EXCLUSIVE: Finland Debt Issuance Head: 3rd Syndicated Benchmark Most Likely 5-Year Benchmark in Q3
28 May 2021
- ‘We Were Right That We Decided to Revise the Guidance’ on Last Week’s 10-Year RFGB
- Expectation of Another USD Deal This Year ‘Fair Assumption’
By David Barwick – Frankfurt (Econostream) – Finland’s third syndicated benchmark issuance this year is most likely to be a 5-year bond next quarter, according to Teppo Koivisto, director of the Financing Division of Finland’s State Treasury and thus responsible for Finnish public debt management.
In an interview with Econostream on Tuesday, Koivisto made clear that he was pleased with the outcome of last week’s 10-year RFGB following tightened guidance.
He was not worried about a possible shift in demand away from longer-dated tenors, he indicated.
Asked about possible syndication in Q3, Koivisto confirmed a total of three euro benchmark syndications in 2021. With a 30-year and a 10-year already out of the way, ‘the most likely outcome will be that the third syndicated benchmark will be a 5-year benchmark bond in Q3’, he said.
The 10-year, executed last week, saw book size drop from €18.5 billion to €13 billion following the State Treasury’s revised, tighter guidance, but the final outcome justified this, he said.
‘We weren’t too concerned about the drop in the book’, he said. ‘€13 billion in bids for a €3 billion book is a very nice allocation and a very strong book indeed. I think the outcome was very nice, and we even saw the market gradually improving throughout the day, so I think we were right that we decided to revise the guidance.’
‘We usually try to do rather tight deals, but of course we also respect the view of the investors as well, so we try to find the right balance and I think what we did was the right balance’, he added. ‘I think the market even tightened it a bit up after the pricing of the bond, and so I suppose everybody should be happy with the outcome.’
Koivisto dismissed concerns about the possibility of a shift in demand away from longer-dated tenors making future syndications at the longer end of the curve less successful, saying he had seen some additional demand.
‘So, from that perspective, I’m not too concerned about interest starting to move away from the longer-dated tenors’, he said.
Finland was not likely to extend its maximum maturity, he said, calling issuance of up to 30-year maturities ‘the natural way to keep up the liquid benchmark’.
‘And if you aim to create a very smooth refinancing profile up to the 30-year point, then I would say that with our funding volumes, our average maturity would be somewhere between 7.5 and 8 years going forward’, he said. ‘At the moment it’s 7.3 years.’
The expectation of another USD deal at some point to come this year was ‘a fair assumption’, he said.
‘Traditionally we’ve been issuing one dollar benchmark on an annual basis, and if we see decent cost efficiency, dollar issuance is a good way to extend our debt diversification by reaching the global central bank community’, he elaborated. ‘So dollar issuance has been pencilled into our plans and we are following the market. We have no particular timing in mind, but we can move very swiftly if we see that the market is good.’
For the State Treasury, which uses derivatives to adjust the duration of its debt for risk management purposes, ‘funding is independent from interest rate risk management’, he said. This allows more freedom ‘to design funding plans in a more efficient way, and also take into account the investor demand.’
‘In debt management we have a target interest rate risk profile for the debt portfolio, and derivatives are used (as an overlay) to modify the debt portfolio’s interest rate risk position’, he added.
European Central Bank asset purchases have had ‘a positive impact on the issuance and on demand for government bonds’, he said. ‘But at the same time, when the ECB first started QE, we knew that this was not going to last forever and that it would be very important for an issuer to make sure that the real investor base is there and is actively managed alongside the ECB buying, to make sure that when the tapering starts, you still have a well-diversified base.’
As the State Treasury has been doing exactly this, he said, an eventual withdrawal of such support was not a worrying prospect. ‘We are ready for that, because as a sovereign issuer, we have to do our funding every year anyway’, he said. ‘Even if the budget is balanced, we need to fund the redemptions. So we are a frequent borrower that has to come to the market every year under all conditions. We have to be prepared.’