TRANSCRIPT: Interview with Finland State Treasury’s Teppo Koivisto on 25 May 2021

28 May 2021

By David Barwick – FRANKFURT (Econostream) – Following is the full transcript of the interview conducted by Econostream on May 25 with Teppo Koivisto, director of the Financing Division of Finland’s State Treasury and thus responsible for Finnish public debt management.:

Q: The book size for the most recent €3 billion new 10-year RFGB dropped from €18.5 billion to €13 billion, following your revised guidance of MS-3a (+/-1). Do you think the communication that you could explore the MS-4 area might have scared some investors and led to order withdrawals, given that the pricing was already tight?

A: When we started the execution of the deal last week, we felt that a level of mid swaps -1 basis point was pretty appropriate to start the deal, and looking at the underlying demand, the book hit €18 billion, so it was very strong. We also saw some more speculative bids in the book, but when you try to issue a €3 billion book, you don’t need €18 billion, so we were pretty confident and revised the guidance in a tighter direction to the -3 area. We weren’t too concerned about the drop in the book. €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. 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.

Q: In general, how big a problem for you are inflated syndication orders, and what if anything do you think needs doing about it?

A: It’s a bigger issue for larger issuers, but all the euro area issuers have seen inflated books in the last couple of years, and of course it’s very much related to hedge fund activity. We prefer to treat any orders above the level of our cap simply as orders for the capped size, and this is something that we try to signal to the market. This is the way we try to handle elevated orders.

Q: The allocations to hedge funds have been quite high this year: 9% for the 10-year and 19% for the 30-year RFGB. What are your thoughts on this?

A: I don’t see 9% as a very large allocation to hedge funds. I think it’s quite decent. We have seen that the hedge funds are in general more active in the longer maturities, and maybe the larger allocations to the hedge funds in longer maturities reflect that fact.

Q: In general, are there any investor segments not being reached that you’d like to reach? Is the distribution of allocation optimal?

A: Not really. I think our debt is very nicely diversified and we’ve been doing a lot of investor work in different geographic locations, and that’s the way we make sure we have adequate pockets available for our funding needs. So I’m content with our investor base, and I think the recent 10-year results show that the investor base is there and it’s very solid and nicely diversified.

Q: The EU is starting to issue under the NGEU programme. Does the competing supply worry you?

A: It’s a new big issuer in the market. It’s not a sovereign, it’s like project funding arm for the European Union. But its annual funding target is very similar to Germany and France, so it’s definitely a big issuer. But I assume that when we talk about this size of funding needs, there has to be a funding calendar, and that will definitely help us navigate those moments when the NGEU will be out in the market. I’m not too concerned about the NGEU.

Q: On your expected borrowing requirements, you have other instruments at €1.50 billion. Should we expect another USD deal later this year?

A: Yes, it’s a fair assumption. 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. 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.

Q: You usually announce whether you are planning to issue a new benchmark in the next quarter; can you provide any insight on possible syndication for Q3?

A: Looking at our funding target for this year, the borrowing requirement is very close to what we saw in 2020, so it means that there will be three euro benchmark syndications for this year. We have communicated to the market that we usually prefer to open the year by issuing the long-term bond, which is usually a 15-, 20- or 30-year bond. This year we executed a 30-year deal. The flagship is a 10-year, which we did last week, and then there’s a medium-term bond still waiting for the issuance, and then the most likely outcome will be that the third syndicated benchmark will be a 5-year benchmark bond in Q3.

Q: The Finnish government has survived two crucial confidence votes over the last weeks, one on the EU recovery fund and one on the budget deal. Are you worried about a possible period of political instability in the country, and what would be the impact of new elections on your borrowing plans?

A: No, I’m not really expecting any sort of political instability.

Q: How much uncertainty are your funding plans subject to for the rest of the year?

A: The government just announced a third supplementary budget to be proposed to Parliament on Thursday. We already had the Minister of Finance’s proposal for an additional increase in net borrowing by €900 million, which was taken into account in our funding plans, but now the government proposal is €2.4 billion, leading to an increase of €1.5 billion in our funding target.

Q: What are your preferred tools at the moment to deal with changes in the need to issue?

A: Given the supplementary budget just announced, the additional funding needs can easily be covered by increasing benchmark bond and T-Bill issuance in fair proportion. So I think we can adjust this rather easily to our funding programme.

Q: Finland uses derivatives to adjust the duration of its debt. Could you explain your thinking on this and whether it is linked to issuance or done as an overlay to the debt portfolio?

A: The underlying principle is to extract the interest rate risk and the funding or the refinancing risk from each other with derivatives. So basically funding is independent from interest rate risk management. And that of course gives some additional degrees of 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.

Q: There has been no issuance under the EMTN bond programme since last May. Is this a decision based on costs or is it a need to keep liquidity on the domestic curve, or is it something else?

A: I would put it this way: it’s complementary funding, and so far we’ve been concentrating on euro-denominated funding. But the USD bond is also under the EMTNs, so basically what we’ve been executing in recent years under the EMTN programme has been the USD bond.

Q: Finland’s public debt-to-GDP ratio is expected to increase to over 75% by 2025. How do you as debt issuer see this?

A: It’s a fact that our public debt ratio is ten percentage points higher than it was before the crisis. Going forward, we still see gradual rise in the debt ratio, though the ratio is stabilising. But the fact is also that the debt-to-GDP ratio will remain at a significantly higher level than before the crisis for a long time. And that’s the case for all European countries. If we look at the level of the debt-to-GDP ratio, 75%, I think it’s still rather moderate compared to the EU average or the euro area average, which are closer to 90% and 100% at the moment. So, we are not standing out with our ratio, but at a national level, it’s something we need to look at very carefully.

Q: You have said there aren’t enough green projects in Finland to justify issuing green bonds and that the ESG approach is more appropriate. Has anything changed in this respect?

A: I have nothing against green bonds, but if you look at the green appropriations in our budget, it would be probably less than €2 billion overall, which is not a very significant amount on an annual basis to go into the green bond market. To my understanding, a far more efficient way of promoting all our debt issuance is to share information and emphasise the virtues and good deeds of our government in the field of sustainable policymaking. And when it comes to green bonds, our government has announced that half of the grants provided by the NGEU will be used for climate change actions and other green appropriations we have in the budget. So we have to see first how those grants will be used, and then we will probably come back to the green bond discussion in the coming years, but it’s not on our table at the moment.

Q: Are you worried about a shift in demand away from longer-dated tenors, such that future syndications at the longer end of your curve might not be as successful?

A: Have we witnessed that strong a shift so far? I think the crucial maturity point on the euro government curves is still 10 years. We’ve seen some additional and some increased demand in the longer-dated tenors, but I’m not sure whether we have seen a meaningful shift. So, from that perspective, I’m not too concerned about interest starting to move away from the longer-dated tenors.

Q: Can you envision taking your maximum maturity a bit farther out?

A: Not really. Looking at our funding volumes at the moment, I think the natural way to keep up the liquid benchmark is to issue up to 30-year maturities, like Germany or the Netherlands do, for example. From 2- to 30-year maturities, the liquidity is there, and because of that we prefer to focus on our issuances in that area. 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. At the moment it’s 7.3 years.

Q: How much difference has ECB policy made for you, in particular asset purchases? What would the significance for Finland be of ECB support being withdrawn?

A: Well, of course we have seen the effect that there has been more activity, so definitely there has been a positive impact on the issuance and on demand for government bonds. 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. And this is exactly what we’ve been trying to do. So from that perspective, I’m not too worried. We are ready for that, because as a sovereign issuer, we have to do our funding every year anyway. 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.

Q: Where do you see Finland’s interest burden heading?

A: Debt servicing costs always have to be put into perspective and looked at along with the revenue side. Of course, the working assumption is that if interest rates are going up, then revenues are also increasing because economic activity is picking up throughout Europe. In that sense, I would say that our debt servicing costs relative to the revenue base should be rather stable. And even looking at the costs we are paying at the moment, they are some of the lowest in Europe.

Q: How do you measure the success of issuance, and by that standard, have you been satisfied recently?

A: The main task of the debt management office is to ensure that the government budget can be funded as planned in all circumstances. Then comes of course the cost efficiency of financing. Furthermore, we have to take care of the even maturity distribution and smooth refinancing profile of the debt. In addition, we take care of the investor base and make sure that debt is sufficiently diversified geographically and among different types of investors.

I think we have managed well in all these areas in 2020, and our strategy for 2021 also looks good. I also have to emphasise that there is a lot of high-level professionalism in European debt offices. I think we all managed very well in 2020. And it’s been a great advantage for all European countries in getting through the current crisis.