BNG on issuance, derivatives, €STR and swap clearing

Hedge trimming


  • BNG Bank strikes early with €1bn 10y Social bond

  • Swapping back to €STR and 6mE; LCH vs EUREX

  • Navigating volatility and the SVB crisis

  • Euro structured note issuance eyes tenor shift  

  • ESG appetite – strong demand, but price sensitive

  • Digitalisation and blockchain

    BNG Bank strikes early with €1bn 10y Social bond
    The summer break is officially over after the European new issue market fully re-opened this week with a big line-up of names looking to price deals.

    A handful of issuers have already tested the market recently including BNG Bank (Aaa/AAA) on 22 August with its sale of €1bn 10y Social bonds. The deal priced at swaps +11bps with an orderbook of €1.5bn through DZ (B&D), Natixis, Nomura and TD.  

    Sydney Siahaija, Funding Officer at BNG Bank, explains the timing on the deal, “Among the important factors to consider, primarily of course whether it fits us, we look at the pipeline and whether other issuers are going to be doing the same kind of tenor. Also, is the market conducive to our intended tenor at this time.”

    By issuing last Tuesday the bank also managed to avoid Wednesday’s market volatility when 10y Bund yields plunged by 12bps after European PMIs printed lower-than-consensus.  “Normally the European PMIs would not be considered the most important data point to watch. For example, they are not typically as important as CPI data or the central bank meetings. Overall, we are happy that we were spared Wednesday’s market volatility,” says Siahaija.

    The Dutch public sector bank, one of the largest issuers in the Netherlands, has a funding target of €16bn for 2023 and has now completed around €12bn. In terms of distribution by currency, almost 65% of issuance YTD has been in euros while just under 30% has been in USD and the remainder across CHF, AUD and GBP.

    The US dollar market is considered a key strategic market for BNG, therefore opportunistic issuance based on cross-currency swap levels are less of a determining factor compared to other non-euro markets such as the Swedish Krona. “Euros and US dollars are two key currencies for BNG, so we are not really looking at US dollar issuance from an arb perspective,” explains Siahaija, “But there are some other currencies where we do look at it more from an arb perspective and whether it works in terms of euro levels.”  

    Swapping back to €STR and 6mE; LCH vs EUREX
    The bank swaps its euro and non-euro issuance back to floating rate euros at the time of issuance. For shorter-dated maturities up to 2y it swaps back to €STR, while longer-dated issues are always swapped to 6m Euribor.

    “We feel that the €STR market has developed to such an extent that we are comfortable swapping back to €STR for short-term dated maturities, so anything up to around 2 years. For anything longer than that we still look at 6mE because we feel that it is the more liquid market at this time in euros,” says Siahaija.

    Like other SSAs, for many years BNG exclusively cleared its swaps through LCH but more recently - and since the 2016 Brexit Referendum - the bank has joined a number of other high-profile SSAs that have joined Eurex including KfW and the Dutch State Treasury Agency.

    However, despite a surge in new clearing members at Eurex, a large portion of the euro-denominated swap market remains cleared at LCH. Subsequently, since Brexit there has been a renewed push by EU regulators for euro derivatives to be solely cleared under its jurisdiction given what it terms to be systemic risk.

    Among the proposals is an amendment to EMIR - known as the ‘Active Account Requirement’ - whereby institutions could be forced to clear a minimum amount at a European Central Clearing Counterparty (CCP).

    Daniel Moorman, Funding and Treasury Dealer at BNG, says the bank is well-placed given it now has a presence on both exchanges, “In the near future, European market participants will likely need to maintain an active clearing account at a European CCP such as Eurex. Although the specifics surrounding this active account are not yet clear, BNG is well positioned as we have accounts at both LCH and Eurex where we actively clear swaps and we have balanced positions across both CCPs.”


    Navigating volatility and the SVB crisis
    Like all issuers and market participants, BNG Bank has had to contend with higher interest rates and elevated energy prices this year. Still, the bank is quick to point out that the impact from higher rates has been limited given its policy to hedge any interest rate risks that are generated on its assets and liabilities.

    Among the big market-moving events was the SVB banking crisis and takeover of Credit Suisse by UBS. In terms of how BNG managed the counterparty risk, Moorman explains, “Most of our interest rate swaps are centrally cleared, but we do have some legacy bilateral swap portfolios. If there is an issue with a big counterparty potentially getting into trouble then it’s certainly an event we monitor closely. In the end, the regulator stepped in across the US, Europe and Swiss markets.”

    Meanwhile, Siahaija adds the bank was quick to mitigate counterparty risks, “The legacy bilateral swap portfolios we have are well within the risk management limits of the bank. We also took pre-emptive steps with regard to Credit Suisse and reduced our exposure through clearing and novations.”

    BNG states that the use of CDS on a bank to hedge counterparty risk is not generally a risk management tool that it would use.

    In terms of other hedging instruments, BNG previously used euro inflation-linked swaps to hedge inflation risks but says these are now considered a legacy product and are traded very sporadically and in small size. The bank does not use interest rate options to hedge interest rate risk.

    Euro structured note issuance eyes tenor shift
    BNG has issued a handful of structured notes in euros this year. Unlike some other borrowers, it does not publish a grid and any transactions are completed solely on a reverse enquiry basis.
    Among the structures issued earlier this year were shorter-dated callables including €25m 3.2% 5y NC2 in February and €20m 3.65% 5y NC1 in March, both via Bred Banque Populaire.

    Such issuance mirrored a general trend in euro callables through H1 whereby the market saw a shift towards short-expiry short-maturity callables, from around 3y NC1 to 5y NC2. Among the drivers were higher coupon rates for investors and a source of convexity for issuers. For euro volatility rate traders, it meant callable supply weighed on the intermediate left side of the vol grid.

    Ahead, some expect the trend of shorter-dated callable supply to continue amid higher rates and the ECB’s higher-for-longer policy outlook. However, BNG says it has observed a pick-up in longer-dated enquiries recently, “At the start of 2023 there was more interest in shorter-dated callables such as 5y NC1 but recently we have seen a trend of longer-dated structures such as 15y NC10,” says Siahaija.

    Among the more recent structured issues to hit the screens from BNG Bank included €10m 3.5825% 24y NC8 via Societe Generale in July.


    ESG appetite - strong demand, but price sensitive
    In addition to last week’s €1bn 10y Social bond being a test for investors’ appetite for duration, it was was also a test for ESG bonds.

    Asked about the current state of the market, BNG reports that ESG-labelled bonds are “generally more sought after” but adds that it varies by currency. “For example, in euros and dollars investors are looking for ESG bonds but it is not necessarily something they are willing to pay a different spread for. However, in some currencies such as CAD there is a lot of labelled issuance and there is more likely to be a pricing discrepancy,” says Siahaija.

    Last year 36% of BNG’s issuance was categorised as ESG and the bank expects this amount to grow steadily but has no strict target. 

    Meanwhile, Siahaija explains why BNG is never likely to reach 100% ESG issuance, “Everything BNG does is to make a social impact. But when a municipality creates a road that has an important function in society it doesn’t necessarily amount to ESG use of proceeds, so in that sense it is impossible for us to issue 100% ESG bonds.”

    Digitalisation and blockchain
    Finally, one area being monitored by BNG Bank is digitalisation in the bond market and use of blockchain. EIB issued its first digital bond a couple of years back while KfW has declared digitalisation a key objective for 2023 in its latest funding letter.

    “One area that has seen some very good developments has been in post-trade documentation. We have onboarded the Origin platform and completed a number of trades and had positive experiences,” said Siahaija.

    As for the pace of development, the bank is more cautious, “We keep up to date with the different developments and have observed with interest some of the digital issuances such as EIB. But we think the digital technology is quite a leap forward from where the sector is now and believe it is likely to progress in a gradual manner.”