On the long term funding
sideevery extra euro you
raise today is more time
and labour intensive than
in the past.
face-to-face dialogueoften
at management-board level,
with investor 9
F UND ING
Michael Gower:
Filling the gap
Rabobank's internat
funding structure
what is happening within the markets. We have a close
relationship with other banking groups and can be sensitive
to changes within the market. For example, we anticipated
quickly when banks came into problems and were therefore
able to reduce our exposure significantly at an early stage.
We did this based on signals within the market, allowing us
to take immediate action."
Marco Roddenhof adds: "When the crisis started, many banks
were forced to pay up immediately for funding. We didn't do
this, as we realised it would send out negative signals. Instead,
we reduced the asset side of the GFM balance sheet, where
we have a lot of liquid assets that can easily be sold. Over the
course of four months we were able to reduce the balance
sheet by about €55 billion, significantly decreasing our
wholesale funding needs.This underlines the importanceofa
liquid GFM balance sheet and the flexibility to manage this."
According to Thijs Berenst, a major challenge for local banks is
the price they have to pay for more funds. So called liquidity
spreads have risen steadily over the last eighteen months. For
example, a five-year spread is now at 80 basis points. This will
be reflected in advised prices for loans and mortgages. "One
problem they're dealing with is trying to convince customers
that they also have to pay more for their liquidity," says Berenst.
Dick Klaasse believes the problem is likely to continue, noting
that an important indicator - the spread between short-term
derivatives and interbank funding - was practically zero until
June 2007, but is now at all time highs. 'This means the market
believes that the banking crisis will be around for a significant
amount of time. However, the crisis will shift more towards
the capital position of banks and will lead to real economy
challenges. The latter will impact the commercial franchise and
credit portfolios of banks."
Despite this deep crisis, Rabobank still has access to large
sources of money market liquidity. Marco Roddenhof: 'The
credit quality of Rabobank is extremely valuable in the money
markets nowadays. Short-term investors, like fiduciary clients,
central banks and money market funds, are willing to place
funds with Rabobank as a safe haven. As a result, Rabobank has
a good liquidity position on the short-end of the curve."
For long-term funding requirements (longer than one year),
Rabobank attracts a large chunk of investment directly from
the market.
The man tasked with ensuring Rabobank covers its long-term
funding needs is Michael Gower, Flead of Long Term Funding
within the Treasury Rabobank Group (TRG). As Gower explains,
long-term funding is split into two parts: the senior long-term
cash requirement of the group, and the subordinated (or capital
raising) requirements of the group. "Annually, Rabobank needs
to raise a certain amount of cash, based on factors such as asset
growth and liability growth," Gower explains. "It is the job of me
and my team to attract the required amount to fund the balance
sheet over the coming year. For example, if Rabobank calculates
the Group needs €30 billion of long-term funding, that's the
gap we need to fill from the capital markets. We'll raise that sum
at a pre-determined maximum cost and at a targeted average
maturity."
Over the past couple of years, Rabobank has taken between €20
billion and €25 billion of long-term senior debt from the market
annually. Gower: "Our principal method to raise capital is to issue
bonds, which are then placed with investors by underwriters.
These underwriters are normally investment banks that have
strong sales and trading teams, and can help us determine the
types of bonds the market is receptive to. For example, if we
decide we need to issue a bond in a particular currency or in a
particular jurisdiction we will talk to the investment banks about
achieving that goal."
"Rl is a valuable counterpart and plays an important role in this
process. In the European market, for example, Rabobank's
own distribution network is extremely useful. And the GFM
business is very useful when we're looking to price up options
or structures, or look at prices within the swap markets. Their in-
formation helps us to gauge the performance of our investment
JL. ISSUE 18
THE WORD