Worldbank Webinar Use of Cross Currency Swaps in the Belgian debt - - PowerPoint PPT Presentation

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Worldbank Webinar Use of Cross Currency Swaps in the Belgian debt - - PowerPoint PPT Presentation

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Worldbank Webinar Use of Cross Currency Swaps in the Belgian debt portfolio Anne Leclercq Director Treasury and Capital Markets Belgian Debt Agency January 2016 Page 1 Kingdom of Belgium - Federal Public Service FINANCE - Treasury - Debt

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Page 1 www.debtagency.be Kingdom of Belgium - Federal Public Service FINANCE - Treasury - Debt Agency

Anne Leclercq

Director Treasury and Capital Markets Belgian Debt Agency

January 2016

Worldbank Webinar Use of Cross Currency Swaps in the Belgian debt portfolio

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Page 2 www.debtagency.be Kingdom of Belgium - Federal Public Service FINANCE - Treasury - Debt Agency

Belgium’s is the 6th economy of the Euro-zone. Its 2014 GDP amounted to EUR 400.64 bn. End 2014 Belgium’s total debt amounted to EUR 427.48 bn representing a debt/GDP ratio

  • f 106.7%.

Belgium is a medium sized issuer rated

S&P: AA/A-1+ Moody’s: Aa3/P-1 Fitch: AA/F1+

Belgium: 3.32% of EA19 population, yet 4.0% of EA19 GDP

GDP (% EA19) Population (millions) Germany 28.7% 81.2 France 21.2% 66.4 Italy 16.0% 60.8 Spain 10.5% 46.4 Netherlands 6.5% 16.9 Belgium 4.0% 11.3 Austria 3.3% 8.6 Finland 2.0% 5.5 Ireland 1.8% 4.6 Greece 1.8% 10.8 Portugal 1.7% 10.4 Slovakia 0.7% 5.4 Luxembourg 0.5% 0.5 Slovenia 0.4% 2.1 Lithuania 0.4% 2.9 Latvia 0.2% 2.0 Estonia 0.2% 1.3 Cyprus 0.2% 0.8 Malta 0.1% 0.4 EA19 100% 338.3

Source: Eurostat, population statistics as of 1 January 2015 & GDP at market prices, 2014.

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Page 3 www.debtagency.be Kingdom of Belgium - Federal Public Service FINANCE - Treasury - Debt Agency

The majority of the financing needs are covered by a Euro LT financing instrument called OLO’s. The current

  • utstanding amount of

OLO’s is €312 bn. Treasury Certificates, the Euro ST standardised financing instrument, represents only 7%

  • f the debt portfolio or

€ 27 bn.

Composition of the debt portfolio in figures

Standardised Instruments, both long and short term represent 87% of the total debt portfolio. LT Flexible instruments or Tailor-made instrumenst only amount to 3% or € 12 bn.

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Page 4 www.debtagency.be Kingdom of Belgium - Federal Public Service FINANCE - Treasury - Debt Agency

Yearly General Guidelines

 General Guidelines

  • proposed by the Debt Agency
  • approved by the Minister and Parliament
  • sets the framework for the yearly Financing Plan
  • Proposes the maturities to be issued in the standard product
  • Defines/reiterates the risk parameters
  • the average life target of the debt portfolio
  • Refinancing and refixing risk
  • Foreign exchange risk
  • Defines the objectives to be achieved when issuing

tailor-made instruments ( essentially EMTN)

 Yearly financing plan

  • Publication of amounts to be financed through different

financing instruments : standardized or EMTN

Yearly financing strategy : set the framework

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Duration, average life and implicit yield

Page 5 www.debtagency.be Kingdom of Belgium - Federal Public Service FINANCE - Treasury - Debt Agency

Riskparameters :

  • 1. Refinancing and

refixing risk, as a percentage of total debt

  • 2. Average life of the

debt portfolio

  • 3. No foreign

exchange risk. All risks should be swapped to €. Hence CIRS. The average life of the euro debt portfolio amounts to 7.98 years, while the duration exceeds 7 years, yet the implicit yield has declined to 2.85%. This year’s target in terms of average life is 8 years.

12- month refinancing and refixing risk remain near their lowest level ever.

Riskparameters

0 % 5 % 10 % 15 % 20 % 25 % 30 % 35 %

Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15

Refinancing 12 months Refixing 12 months

23.48% 16.40%

7.30 7.98 2.85

1 2 3 4 5 6 7 8 9

Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15

Duration Average Life Implicit yield

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Page 6 www.debtagency.be Kingdom of Belgium - Federal Public Service FINANCE - Treasury - Debt Agency

1999 till 2008 : use of only standardized Euro financing instruments

Trigger for changing the Issuance framework and Strategic decision making process  1999 till 2008 Concentrate on building a liquid benchmark curve

  • build sizeable lines over the whole curve
  • improve liquidity of secondary market

 2008 : Decision to further diversify the financing instruments framework and to capture opportunities according to well–set conditions

Rationale for issuing tailor-made products (EMTN)

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Page 7 www.debtagency.be Kingdom of Belgium - Federal Public Service FINANCE - Treasury - Debt Agency

 Rationale

  • Increase the investor base

Tailor-made products are used as a TEASER. Belgium is medium sized issuer. Attracting investors by

  • ffering specific products will induce them to analyze the

credit and install credit lines. This could lead to a further investor diversification for the standard products.

  • Cost efficiency

In order not to cannibalize the main financing instruments tailor-made products need to be cost efficient versus the curve of the standard financing instrument

 Risk management strategy

  • Risk parameters prohibit any foreign exchange risk

HENCE : usage of Cross Currency Swaps

Rationale for issuing tailor-made products

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Page 8 www.debtagency.be Kingdom of Belgium - Federal Public Service FINANCE - Treasury - Debt Agency

  • A solution to transfer liquidity from one currency to another.
  • Reproduce a variable rate quarterly loan in one currency against a

variable rate quarterly loan in another currency.

  • Swap of the nominal amount on the inception date and at maturity.
  • A Cross-Currency Swap is not sensitive to the evolution of rates and

spot prices.

  • Idealy, the basis level would be null.
  • In reality, access to liquidity is not equal.
  • The basis margin represents these differences and is solely

influenced by offer and demand.

What is a Cross-Currency Swap ?

+ 100 Mios EUR

  • 125 Mios USD EURUSD Spot)

125M x Libor 3M 100M x Euribor 3M +/- spread + 125 Mios USD

  • 100 Mios EUR
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Page 9 www.debtagency.be Kingdom of Belgium - Federal Public Service FINANCE - Treasury - Debt Agency

Factors of evolution of the EUR-USD curve

  • Short part of the

curve efficiently managed by Central Banks.

  • 2-to-4-year zone

impacted by FX Swaps.

  • 5-to-10-year

zone affected by the ECB’s QE program.

  • 20-year+ zone

affected by:

  • CSA contract

modelling, CVA hedge desks.

  • Foreign

currency debt issuance (mainly in GBP and USD) by European companies.

EUR-USD Basis

  • 60
  • 50
  • 40
  • 30
  • 20
  • 10

3m 1y 2y 3y 4y 5y 6y 7y 8y 9y 10y 11y 12y 13y 14y 15y 16y 17y 18y 19y 20y EUR-USD spot curve EUR USD 09/06/2014 curve EUR-USD 04/06/2013 curve

EUR-USD curve EUR-USD 2-year and 10-year base

  • 100
  • 90
  • 80
  • 70
  • 60
  • 50
  • 40
  • 30
  • 20
  • 10

May-11 Nov-11 May-12 Nov-12 May-13 Nov-13 May-14 Nov-14 May-15 Nov-15 2Y EUR-USD 10Y EUR-USD

BCE QE

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Page 10 www.debtagency.be Kingdom of Belgium - Federal Public Service FINANCE - Treasury - Debt Agency

Regulatory context

VOLCKER LAW COMPENSABLE CROSS-CURRENCY SWAP? NET STABLE FUNDING RATIO (NSFR) LEVERAGE RATIO

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Page 11 www.debtagency.be Kingdom of Belgium - Federal Public Service FINANCE - Treasury - Debt Agency

EMTN issuance The total amount issued under the EMTN format and in foreign currencies since 2008 amounted to 11.154 bn, with US $ representing 85% for 14 transactions. Current

  • utstanding in

foreign currency transactions amount to 4.3.bn or 1.5% of total debt. Small but interesting given the cost efficiency and the investor diversification.

EMTN issuance since 2008

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Page 12 www.debtagency.be Kingdom of Belgium - Federal Public Service FINANCE - Treasury - Debt Agency

Pre-trade legal and credit requirements

 Documentation Choice for EMTN program :

  • Multi-product, multi-currency, multi-maturity, multi-dealer

program

  • Each transaction which be represented by a pricing

supplement

  • Advantage : Ready-to-tap the market with a well-known

documentation.

  • Disadvantage : impressive work to set-up and regular

updates  Credit requirements

  • Negociation of ISDA and CSA with all Primary Dealers

Issuing flexible instruments : set the framework

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Page 13 www.debtagency.be Kingdom of Belgium - Federal Public Service FINANCE - Treasury - Debt Agency

Continuous monitoring of the market by Debt Agency and Primary dealers

 Input dealers

  • Market changes or inefficiencies in €/$ or €/£ or other

currencies

  • Calculate the cost of a possible transaction on a given

maturity including FVA and CVA charges  Input Debt Agency

  • Indicate the value of the OLO curve
  • Indicate the cost efficiency required for the transaction

Issuing flexible instruments: monitor the market

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Page 14 www.debtagency.be Kingdom of Belgium - Federal Public Service FINANCE - Treasury - Debt Agency

Thank you for your participation.

www.debtagency.be