Sticking to innovation
WHAT'S News Issue 1 January 1996
new products
19
DEDICATED TEAMS
'But our target area covers a broad range
of other sectors as well,' says Vaarties. 'In
fact, we do everything you can't eat or
drink. The telecom market is our second
main stream at present. This is a very
interesting market. There is now a
dedicated team in position in the US and
there will be a similar team here in
Utrecht. You can split "telecom" into two
main sectors - media, which includes
areas like cable television, and telephone,
which includes for example, mobile phone
services. But our team will also remain
dedicated to the other areas we work in.
In general, that means all imaginable
industrial projects, such as waste
treatment, chemical plant financing, oil
and gas projects. Because of political risks
usually involved in the projects, it is
difficault to finance infrastructure, which
does indeed not receive a particularly
positive response from the bank.'
EXPORTABLE CONCEPTS
In international terms, the team is
gradually becoming more active in cross
border projects. Recently, it structured a
DEM 100 million deal for a German co-
generation project. 'We had done similar
project finance for Akzo Nobel in the
Netherlands so we had built up quite
some experience. It was interesting to see
how "exportable" concepts are. We're
currently working on another cross-border
project, this time for the Dutch paper
giant KNP BT. About three years ago, we
financed a co-generation plant for them in
the south of Holland. Now KNP BT is
working on a co-generation plant for their
big paper production plant across the
border in Belgium.'
NETWORK SUPPORT
Vaarties says that cooperation and support
from the international network is
extremely useful when doing cross-border
deals. 'We worked closely with Rabobank
Dick Vaarties
business.
no risky
It's calied a 'sticky cap floater'- a hybrid creature of financial engineering that
Rabobank has been first to release onto a market that was hitherto dominated
by traditional fixed-rate bonds and some floating rate notes.
The purpose is to give customers a chance to
bet against the long-term movements in the
capital market,'says Bart Heenk, head of
derivative sales. 'It's basically an instrument for
those who think the steep yield curve is
overdone.'Until recently, such unique
opportunities were available only to private
investors.They would be assembled by
arrangement with investment banks like JP
Morgan and Morgan Stanley. Like a Saville Row
suit, these were investments cutfor a special
taste. Now, Rabobank has brought sticky caps
to the open market.They are being offered not
only to the pension funds, insurance
companies and money managers in
denominations of NLG 100,000, but also to
retail customers in smaller sums of NLG 5,000
and 10,000. (The total issue size is NLG 200
million.)
'This kind of thing happens more and more
these days,' remarks Heenk. 'You start out with
a tailor-made product for a particular investor
and then realize this instrument has a
potentially wider appeal. In this case,you have
a bond created on the assumption that the
difference between short- and long-term
interest rates is too wide.Why not sell it off-
the-shelf it to anyone who takes the same
view?'
Fair enough. But why the name 'sticky cap?'
Basically, because investors get a premium of
50 basis points over the London interbank
interest rate,(or Libor).This creates a nice little
incentive, when you consider the alternative is
a regular deposit that pays libor minus 12.5
points. As always, such upsides require the
Deutschland on the Akzo deal last
summer,' he says. 'In Germany, people do
business in German. All the
documentation was in German. So simply
from a language point of view, we really
needed them. Besides that, there are a lot
of local regulations and the environmental
aspect is very important in Germany. We
were able to tap into a cheap funding
source which is provided for
environmentally-friendly projects. Local
market knowledge of this kind is
indispensible.'
LOOKING AHEAD
Although the project finance team has
already gained a considerable position in
both energy and Utilities, there is still some
taking of a certain risk. In this case, if the short
term interest rate hits 7.5 percent on any one
of the 20 market rollover days that occurevery
six-months during the ten-year life of the
bond, it automatically converts to a Standard
fixed-rate note at that level. Hence, the sticky
cap. Now, investors who consider the
differential between short- and long-term
interest rates too high have a vehicle to act on
that view. Neither ING nor ABN Amro can offer
their clients the same thing.
'Smiles Heenk: 'I think we caught the other
banks by surprise.'
way to go before they achieve similar
positions in all their target areas. 'And
that will not be limited to the domestic
market,' Vaarties confirms. 'We've been
given the go-ahead to broaden our scope,
especially in the energy field, to cover the
whole world. We'11 be pushing further into
Europe, the Far East, but also North and
Latin America. The bank was involved in
a number of projects in those regions in
1995, and we're looking to expand on
them in the near future.'
