Bank Nederlandse Gemeenten (BNG) has issued a 10-year step-up callable note aimed at European institutional investors. The note, which can be redeemed early by BNG on November 25, 2019, requires a specified denomination of €100,000. In the first three years, the Luxembourg-listed product pays a fixed coupon of 0.25% pa which is subsequently increased to 0.75% pa for year four to 10. Deutsche Bank is the paying agent while DZ Bank acts as non-syndicated dealer.
The note is the seventh step-up callable note issued by the Dutch municipal bank this year, compared to just one in 2015, which is purely the result of the very low interest rates in the Eurozone, according to Willem Littel (pictured), senior manager capital markets & investor relations at BNG Bank. "Callables are products where, by building in more risk, investors can achieve a slightly higher return," said Littel. "Why have we opted for a step-up coupon? This type of product allows you to push your coupon a little."
BNG's investment products, which, apart from callables, also include fixed-rate and zero-coupon bonds, are always targeted at professional investors, according to Littel. "We don't do retail," said Littel. "Investors are often life insurance companies, at a Pan-European level, who use these products as part of their investment portfolio.
"Step-up callables are most suitable for insurers," said Littel. "This type of product allows [insurers] to increase the coupon because of the risk of early redemption." Investors in callables are partly the same as those who invest in fixed-rated bonds, although "[step-up callables] are a very specific part of the market", said Littel.
The bank's (step-up) callables are, with the exception of a callable note in Japanese yen (JPY 5bn Callable 0.71% Notes due October 2046), which was issued in October this year, denominated in euros. As well as euro-denominations, BNG's fixed-rate bonds were also created in a wide range of currencies, including Australian and US dollars, Japanese yen, Norwegian krone and South African. "In other currencies, there has, of course, not been any negative interest, or very low interest rates, this year," said Littel. "The rising interest rates in the US have certainly played their part too, and has resulted in little demand for callables out there.
"Callables are purely the result of the low rates, the negative interest, particularly on the short side," said Littel. "[BNG] has not done this, but many other issuers have issued very short callables, such as 10 non-call one plus one, for example," said Littel. "To compensate for the very low money market rates, they build an X amount of calls in a product and investors see these as an alternative to money market instruments."
BNG is a specialised financial institution for the public sector. Its clients are local authorities, public sector housing, healthcare and educational institutions and public utilities. BNG Bank provides customised financial services ranging from loans and funds transfers to consultancy, electronic banking and investments. Its debt securities are rated AA+ by Standard & Poor's, Aaa by Moody's and AAA by Fitch.
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