3 Issuing costs of state guaranteed bonds - Financial Risk and ...

2 Overview of state guarantee schemes
Figure 4: Maturity structure of SG bonds at issue by number of issues at different maturities
Number of issuances
400
350
300
250
200
150
100
50
0
Source: Bloomberg
1 - 1.5 1.5 - 2 2 - 2.5 2.5 - 3 3 - 3.5 3.5 - 4 4 - 4.5 4.5 - 5
2.5 Pricing of issuances
2.5.1 Fees
Average maturity at issue (yrs)
In order to access a state guarantee, banks had to pay an annual fee to the government acting as
guarantor of 50 basis points (bps) plus the median five-year CDS spread of the issuing bank over
the period January 2007 – August 2008, and in some cases an additional premium based on the
credit rating of the issuing bank.
The inclusion of a CDS spread measure in the state guarantee fee implies a risk-based structure.
The median five-year CDS spread over January 2007 – August 2008 for Fortis Bank, for example,
was 91.6 bps implying that it paid 141.6 bps annually on the value of its SG bonds to its guarantors.
Nordea Bank, as another example, would have had to pay only 124.3 bps on the value of SG bonds
as its median five-year CDS spread over January 2007 – August 2008 was lower – at 74.3 bps.
Interestingly, however, Nordea Bank chose not to issue SG bonds, suggesting that its total issuing
costs were lower if it issued non-SG bonds.
2.5.2 Issuer versus sovereign credit ratings
In general, the range of issuer ratings for SG bonds was relatively large: close to 90% of banks
received one of five types of 'A' rating and slightly more than 10% of banks received one of six
types of 'B' rating. Despite this, banks of a wide range of creditworthiness were issuing SG bonds at
relatively low issuing cost compared to non-SG bonds, as shown in Figure 5. This suggests that
issuer credit ratings are relatively unimportant to the pricing of credit risk embedded within SG
bonds, and investors treated SG bonds as gaining exposure to sovereign risk.
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