The sub-sovereign & agency (SSA) universe continues to see greater diversification via the start of issuance activity of new agencies & supras. After a calmer year with respect to funding volumes with EUR 278bn in 2010 (2009: EUR 370bn incl. SFEF, EUR 307bn excl. SFEF) for agencies & supras, we expect a return to elevated levels for 2011.
27% funding increase of the main European agencies & supras
The overall funding volume of the main European issuers in the agency & supra universe is expected to increase by 27% yoy to EUR 354bn in 2011 (2010: EUR 278bn). Note that this figure excludes the Irish support package involving the European Commission and the European Financial Stability Facility (see below). While most issuers have very similar funding forecasts compared to 2010, new issuers as well as increased funding needs of Caisse d'Amortissement de la Dette Sociale (CADES) are the main drivers for the significant increase of the overall forecasted volume. Given redemptions of EUR 248bn (according to Bloomberg data), net supply will be in the area of EUR 105bn.
New issuers in the SSA universe
The trend of new issuers emerging in the agencies & supra universe since the financial crisis continued in 2010. They contribute significantly to the elevated overall expected funding volume in 2011. We briefly introduce the new ones (of which only EAA has had its inaugural issue so far):
■ Two deconsolidated entities have enriched the German agency market, namely Erste Abwicklungsanstalt (EAA, Aa1s/AA-s/AAAs) and FMS Wertmanagement (Aaas/AAAs/AAAs). The former is the deconsolidated entity of WestLB AG with an expected funding volume of EUR 7bn next year, and FMS stemming from Hypo Real Estate Group targets a funding volume of EUR 20-30bn. This makes FMS the second largest issuer after KFW (target of EUR 75bn). Both agencies benefit from a loss compensation mechanism ("Verlustausgleichspflicht"), which is reflected in their ratings. EAA's main support provider
is the state of North Rhine-Westphalia and for FMS the SoFFin, thus indirectly the Federal Republic of Germany.
■ The Spanish Electricity Deficit Amortization Fund FADE ("Fondo de Amortizacion del Deficit Electrico") was established to securitize the tariff deficit that has been accumulated since 2000 by electricity companies operating in Spain. S&P assigned an AA rating based on the explicit, timely, unconditional, and irrevocable guarantee from Spain, with the maximum guarantee authorization provided in the annual state budget laws (EUR 13.5bn in 2010).
■ The European Financial Stability Facility (EFSF, Aaas/AAAs/AAAs) is a new supra created as part of the European stabilization package, which is expected to tap the capital market soon. As part of the Ireland package, EFSF's share of the EUR 85bn total is EUR 17.7bn. This supra will exist until the last loan and debt instrument is repaid. In addition, the European Commission's share is EUR 22.5bn, thus increasing their funding target for 2011 as well.
The second major reason for the significant increase in 2011 funding is the French CADES, which expects a total 2011 funding requirement in the vicinity of EUR 65bn (2010: EUR 15bn). The agency will assume the deficits accumulated in the French social security system amounting to some EUR 130bn in the period 2011-2018. At the same time, its lifetime was extended to 2025. The first tranche of EUR 68bn is expected for 2011, with the remainder to be transferred from 2012-2018 (about EUR 10bn per year). The planned debt transfer means that CADES' debt assumption almost doubles – EUR 134.6bn have been assumed since 1996, of which EUR 42.8bn has already been amortized.
Sub-sovereigns
Expected issuance of German states should be at a similar level to this year, about EUR 100bn "Kreditermächtigungen"). The November tax estimation with a sizable upward revision was good news with pre-recession tax revenue to be reached again in 2012. This will support the states' consolidation efforts to adhere to the zero borrowing rule in 2020, provided they continue to show fiscal constraint. The institutional framework based on the revenue equalization mechanism as well as the solidarity principle is very supportive. This leads S&P to consider upgrades of the following states: Baden-Wuerttemberg (Aaas/AA+wp/AAAs), Hamburg (--/AA-wp/AAAs), Saxony (--/AA+wp/AAAs), and Saxony-Anhalt (Aa1s/AA-wp/AAAs). An upgrade of BadenWuerttemberg and Saxony would increase the club of German states with an AAA rating by S&P to three (currently only Bavaria), and the club of German states rated AAA by all three rating agencies to two. Particularly noteworthy is the improving credit profile of Saxony-Anhalt, which may lead to an upgrade of up to two notches (including the one-notch uplift for credit support).
The Spanish regions were hit hard in 2010 with large tax shortfalls and rigid expenditures, resulting in larger budget deficits and thus higher debt accumulation. This led to numerous downgrades and, given that all ratings on Spanish regions currently have a negative outlook, we would not be surprised to see further downgrades. The Spanish government has tightened control over the regions' budgetary performance since the beginning of 2010. As of mid-2010, the regions are in compliance with their budgetary targets. In recent months, the regions have experienced difficulty accessing wholesale funding markets. Nevertheless, we continue to
believe that the institutional framework is supportive and financial support, if needed, is likely to be forthcoming from the central government. Moody's estimates total borrowing needs of EUR 25bn in 2011.
Outlook 2011
Relatively high funding volumes in 2011 in all segments of the SSA universe could lead to spread pressure, especially in the first half of the year when SSA issuance has traditionally been quite heavy. We expect USD issuance to remain popular in the next few months, as was the case in 2010. This will support the absorption capacity in the EUR market. Nevertheless, we believe that the capital market continues to absorb the
high issuance volumes of SSA bonds due to its proven safe-haven track record during the crisis. There is differentiation of SSA spreads due to the following: 1. coreperiphery with national differences, similar to sovereign bonds, with sovereign newsflow being an important spread driver, and 2. explicit vs. implicit support mechanisms.
This differentiation will continue in 2011.
Covered bonds: Trends of 2010 to continue in 2011
A trend is a development if it is awarded a trademark Jumbolino development pushed by two forces
One year ago, when we discussed our forecast for 2010, we were quite aware of the high degree of uncertainty regarding the relationship between Jumbo and sub-Jumbo funding. Hence, we included in our analysis a certain shift from what had been funded through Jumbos into what will be funded in the sub-Jumbo format going forward. Not only has our opinion been proven correct that sub-Jumbo funding will gain in importance; there was even a new (unofficial) name created for issues that target a minimum volume of EUR 500mn, but were declared to be "sized to sell": Jumbolinos. In fact, the new Jumbolino segment accounted for 56 or 34% out of 164 new issues, with 29 of the 56 Jumbolino sized EUR 500mn. Of the 108 Jumbo
transactions, a majority of 61 had a volume of EUR 1bn – the classical Jumbo amount. The reason for the increased importance of what is now popular under the name "Jumbolino" is overwhelmingly based on two things: rating agencies (correctly) putting more emphasis on the liquidity situation of the cover pool as well as the sustainable discontinuation of a functioning market-making agreement. The liquidity management of the cover pool is improved if issuers – in particular with small- to mid-sized programs – manage to run a higher degree of granularity on the liability side and therefore reduce liquidity gaps. With regard to the market-making situation, one big selling argument for Jumbos simply vanished. Therefore, the advantage with respect to funding levels via Jumbos is no longer significant. In fact, there are some indications that various issuers even have to pay some additional basis points when issuing large volume bonds simply because of price concessions to attract more spread sensitive investors. The high importance of Jumbolinos led us to slightly change our approach for forecasting issuance volumes for 2011. While in the past we only concentrated on the issuance of Jumbos (2010 point estimate EUR 140.5bn; YTD issuance EUR 133.45bn), we decided to broaden our scope to all primary market actions with a volume of EUR 500mn or more, including taps thereof. However, what will remain outside our scope concerning forecasts are registered covered bonds.
EUR 200bn Benchmark Covered Bonds expected
Our base-line supply expectation for 2011 with regard to Jumbos, Jumbolinos and taps thereof is EUR 200bn, more or less zero change compared to 2010. Jumbo issuance of 2010 will end up at close to EUR 140bn, one or the other transaction could still arise (YTD EUR 133.5bn), which matches last year’s call of EUR 140.5bn. The figure might increase slightly in 2011 to EUR 145-150bn. Some accounts that only managed to do a EUR 500mn+ transaction might be able to size up to Jumbo volume in a better market environment.
Assumptions
This base-line estimation is subject to the following assumptions:
- The peripheral sovereign crisis continues at least until the beginning of 3Q11
- No EU sovereign default; no EU bank default; no haircuts on existing senior debt of sovereigns or banks.
- EUR 25bn to come in 2011, with 25%-30% in Jumbolino form , Spain: We expect the difficult sovereign environment to prevail at least until 3Q11. Hence, the EUR 25bn of new issues we predict for Spain in 2011 should occur rather late in 2Q11. We consider the breakdown of Jumbos and Jumbolinos to remain rather constant. Jumbolinos should account for roughly 25%-30% of total gross issuance in Spain.
- EUR 50bn in total: EUR 27bn in OHs and EUR 23bn in OFs , France: Our total estimate for 2011 amounts to EUR 50bn. OHs should account for EUR 27bn, while we expect mortgage OFs at around EUR 13bn and public OF at around EUR 10bn. Jumbolinos should play a minor role and be limited to some 10%-15%.
- Germany with EUR 25bn , Germany: The German market will be represented with around EUR 25bn of supply,making up 12.5% of total 2011 supply. This is roughly the same level as in 2009/10 (EUR 24bn and EUR 26bn, respectively). As in previous years, the shortfall of supplycompared to redemptions is mainly due to the low roll-over ratio of public sector funding.
Full report: Fund and Bond Outlook 2011
