Strong Q1 funding performance
KBN again expects to experience stable growth in its lending business for the year ahead. Population growth, climate change, demographic changes and the continual need to upgrade and modernise facilities and services mean that KBN expects the level of investment and the need for long-term borrowing to remain high. KBN expects the local government sector to continue to have sizable investment needs going forward and for 2017, lending growth is expected to be around 5%.
Funding highlights in Q1 included a new 5-year USD Benchmark, a new 3-year GBP Benchmark, a USD 350m FRN TAP as well as issuance in both the Kangaroo and Kauri markets. In addition, KBN continued its run in the Formosa market, a market it first accessed in 2016, with two new trades during the quarter, totalling USD 415m. KBN also continued its strong activity in the Uridashi market, issuing over USD 2bn equivalent in the first quarter.
KBN 2016 FULL YEAR RESULTS
KBN’s net interest income totalled NOK 2,087 million in 2016, as compared to NOK 1,642 million in 2015. The increase reflects KBN’s good lending growth and continued strong margins in 2016.
Profit after tax for 2016 was NOK 689 million as compared to NOK 1,870 million in 2015. KBN’s profit for the year was influenced by unrealised losses of NOK 974 million, which stem from losses on fixed-rate loans and derivatives contracts used to convert KBN’s funding into Norwegian kroner. These unrealised losses primarily relate to IFRS effects on market value of KBN’s outstanding debt and derivatives used for hedging. These will be reversed toward the maturity of the underlying debt.
KBN’s loan portfolio grew by NOK 12.1 billion in 2016, representing an increase of 4.8%. KBN granted 610 new loans in 2016 totalling NOK 48.1 billion. Total lending to the local government sector at the end of 2016 was NOK 266.6 billion. Lending for climate and environment projects increased by 11% in 2016 and as at the end of 2016, 99% of Norway’s municipalities had loans from KBN.
KBN’s total primary capital at 31 December 2016 was NOK 13,989 million, of which NOK 10,996 million is total common equity Tier 1 capital. KBN’s Tier 1 capital consists of share capital, retained earnings and additional Tier 1 capital. The common equity Tier 1 capital adequacy ratio at 31 December 2016 was 16.86%, the Tier 1 capital adequacy ratio was 18.39%, and the total capital ratio was 21.45%.
USD AND GBP BENCHMARK RETURN
On 18 January, KBN launched its 2017 USD benchmark programme by issuing a USD 1.5 billion, 5-year RegS/144a transaction due 25 January 2022. The deal pays a semi-annual coupon of 1.625% and a spread of 35 bps over mid-swaps, or 40.03 bps over the UST 2.0% due December 2021.
With a busy primary market expected, KBN announced the mandate at the London open on Tuesday 17th January in order to focus investor attention as early as possible on their transaction.
Indications of Interest grew steadily and at the official orderbook opening time of 8:10am London time on Wednesday 18th January, these were in excess of USD 1.75 billion. Given the strong momentum in the orderbook, official price guidance was set 1bp tighter than IPTs and released simultaneously at +36bps area. The orderbook continued to grow, reaching over USD 2.5 billion by 9:55am London time, at which point the final spread was set at mid swaps + 35bps.
More than 55 investors participated in the transaction. Central banks from across the globe drove the transaction, representing 52% of the final allocations. Investors in EMEA were dominant at 48%, whilst US/Americas investors were also a significant portion of demand at 36%.
On Wednesday 1 February 2017, KBN, priced a successful new GBP250m December 2020 benchmark at UKT+46bps. The transaction marks KBN’s first benchmark outing in the Sterling SSA market since August 2013 and was timed to take advantage of the broad based investor demand present at the front-end of the Sterling market.
The benchmark adds a second point to KBN’s Sterling curve, extending beyond the existing December 2017 maturity and replenishing the curve following the redemption of the GBP 600m December 2016 line last year. The book closed with final demand in excess of GBP 300m, allowing the deal to be comfortably sized at the capped GBP 250m.
Over 20 accounts participated with Bank/Bank Treasuries taking 40% of the final allocation, supplemented by Asset Managers / Pensions (30%), Central Banks and Official Institutions (28%) and Insurance (2%). In terms of geographical distribution the UK (48%) and EMEA (Ex.UK) (46%) took the majority of the allocation.
KBN RELEASES ENVIRONMENTAL IMPACT REPORT
KBN has released its first Environmental Impact Report, which aims to provide insight into the environmental benefits of the projects funded through KBN’s Green Bonds.
The objective of this report is to promote transparency and integrity in regard to the impact of the Norwegian local government projects financed under KBN’s Green Bonds Framework by the end of 2016. KBN has acquired USD 1.00 billion through green bond funding and has a portfolio of green loans of USD 1.13 billion.
The impact report gives an overview of all the projects included in our green portfolio as well as their impact. Key figures included are CO2 reduced and avoided annually, renewable energy produced annually, energy reduced and avoided in buildings annually, sea floor restored and tonnes of added capacity of sustainable waste management.
URIDASHI FLOWS AT HIGHEST LEVEL SINCE 2013
KBN has seen strong interest for its name in the Japanese Uridashi market where it qualifies as a sovereign borrower.
As of the end of Q1, KBN has raised more than USD 2bn of funding in Uridashi format via 117 individual trades across 6 different currencies.
As loan demand from the Municipal sector is expected to remain solid in Q2, KBN will continue its funding activity looking for opportunities in the public markets in general, while keeping focus on the private placement and retail markets.
With regard to KBN’s benchmark programme, KBN foresees another 2 benchmark transactions during 2016 with a maturity focus of 3-10 years. These will be focused in either EUR or USD and the current expectation is that KBN will next look to access the market during Q2. KBN also hopes to re-enter the public Green Bond market during the latter part of the year.
The KBN Funding Team