KfW Successfully Completes Funding for This Year
2019: targeted volume of EUR 80 billion reached
Inaugural €STR-Bond successfully issued
Innovations in ‘Green Bonds – Made by KfW’ very well received
2020: planned long-term funding amounts to EUR 75 billion
“We have succeeded once again in meeting our high funding requirements in challenging market conditions this year”, explained Dr Frank Czichowski, treasurer of KfW Group, at the promotional bank’s capital market press briefing in Frankfurt today. Issuers and investors have clearly felt the impacts of central bank policies this year. Bond yields dropped to record lows in the course of the year, especially in the euro market. Whereas only the yields of KfW bonds with shorter maturities were in negative terrain at the start of the year and investors were still able to divert to longer maturities, the yield curve of all KfW bonds was in the negative zone at times during the second half of the year. “It is particularly in this kind of market conditions that our established and well-diversified position in the international capital markets shows its worth”, Czichowski elaborated. “Although the euro remains KfW’s most important funding currency with a share of more than 50%, we have been able to respond flexibly to specific investor demand in foreign currency bonds”.
As at 30 November 2019, the promotional bank issued 148 bonds in 12 currencies in the equivalent of EUR 79.4 billion in the international capital markets to finance its business. This makes KfW by far the world’s largest non-sovereign bond issuer.
Refinancing operations in its two core currencies, euro and US dollar, accounted for EUR 41.6 billion and USD 23 billion (approx. EUR 20.7 billion). As was foreseeable already in the first half of the year, there was unusually high demand for bonds in pounds sterling, which KfW responded to by issuing 18 GBP bonds in a total volume of GBP 8.45 billion (approx. EUR 9.6 billion). With a market share of 19%, KfW is the largest GBP issuer in the SSA segment this year. A similar trend emerged in the Norwegian kroner, which offers attractive returns for investors. KfW responded to this with a significantly higher offer, placing bonds in a total volume of NOK 24.5 billion (approx. EUR 2.5 billion). That made KfW the largest issuer in this currency in 2019 after the Norwegian state.
Liquidity remains highly valued
KfW’s attractiveness for investors is strongly related to the liquidity of its bonds. “The strategy we had announced for 2019, which was to further expand our offer of highly liquid bonds in a variety of currencies, has proven to be the right one”, explained Czichowski. This is demonstrated by the regularly oversubscribed order books, the successful placement of bonds in the primary market and their performance in the secondary market. Investors value large-volume bonds because they can trade them in the secondary market at any time.
Development of new reference interest rates €STR - SONIA - SOFR
KfW made an important contribution to the development of the market and liquidity with its first €STR bond, which was placed in November with a volume of EUR 1 billion. The new Euro Short Term Rate (€STR) will gradually replace the EONIA overnight interest rate, so that a growing number of investors who can subscribe to €STR bonds is to be expected. “Bonds with variable interest rates represent merely a supplement to our set of funding instruments, but we will keep our eye on this segment. Provided the market conditions are favourable, we will also issue bonds to support the establishment of the new reference interest rates SONIA (UK) and SOFR (USA)”, explained the treasurer.
Innovations in ‘Green Bonds – Made by KfW’ very well received
The green bond market continued to grow strongly in 2019. With new issues amounting to some EUR 170 billion around the world, the outstanding volume has now risen to approx. EUR 500 billion. KfW, too, was able to significantly expand its offer through the announcement of the expansion of its Green Bond programme in May 2019: This year it issued 11 bonds in seven different currencies with a total volume equivalent to EUR 8.1 billion. Among all green bonds a EUR 3 billion outing stood out and was recently increased to EUR 4 billion.
KfW welcomes the steadily growing demand from investors around the world. After all, since it entered the market segment it has been aiming to win global investors for climate action related financing. “It is our hallmark that we, as a German issuer with the highest possible rating, not only provide liquid Green Bonds but also a wide variety of products and currencies”, explained Czichowski.
In addition to that, KfW has received very positive market feedback after explicitly advertising its sustainability ratings when marketing its Green Bonds. “We are convinced that a holistic view of the issuers’ business model will gain importance particularly in this segment”, added Czichowski.
The positive development of the market segment is also being reflected in KfW’s Green Bond portfolio. In 2019 the investment target of EUR 300 million was reached, resulting in a total portfolio volume of EUR 1.6 billion. New issuers account for more than half of new investments, of which Europe is the dominant geography. These Green bonds are used primarily to finance projects in the areas of energy efficiency, environmentally sustainable transport and renewable energy.
KfW plans to raise EUR 75 billion in the capital markets in 2020. Up to EUR 8 billion of this volume is to be raised through the issuance of Green Bonds – in euros and in non-euro currencies.
KfW expects the euro market to continue to be supported by an expansionary monetary policy in the coming year as well, that the interest level in the euro area will remain largely steady next year and further negative yields can be expected. This will require sound judgement in terms of timing and pricing new KfW issues. “We have strong credit and sustainability ratings, a proven and transparent funding strategy, and a broad range of products and currencies”, said Czichowski, confident that the target volume will be comfortably achieved.
The green bond segment will continue to grow dynamically. Besides further diversification of sectors in which issue proceeds are used, issues by sovereigns can further support the market as well.