How are you approaching the markets this year?
Our strategy focuses on the sourcing and accumulation of high-quality assets. As a firm, we are seeking to add approximately Ç50 billion ($76 billion) of new public sector assets per annum. Public sector credit represents the most efficient use of capital in the current market environment; it is logical to assume that the group strategy going forward will be reflective of this.
Our Asian strategy has accelerated and intensified in the current market environment. TodayÆs widening spreads in Asia present a unique opportunity for us to accumulate assets faster for our portfolio than we had originally planned for the year. For example, we were strong buyers of Korean paper when prices stood at 15bp to 20bp over Libor, so at the current prevailing levels for the same assets, this is even more interesting.
The prevailing wisdom now is that the market will continue to be volatile for a while, and I balance that with the knowledge that the number of borrowers in the public sector that I am trying to get exposure to is finite. Plus I canÆt be sure how big or when upcoming bond transactions are going to be, nor what allocation IÆm going to finally get, so I am seeking to increase that exposure now. We can work with the borrowers and address directly their balance sheet requirements. We offer funding bilaterally or as part of a larger bond or loan offering, and are actively asking clients what they want and providing them with those funds where and when they need them.
Your largest presence in Asia is in Korea?
Yes. It has always been the largest user of the international capital market in Asia, and it has a very deep pool of borrowers, especially in the public sector, such as all the state policy banks and quasi-sovereign corporates. This is exactly what our investment strategy and public sector mandate are focused upon. We are now a bookrunner or a joint lead manager on many of the major benchmark transactions, and have significant relationships and ongoing dialogues with all those borrowers directly. We are looking at maintaining the same kind of dialogue with the public sector borrowers in Indonesia, Vietnam, Malaysia and Thailand, but there is not the same amount of high-quality assets available from those countries. China is also a place where we want to increase our footprint.
Can you tell me a little about how you came to act as bookrunner on Korean bond deals alongside the other investment banks?
IÆve enjoyed a close personal relationship with Korean borrowers for a long time. I worked on the first KDB yankee bond in 1990, and have been working closely with the sovereign, the policy banks and the electric company (Korea Electric Power Corp) continuously since then at a variety of different firms where IÆve been, such as Morgan Stanley, Credit Suisse First Boston and Barclays. The relationships travelled when I did. At Depfa we have leveraged those relationships and quickly moved from one of the largest investors in those public sector names into a funding partnership role, and weÆre very happy to continue in that regard.
What expertise do you bring to the table in distribution capacity and syndication?
Depfa has acted as bookrunner for many sovereigns and quasi-sovereigns globally. We have a very strong sales force, which has grown from distributing DepfaÆs own treasury products (Depfa is a triple-A covered bond borrower and often can be viewed as a treasury substitute or hedging instrument in Europe). Our main point of distribution has been to central banks around the world.
Korean issuers have traditionally targeted insurance companies, pension funds or firms like Depfa, but when bonds from Korean policy banks tightened last year to around 15bp over Libor, a lot of those investors lost interest and shifted their focus to higher yielding Korea assets, such as Korean bank subordinated paper.
But Korea is an OECD country, and a 20% risk-weighted asset at the state policy bank level. So Korean quasi-sovereign paper is just the ticket for us, and likely to be of interest to central banks in the future, as KoreaÆs rating continues to improve.
Can you clarify the separation between the investment arm and the banking and syndication function at Depfa?
ItÆs totally separate. The investment arm and portfolio managers are managed from our head office in Dublin, and all the banking for Asian clients is done here in Asia. If we are hired as bookrunner, we act as bookrunner and bring pricing power to the transaction. But Korean borrowers tend to care acutely about their pricing levels, and if they are trying to price a little tighter, DepfaÆs portfolio arm is still apt to buy $50 million-$100 million of bonds from us at that level. As bookrunner, we are first and foremost focused on getting the best clearing level for the issuer. The constructive approach taken by the investment arm of Depfa can give the book momentum and is ultimately supportive to the issuerÆs end pricing target.
If we are not on the mandate, like any other investor, we would like to receive more yield and thus have no influence on the pricing process. In such a case, we are a price-taker and not a price maker and Depfa is not the first or lead investor in the book. We will look at the bonds relative to value available in the secondary and CDS markets.
Some people say had you placed orders earlier while bookrunner on a deal, the trades may have priced tighter...
Our participation as an underwriter has no bearing on the timing of our orders.
Tell us about Sung-Uk Hong's role, who stepped down as executive director of Kexim and joined Depfa.
Hong is a key strategic hire for Depfa. He is here to head our Korean banking business and relationships. Away from the sovereign and quasi-sovereign institutions, as a non-Korean language speaker it became a challenge for me to create relationships with clients. Now we are building a dialogue where we havenÆt had one before. He brings to us a wealth of knowledge as well as a depth of relationship at government and policy bank level which I would say no other bank in the world has. So his role is to triple or quadruple the size of our footprint in Korea.
How will the Korean policy banksÆ borrowing strategy develop this year?
From what they have announced, they have huge financing requirements and are looking at niche and local currency markets to try to find cost-efficient and arbitrage-driven funding. But the reality is that with such large funding requirements, they will have to bring benchmark-size transactions to the G3 market and they may need to pay up to get the large size done. They will also have to space them out to make sure there is not an oversupply at any given time.
Do you hope to be involved in the local currency deals?
Not at present. If we canÆt bring any value to the transaction then we are not going to be involved. If a deal is in a currency we are interested in, or we have a way to hedge the currency risk, then we can take a look, but right now our main portfolio is the dollar and euro-denominated portfolio. But itÆs not just about Korea since we want to increase our expose in all the other Asian countries as well. If we need to be creative to gain exposure because those other borrowers are reverting to domestic markets due to exaggerated spreads in the international dollar and euro markets, then we will do so.
What other business is Depfa seeking to do?
Aside from driving the expansion of our public sector financing to the rest of Asia, I would like to see more synergies between our public sector origination business and our infrastructure finance business, and we are driving our origination forces together in this regard. We are also working to identify real estate financing opportunities for our clients in the region. This will be a key focus area for us in 2008 and beyond, and is an exciting prospect for us.
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