Hitting the Asian bid

KfW is one of Europe's largest development banks and as such is a huge issuer of bonds throughout the world. In recent years nearly half of its funding has come from Asia. Yield hungry Asian investors are not new to the credit, but their appetite is still large. Here we find out more about KfW's credit and the bank's issuing plans for the rest of the year.

Last year you raised some €50.7 billion. How much have you raised so far this year?

This year we're aiming at between €50 billion to €55 billion depending on the developments on our asset side. By now we have funded €30 billion so we are a little bit ahead of plan. But that is quite normal as there is heavy demand at the beginning of the year and so we used that opportunity.. So all in all with €30 billion done including two euro benchmarks and one dollar benchmark, we are exactly where we want to be.

Of this €30 billion, how much has been dollars and how much has been in euros?

46.5% has been in euro, 30% in US dollar, 3% in yen and 12% in sterling, with the rest in a variety of other currencies. So all in all it reflects our funding needs. Our home currency is euro and we have a euro benchmark programme where we have committed to do at least three benchmark deals this year. But we also have a strong need for the US dollar and two years ago implemented a dollar benchmark programme.

Of this total amount how much has been sold to Asian investors and how important is Asia as a funding source for you?

If you look at the benchmark deals, you can see between 5% and 20% of the eleven euro benchmarks have gone to Asia including Japan. For the six US dollar benchmarks the amount has been between 20% and 50% although with our most recent deal nearly 70% went to Asia. So you can see it is a very important market for us.

With the euro benchmarks why has there been a decrease in Asian participation from a level of 28% in March 2003 to 13% with your most recent deals?

I would think the main reason for this difference is simply the maturity. The most recent Euro Benchmark is a ten year maturity whereas the Benchmark issued in spring last year had a five year maturity. There is just more appetite for short to mid-term maturities in Asia. Furthermore, the volatility of exchange rates might have had an impact

How do you meet the challenges of currency volatility in your issuing activities?

For us it is not really a substantial problem. We do issue in euro as well as in dollar. Of course the euro is our home currency, but we have also a natural need of $7 billion to $8 billion for our export and project finance activities. That's the reason we have strategic funding programmes in both currencies, which are in fact not influenced by currency volatility.

Your recent five-year dollar deal sold at 29bp over Treasuries whereas your recent Euro deal sold at 20bp over Bunds. Does this mean US dollar issuance is more expensive for you?

Our main target as a frequent borrower is to have permanent access to the euro and to the dollar market. We have to be transparent and reliable with respect to our funding strategy and as announced at the end of last year we will issue at least three euro bonds and two dollar bonds from our benchmark programmes.

We do focus on performance of our benchmark bonds in the respective currency and we do not compare spreads in different currencies. However, I think it is quite normal that spreads are narrower in our home market, which is the euro.

You are also a big issuer of structured products. What is demand like this year and what kinds of structures appeal to the market?

We have done 180 structured transactions this year, which clearly shows demand is there. We're seeing more demand in different currencies this year. In the past this was very much focused on the yen but now we see demand for example in Australian dollars, in Singapore dollars and Hong Kong dollars. There is a broad variety of currencies in which we fund and it is broader than in previous years. With respect to structures PRDC's and step-ups are leading.

Obviously investors who are interested in triple-A names are driving the strong demand for structured products.

The key selling point of your bonds over the years has been that you can offer a yield pick up for a triple-A name. In a rising interest rate environment, does that selling point still stand, when investors are getting greater returns from buying the government names?

The yield pick up will continue to exist and the main marketing argument we have remains the same. Our benchmarks bonds are true surrogates for government bonds. There is no reason for investors even in a rising interest rate environment to give away a yield pick-up.

How is your underlying business being affected by what is going on in the German and global economy at the moment?

We are a promotional bank. We give impulses for the economy, society and ecology in Germany, Europe and the world over. Due to this special task, our activities are only to a certain extent linked to the growth of the German economy or the global economy.

Our experience from the past is that economic cycles don't have a dramatic impact on our activities.