Transcript: Interview with Instituto de Crédito Oficial’s Antonio Cordero on 16 December 2024

20 December 2024

By Marta Vilar – MADRID (Econostream) – Following is the full transcript of the interview conducted by Econostream on 16 December 2024 with Antonio Cordero, Director General of Financing of Spanish debt issuer Instituto de Crédito Oficial:

Q: I’d like to start by asking whether you’ve completed the debt issuance planned for this year. If so, have you reached the €8 billion that was planned?

A: Yes, we have finished. In fact, apart from the €8 billion, we have done a bit more, around another €2 billion. We are now at around €10 billion. That €2 billion is funding for the year 2026.

Q: Was that because you think market conditions now might be better than next year?

A: Pre-financing is not something we have proactively sought, but we have seen very good and very attractive opportunities in the market. If they are good, then it is better to take them and not wait until later because you never know how the markets are going to be. But that doesn't mean that next year can't be a good year.

Q: In what format did you do the prefunding?

A: We have done it mostly in private placements, not in a public format. In private placements we have been very active with different interest rate structures, exchange rates and not only domestic but also foreign investors who want to adjust their cash accounts before the end of the year, and we have been quite active there.

Q: How much do you expect to issue next year, taking into account this pre-financing of €2 billion?

A: I think we will be around €6 billion. But it is true that this evolves depending on how our lending activity is going. If we lend more, we will need more, and if we lend less, we will need less. We started the year thinking that we were going to do around €6 billion and we ended up with €8 billion in the programme and €2 billion more in pre-financing. So, we are flexible. We think our best estimate for next year will be around €6 billion, but it will be more or less depending on how our business evolves.

Q: So, your approach is more flexible and opportunistic than predetermined?

A: Absolutely. In terms of volume, it is opportunistic in the sense that we adapt to the activity that the ICO has. In terms of which benchmark transactions we do, we are quite strategic, quite stable and quite reliable. That is why in recent years we have been recurrently doing public issuances in a syndicated format. But then the adjustment up to the total amount we do via private placements is adjusted according to the needs of the ICO's balance sheet.

Q: How are you going to structure the issuances in 2025? Will it be similar to the way you have done it this year?

A: I think so, and I say ‘I think so’ because then the markets interpret you one way or the other. But our idea is to do what we have been doing in recent years: two sustainable bonds – generally in recent years we have been doing a green bond and a social bond of approximately €500 million each - and what we did last year and this year as well, and plan to repeat next year, namely a conventional bond. If everything goes well, it will also be for an amount similar to that of recent years, €1 billion. We think that we will be able to replicate this public and syndicated format next year and also complement it with private placements, which will give us more room for flexibility and where we will act depending on how the markets are moving. In other words, we will do more on a certain structure, more in one currency or less in another currency, depending, of course, on the state of each of the markets in which we are always on the lookout for opportunities that may arise.

Q: So, you expect syndications in 2025?

A: We expect those three. When I say they are public placements, it is because ICO does not do auctions like the big treasuries do. All the large issuances we do are syndicated. So, we are expecting three syndicated issuances: one for the social bond, one for the green bond and one for the conventional bond.

Q: Do you have a date in mind for the conventional bond issuance?

A: Generally we have the flexibility to be able to change this according to demand. But we do believe that we are going to do the same as we have been doing in the past years. That is, first, issue a green bond in the first four months of the year, issue a social bond in the second four months, and leave the conventional bond for the last part of the year, because once the bulk of the financing has been done, which we usually do in the first half of the year, we already know the volume that we are going to have to do. It is true that in the past two years we had to do a slightly larger volume in sustainable bonds and go to €1 billion, but if we no longer need so much, it also gives us the possibility of making the adjustment in terms of volume in the conventional bond.

Q: The mid-2024 investor presentation states the ICO's preference for shorter maturities. Do you expect this trend to continue next year given market conditions?

A: It is true that we have been in this maturity range of 3 to 7 years for four or five years, which is what suits us best from the point of view of asset and liability management, also because of the maturities of all our lending activity. It is what suits us best because of good management and matching asset and liability durations. But what we are seeing in recent quarters, and we will also have to see what happens next year, is that the appetite to go for something longer is growing. We will probably have to lengthen a little bit the maturity of the issuances we make. What we don't know yet is whether this extension of the maturity, which is not going to be much, will be done through public placements that will be announced on the market or whether we will do it through some private placements. Until now we have been saying that we did not do this type of private placement because they were very long term, but now we will probably be able to accommodate the appetite that some European investors had for long-term operations.

Q: How much do you expect to extend the average maturity?

A: If in previous years the sweet spot was between 3 and 7 years, now I would say it could easily be between 4 and 9 years. It is true that you do an average and you do issuances very long term and very short term, but on average we will probably move between 4 and 9 years.

Q: What are the longest issuances you have now?

A: The longest issuance is a green bond in April 2031.

Q: We have talked about how investor appetite is changing, but how is the ECB’s easing cycle affecting your issuance?

A: It always affects something, but neither the tightening cycle nor the easing cycle was affecting ICO's issuance in a positive or negative sense, because generally our issuances are at a fixed rate, but we swap them at a floating rate, at 6-month Euribor plus the corresponding spread. So regardless of what the rate cycle is, our level is going to be at a margin over the 6-month Euribor. So, in terms of demand and type of issuances, it doesn't affect us much.

Q: A significant number of your investors are from markets outside the euro. Do you plan to issue in another currency next year?

A: This has to be seen through a historical perspective. The ICO was more of a dollar issuer than a euro issuer. This was before the financial crisis, at the beginning of the century. After the crisis, the investor base became a little bit smaller in Europe, and with the European Central Bank's monetary policy favouring low interest rates, the euro market provided us with very good demand and at good prices. So, we did not need to exit the euro market. But we are an issuer that likes to be always looking at other markets that may be opening up. Now we are looking, but until we see financial conditions that at least equal what we can achieve in the euro market, we are not going to be very active in other markets, at least in public placements. But we are following the dollar market very closely, the sterling market as well and the Australian dollar market as well, because we have natural funding needs in Australian dollar, because we have a lot of Australian dollars on our balance sheet on the asset side. Recently it also looks like there may be good opportunities for next year in Swiss francs. We like to diversify our investment base by always looking at which markets can provide us with good financing, but it is true that in recent years the euro market has been very competitive in terms of price and therefore it did not make much sense for a modest financing programme like ours to do much more simply for the sake of diversification. But it does look like those conditions may be in place in 2025. I don't want to anticipate anything, but we may be issuing in one of these markets in a public format.

Q: Is there any type of investor or geography that you want to increase your investor base?

A: Yes, as part of our policy of trying to diversify our investor base as much as possible. We mostly have European investors because our market is fundamentally the euro. But we also have some investors in Asia and the Middle East, the number of which I would like to increase. In order to reach out to these investors in the Middle East and Southeast Asia, we would probably need to make an issuance in US dollars, which is where they are most active. We would love to further diversify the investor base, to increase the proportion of our issuances that are being placed in these markets, but for that we would probably have to go to the dollar market. Next year we will see if this market can provide us with a good price compared to the euro market, and then we would go for it.

Q: There are more German and Austrian investors in your investor base than Spaniards. But that has been the trend of the ICO, to expand abroad, hasn't it?

A: Absolutely. We believe there is value in trying to place our issuances largely outside the domestic territory, because we do not compete with some other Spanish issuers that may have a less internationally diversified investor base. We focus a lot on foreign investors and that adds value. Although in our issuances the domestic investors is participating and we are delighted.

Q: Do you expect to issue only one green bond next year?

A: We issue one annually. In the last few years we have been doing one green and one social one per year.

Q: How is the demand for these sustainable bonds behaving? Do you think it has the potential to, maybe not in 2025, make you go for more issuances in the future?

A: In terms of investor demand, yes, there is enough appetite for us to do more. But it is true that all the assets that need to be generated to support these green bond issuances are in great demand for other loans, for example from the EIB. Also, within the Next Generation EU funds, which we are going to channel, there is a very important part, which is the up to €22 billion green facility. That will take up a large part of the green projects that ICO delivers. It is more a question of our capacity to have green projects that are not used by other types of financing than of market demand, which is still very strong and I believe has the potential to grow more for sure. It depends a bit on what we can bring to the market.

Q: Are there any innovations you are considering now? Some issuers, like sovereigns, are creating platforms to increase the retail investor base.

A: Not at the moment. Years ago, the ICO delivered some issuances that were specifically aimed at the retail public. But right now I think savings are sufficiently well covered with other products and we don't plan to do anything there.

Q: In the benchmark bond issuance maturing in October 2030, you managed to reduce the spread with the Spanish Treasury bond of the same maturity by 3bp to 10bp. Do you expect this trend of reduced spreads versus the Spanish Treasury to continue?

A: To know that, I would need to have a crystal ball, because it depends on what market conditions are at any given moment. If the market is very strong, if it is in risk-on mode, we will be able to tighten it more. But if it is a little bit weaker, in risk-off mode, probably the issuances are not going as fast and therefore we can't narrow the spreads as much. It depends so much on the timing of the issuance, the window that is used, whether the market is very strong or not, that trying to anticipate what is going to happen is not possible.

Q: Is it not possible to tell the trend?

A: Even in years that, in trend, may be good, just the window you choose may be contrary to the trend. So, I am not able to anticipate it. As a strategy or tactic in the issuance process, we try to go out with a sufficiently attractive and generous price to attract attention and then from there, if there is a good book of orders higher than what you had expected, then you do have some room for manoeuvre. In sustainable bond issuances, as you have a good buy-and-hold investor base that is not very price sensitive, it allows you to extend this run by adjusting the price of the Treasury.

Q: Fitch recently revised its outlook for the ICO from stable to positive, a step prior to a rating upgrade. Do you expect the upgrade to happen soon?

A: When they put you on positive outlook it is because it is assumed that in a reasonably short period of time there will be a rating action. We do expect both Fitch and Moody's, which also has Spain's outlook at positive, to upgrade their rating at some point next year.

Q: Because your rating is very closely related to that of the Spanish Treasury.

A: So much so that it is equalised. If you read the rating agencies' reports on the ICO rating, what they do is analyse us based on the direct, explicit, irrevocable and unconditional guarantee of the Spanish Treasury. The close ties we have with the government's implementation of economic and monetary policy mean that the Treasury's rating is equalised with that of the ICO. So, the question is: when do we think Spain's rating is going to be upgraded, because that will be immediately when the ICO's rating is also upgraded. The answer remains the same: I expect both Fitch and Moody's to review it next year.

Q: Regarding the ICO business, do you expect the NPL ratio to continue to decline in 2025?

A: We expect stability. ICO's NPL ratio is somewhat below what would be comparable to the financial industry in Spain, and I say comparable because it would not be the general NPL but rather that of productive activities, because ICO has neither mortgage business nor consumer loans. In the projections we are elaborating, we expect stability in these ratios.

Q: How do you assess the sharp fall in the Tier 1 capital ratio over the last four years, from 37% to 22% in 2024?

A: We view it very positively because it is a strategic decision by the ICO to want to have more lending activity, which obviously means a higher consumption of resources simply because of the increase in activity. We are also being very active in venture capital investments, which we do through our subsidiary Axis, because that also consumes a lot of capital. So, we assess it very positively because that is where we want to go: more activity and more involvement of the ICO in the economy. Not only in times of crisis, where ICO is well known for its response to crises, but also in times of robust, solid and sustained growth, we want to play a more active role in the economy.