And Frank Weingarts, head of debt origination for financial institutions, at Bayerische Hypo und-Vereinsbank, which has done four reverse enquiry trades for SNS, says: "When investors call looking for single-A names, I know that SNS is always there as a strong credit with a large need. It is an excellent issuer to work with. It is clear on its targets and its levels are fair. That makes my life a lot easier." Snijders moved to SNS in May 1999 from Barclays Capital (Barclays), where he worked marketing derivatives to Benelux countries for six years. He places strong emphasis on marketing SNS to as wide an audience as possible. He says: "We have been roadshowing on London trading floors. We believe that doing dealer presentations has greatly helped in keeping our name fresh in dealers minds." Among the dealers which voted for SNS in the survey were four from the top 10 houses in MTNWeek's issuance league tables. But SNS doesn't give its dealers an easy ride. It dropped Salomon from its panel in June 1999 - it had brought no trades for SNS. And JP Morgan was dropped in February 2000. Geert Vinken, head of syndicate and Euro-MTNs, at Barcalys, says: "No one likes to be dropped from a dealer group. I'm sure that strategy does make a difference in getting dealers to work harder." Since being axed Salomon has traded $141.43 million for SNS off five trades in yen and euros. It was rewarded by being put back on SNS' dealer group in February this year. In a competitive market even the borrower making the best use of its programme can't afford to rest on its laurels. Snijders at SNS says: "In recent months we have increased name recognition in southern Europe and Scandinavia and we want to do more work on those areas. Also we want to expand our reach in the UK, especially amongst the investment management group." Barclays is the top dealer off SNS' programme in 2000. It did a £

THE SOUTH African debt market welcomed its first ever collateralised debt obligation (CDO) this week, as Gensec Bank and JP Morgan sold R450m of senior notes backed by a pool of South African loans and bonds managed by Kiwane Asset Management. The five year senior 'K001' notes, issued via special purpose vehicle Kiwane Capital Holdings, were placed with 16 domestic institutional investors. They carry a semi-annual coupon of 12% and a spread of 150bp over the 12% 2004 government bond, equivalent to a yield of 14.485%. In addition, R32m of 'K002' mezzanine bonds are believed to have been taken up by an international multilateral agency.

Market report Compiled by Vusi Mhlanzi

BSCH International Ltd Guarantor: Banco Santander Central Hispano SA

Western Power Distribution (WPD) regained the initiative on Wednesday in its battle with Nomura for control of Welsh electricity and water company Hyder plc after a possible investigation into the US utility's bid by the UK's competition commission was ruled out. But although regulatory clearance has put WPD back in the running, bankers said that a successful bid from the US company would not necessarily save bond investors from a sub-investment grade rating of Hyder's debt.

The sterling sector is stagnant. After the surge of issuance at the end of last year and the beginning of this year, buyers of sterling just do not seem to be interested. $8.5 billion-worth of sterling was issued in the last two months of 1998, but in June and July of 1999 tickets worth only $6.8 billion were printed. Matt Pass, head of MTNs at Greenwich NatWest, sums up the disappointment among many dealers. "Sterling was a complete winner for much of last year and going into 1999 when it was obvious rates were going to come down." But, he continues: "At the moment the sterling sector is quiet and the main investors are reticent. Despite coming up with what feel like good value trades we are seeing few people with an interest in dipping a toe back in the water." Not all market participants agree, however. Chris Hutton is head of debt capital markets at Halifax, one of the top issuers of sterling this year. He says: "I'm very bullish about the sterling market. Despite everyone saying it would be in the shadow of the euro this year, it has performed terribly well as an out currency. It has come to the fore as a bit of a currency play and there are not many of those left." However, there are many who believe that whether sterling is inside or outside Emu is irrelevant because the only real buyers of sterling are UK investors. Jens Nielsen, head of MTNs at Barclays Capital, says: "A major problem for the sterling sector has been the strong pound. This has lead many international investors to hold only a small proportion of their portfolio in sterling." Matt Pass at Greenwich NatWest voices a widely held view. He says: "This is a fairly cannibalistic market. People issuing sterling notes are often the very same people buying them." The main issuers of sterling notes are UK building societies and recently de-mutualised building societies, known as converts. Fergus Kiely is head of MTNs at HSBC which has lead managed more sterling notes this year than any other house. He dismisses Pass's view. He says: "I disagree that this is purely an incestuous market. We place a large proportion of paper issued in sterling outside of the UK financial world." But even the top UK issuer of sterling this year agrees with Pass. Antony Swalwell, senior manager at Northern Rock, says: "The sterling market is pretty incestuous. We buy other building societies' and converts' paper. And we anticipate that Northern Rock paper is bought by other building societies." Swalwell believes that UK financials should try and diversify their investor base away from such a reliance on the UK. And he admits Northern Rock issues probably too much into the UK. Supranationals however have been issuing large amounts of sterling this year. This is explained by the lack of gilts due to the successive cuts in UK interest rates from 7.5¥r last year down to 5¥ne this year. Kiely, at HSBC, says: "As the gilt supply becomes further reduced, triple-A issuers offer an excellent substitute." This has further been helped by a recent ruling from the Bank of England. John Borthwick is chief financial operations officer at International Finance Corp, a supranational which has benefited. He says: "The recent announcement by the Bank of England allowing various supranationals' issues to be eligible for repo operations has helped liquidity in the sterling sector. We have seen more opportunity to issue gilt surrogates." But many think that this will have only a marginal affect on the private markets. Indeed some believe the very success in the sterling sector in the public markets this year is taking investors away from the private market. Nielsen, at Barclays Capital, says: "The increased issuance in the public sterling market has to some extent hindered sterling issuance in the private markets for plain vanilla products. With the attraction of a more liquid deal and an often generously priced public issue, why would you bother going to the private market?" Volatilites remain low in the structured market with the consensus that the Bank of England will not cut rates further. The popular trades of March and April do not hold any enthusiasm for investors. Investors are no longer willing to pay to have a cap put on floating rate notes. Flippers, where the investor can convert the coupon from fixed to floating rate, were very popular but are unattractive now. HSBC, however, is not daunted. It has specialised in putting together trades and splitting them amongst many issuers. This is particularly popular with potentially risky FTSE-linked trades. Kiely, at HSBC, explains: "Where an investor is looking to take exposure to a specific market such as equity performance, we can alleviate mutual counterparty risk between investor and arranger by packaging the underlying into a series of Euro-MTN tranches issued by a number of third parties." Many think that the sterling sector will only fully take off again when the UK financials see some competition. Nielsen, at Barclays Capital, says: "I would like to see a greater diversification of issuers. And the increased number of UK corporates signing new programmes this year is a welcome breath of fresh air." Kiely, at HSBC, agrees. He says: "In a market historically preoccupied with financials, corporates will present a challenge as the search for yield pick-up grows."

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Swedish krona showed great potential in the MTN market in 1998, with $3.9 billion-worth issued. Dealers thought opportunities for convergence plays would open up in 1999 as Sweden prepared to join Emu. But the currency has yet to live up to expectations. Issuance so far this year is six-times less than for the same period last year. Credit Local de France (CLF), the leading issuer of krona in 1999, believes the potential is being realised. It issued a skr500 million ($58.74 million) fixed rate note on Wednesday, this week. Jean-Luc Petitpont, head of long-term funding at CLF, says this is a convergence play to take advantage of the higher interest rate in Sweden over those in Europe. General opinion in the market is different. Many dealers believe that uncertainty over whether Sweden will join Emu, together with lower interest rates than expected, has led investors to look at other higher-yielding currencies. David Eley, head of distribution, SEB debt capital markets, says: "In the last couple of weeks [Swedish] interest rates have been choppy. They still aren't attractive enough to encourage convergence plays." Issuance in Norwegian krone since January 1999 is $892 million-worth - three times that of Swedish krona. High interest rates in Norway have caused the increase in demand. It's a strong contrast to last year, when issuance in Swedish krona was over $1.8 billion-worth at this time. Eley, at SEB, explains: "The credibility of the Swedish market is currently not as strong as that of the Norwegian krone. And if rates rise too quickly in Sweden, investors may worry about volatility and stay away anyway." Danish krone is also an attractive option since Denmark has an ERM2 agreement with the European Central Bank. Although interest rates are lower than in Sweden, the currency is appealing because risk is reduced. Fluctuations greater than 2.25 bove or below the euro rate are prevented. Traditionally investors in Swedish krona have come from the retail sector, not only in Sweden but Germany and the Benelux area. Also, issuers are seeing an increase in interest from institutional investors, especially in the UK and US. Sweden has a strong and diverse domestic MTN market, established in the mid 1990s. Neither Norway nor Finland can boast this. Many large Swedish corporates still prefer to issue off domestic programmes rather than their Euro-MTN facilities since the local market can be more flexible. It is easier to issue smaller notes of around skr50 million and it is often a cheaper option than the Euromarket. Borje Wigfeldt, head of funding at Statens Bostadsfinansieringsaktiebolag (SBAB), says: "For Swedish issuers there is a premium involved when issuing in the international markets because Sweden is outside Emu. The premium is not recognised in the domestic market, and from time to time it is cheaper, yield-wise, to issue domestically." For some Swedish issuers concerns will grow if the euro strengthens. Per Akerlind, executive director and treasurer, Swedish Exportkredit (SEK), says: "If the krona is weakening against the euro issuers will have to pay a premium in absolute levels above the euro interest rate to attract investors." For investors however, this could mean excellent opportunities for high pick-up. Historically, the most popular debt type in Swedish krona notes issued in the Euro MTN market has been plain vanilla. However, more recently equity-linked structures have been in demand. Swedish investors are comfortable buying equity, and the capital guarantee is an added attraction of the note. Investors get the opportunity for higher risk, but have the assurance that they will not lose their principal amount. The maturity of notes issued in Swedish krona in 1999 has been generally shorter than those issued in 1998, with very few having a duration longer than five years. Dealers and issuers all have opinions on the trend but most agree that the major factors are hesitancy with regard to Sweden's future in Emu and the fact that the yield curve is not steep enough to attract long-term investment. The progress of Swedish krona issuance will now be unavoidably affected by that of the euro. And the success of Emu will inevitably influence Sweden's decision whether or not to join. This is a hotly debated topic and issuers and dealers of Swedish krona see the benefits and problems on both sides. Akerlind, at SEK, says: "The Swedish economy is stronger now than five years ago, but if we remain outside Emu, it will be necessary to hold inflation down and control interest rates. If we can continue to do this, the Swedish economy will have a good opportunity to remain strong." Other issuers are less confident. Anders Arozin, head of debt capital markets, Svenska Handelsbanken, says: "Investors won't care whether Sweden is in Emu or not. But Standard & Poor's will take it into consideration if Sweden doesn't join. This may have a negative impact on the ratings of Swedish issuers." If Sweden does vote to join Emu in the new millennium, Arozin is confident that Swedish issuers will have no problem adapting. Though issuance in legacy currencies has occurred in Europe, post-Emu, he doesn't think this will happen in Sweden. He says: "Sweden and the Nordic area in general is fast to adjust to new situations. If Sweden joins Emu there will no longer be any need to issue in krona."