As a conduit for Covid-19 economic mitigation measures, KfW is at the heart of Germany’s fight against the impact of the coronavirus. New treasurer Tim Armbruster and head of IR Jürgen Köstner spoke to Sustainabonds’ Neil Day about the practical and market challenges it faces in its latest role, and its overall sustainability ambitions.
Neil Day, Sustainabonds: KfW has been tasked with some important missions during its history. What is KfW’s role today in tackling the Covid-19 crisis and its societal and economic impact? To what extent does it extend beyond your usual activities? How are the support measures developing?
Tim Armbruster, KfW (pictured above): The German government quickly implemented a package of measures to mitigate the ongoing economic impact out of the Covid-19 pandemic. As the government’s flagship promotional bank, KfW is playing a key role in this, being the principal institution handling the loan programmes providing liquidity support to German businesses, for example. We started in mid-March, immediately after the lockdown began in Germany, by launching the so-called KfW Special Programme 2020, comprising various loan facilities. The programme was launched in close coordination with the German banking sector and the German Federal Government and, speaking for KfW, I can report that the cooperation on both fronts has been excellent.
As lessons have been learned, the programme has already been adjusted and expanded in order to increase the universe of eligible enterprises and its attractiveness. The lion’s share of the special programme has been operated on the basis of our proven on-lending principle, which involves the commercial banks handling the loans. Only very large volume loans to large corporations may be granted directly by KfW.
Jürgen Köstner, KfW: As of 19 May, we have received approximately 44,000 loan applications totalling around €42bn. We currently receive roughly €1bn in new loan applications per day. The number of loan applications is driven by smaller loans, with more than 90% of applications being for loans of less than €800,000. 99% of all loan applications have already been committed by KfW, totalling more than €23bn.
There are two takeaways from that. Firstly, the processing of the loans here at KfW is very fast. That’s thanks to digital processing, which we launched a couple of years ago, and also to the very close collaboration between KfW and the banking sector.
The other conclusion is that larger loans require more intensive risk assessment — the 1% of all loan applications that have not yet been approved account for roughly €17bn.
Day, Sustainabonds: Simply from a practical perspective, that sounds like an awful lot of work that you couldn’t have been anticipating at the beginning of the year. Have you taken on staff? How easy is it for you to cope with that extra volume of loans?
Armbruster, KfW: Without a doubt, this is one of the greatest challenges KfW has ever faced. And as you suggest, it will clearly dominate our activities this year.
When I joined KfW in March, it was amazing for me to see how the KfW staff is tackling the task — there is strong support within the organisation, great teamwork and faith in each other. It’s a big challenge, but the institution is handling it very well and that is borne out by what we have achieved so far.
From a treasurer’s perspective, there is a lot to consider, especially how we provide the funds needed for such a programme. And we’re still in very uncertain times, of course.
Day, Sustainabonds: Although you have this new programme, you have not yet increased your debt capital markets funding programme for the year. Could you explain your refinancing plans? And could the DCM programme yet increase before year-end?
Armbruster, KfW: When it comes to refinancing, the question is how much we require, and this is also driven by the needs of the businesses we support. For example, what is the demand and disbursement pattern of the KfW Special Programme? But we should not forget that we have our regular promotional business and its needs, and how demand there is being affected by the Covid-19 environment. And then we have to consider topics such as deferred payments. It’s also important to remember that there are other opportunities when it comes to funding — for example, we have the support of the Eurosystem.
The refinancing of the KfW Special Programme is safeguarded by the federal government, as the Ministry of Finance is authorised to refinance the relevant KfW funding requirement through the newly created so-called economic stabilisation fund (WSF). That means the WSF is entitled to lend KfW an amount up to €100bn linked to the needs of the Special Programme and this is very much part of our strategy. In the short term, we have covered the initial refinancing needs, and then at a certain point refinancing via the WSF will take over.
We have not, therefore, increased our overall capital markets borrowings, with the WSF complementing our regular activities, and we currently remain at the €75bn requirement we set out for the year. As usual, we are reviewing our plans after the end of the first two quarters, and we will give an updated outlook immediately thereafter.
Köstner, KfW (pictured below): So far this year we have raised roughly €35bn in the debt capital markets. This is a little less than half of what we announced for the full year and is absolutely in line with our plan.
Issuance has been very much dominated by our benchmark programmes: three-quarters of the funds raised so far are from benchmark issues, four euro benchmark bonds and one US dollar benchmark. A further 20% is from other public issuance, primarily pound sterling, and then we have 4% from tailor-made placements and just 1% from green bonds — green bonds are represented a little less than we aim for over the year, but we can come back to that later.
So far, we have issued in 14 currencies, which is quite a good number for this time of year. Two-thirds of our funding has been via euros and 17% US dollars. The euro share is currently a little bit higher than we expect for the full year, simply because we have issued four euro benchmarks and just one US dollar. The euro share was a little above 50% last year and this is a good approximation of what we are aiming for this year.
Day, Sustainabonds: Following the onset of previous crises or panics, larger government-related entities have played a leading role in reopening capital markets, arguably bringing a “social” dimension to their actions. When you were approaching the market in March with your euro benchmark, obviously you would have been considering how it fits into your funding plan and targets, but to what extent were you mindful of the responsibility that might lie with you in giving some leadership in the debt capital markets?
Armbruster, KfW: Due to the fact that KfW is among the largest issuers in the bond market, we are completely aware of our prominent role, especially in the SSA space and in the euro market, and of the accompanying responsibility, particularly in those turbulent conditions of February-March when capital markets were pretty much closed.
It’s fair to say that we were a bit nervous when we entered the market with the five year benchmark, our third of the year. It was of course important that we did our homework, following the market very closely and in continuous dialogue with our lead banks and investors. We then took advantage of the window of opportunity provided by a stable market backdrop after those weeks of turbulence. Additionally, we decided to go for four lead banks instead of three, to gain a certain extra degree of comfort. The strategy clearly paid off: we had a high quality orderbook with 140 individual investors, which allowed us to tighten pricing by a basis point and ultimately print a very fine €4bn transaction. This was also a very good signal to the market and for follow-up transactions, also delivering guidance on pricing in the primary market, with secondary markets at the time not really being reliable.
Day, Sustainabonds: This was at a time when social distancing and other measures had been put in place. You’ve already mentioned how impressed you were with everyone getting well when you arrived, but how much of a challenge have these practical issues proven to be?
Armbruster, KfW: There have been certain challenges, yes. KfW had very few Covid-19 cases among its staff — most cases were among those returning from vacations and they did not have any further contact with other KfW staff. It was very important that we had very strict rules in our internal pandemic plan from the start, and these clearly paid off.
It took some days to get everything up and running, but that’s because it was a new situation. We greatly increased remote working arrangements and we have sufficient capacity to sustain the situation for a longer time. I have to give a big thanks to our colleagues in IT and services, because in a very, very short timeframe they did a lot of work supporting everybody here in the institution.
As precautionary measures, we have split units with time critical processes — like bond issuance activities and transaction management — to ensure their ability to act in case of a government-ordered quarantine or any unexpected events — preparation is key.
At the moment, approximately 50% of the staff in our treasury department are working from home. This is something we implemented right from the start and I have to say working from home has worked out pretty well, probably better than we expected before the crisis — this is also something we can learn from for the future.
Day, Sustainabonds: Several supranationals and agencies have launched bonds with the proceeds earmarked specifically for measures aimed at alleviating the impact of Covid-19 on society, either under existing social bond frameworks or newly established. What is KfW’s position vis-à-vis such initiatives? You have experience of use-of-proceeds issuance from your green bond framework.
Armbruster, KfW: In responding to the crisis, Covid-19 bonds definitely have a social, ESG aspect and that is welcomed. However, they will probably prove to be a passing trend.
We believe that green will remain a long term trend and it remains so for KfW — it is part of our DNA and green bonds are here to stay. It has moved into the background a little due to Covid-19, but sustainability is still at the top of our agenda.
Köstner, KfW: We are clearly pursuing the strategy that we have followed from the start over six years ago, and this is to issue high quality green bonds.
This year, we have already issued seven green bonds, smaller ones totalling roughly €430m. In total, we are targeting around €8bn for the entire year. That’s what we announced at the beginning of the year, but it depends on the development of the underlying loan programmes. We will have to see how demand develops in renewable energies and energy efficient housing. But I’m quite sure that the sustainability factor overall will remain key for KfW and hence for our green bonds.
Day, Sustainabonds: Can you explain further how sustainability is integrated into KfW’s overall activity and in particular its funding activity? I know of at least one investor who scores KfW 100 out of 100 for even your non-green bonds. Do you expect investors to take a more holistic view of issuers beyond green bonds?
Köstner, KfW: Absolutely. We take a holistic approach here, so it’s sustainability in general that remains at the top of our agenda. It’s not only the E in ESG, it’s also the S and G. And we are delighted to hear that we are getting 100 out of 100 points on that issue from some investors.
Our financings, domestically and internationally, contribute to the transition to a sustainable society, and that’s what we are aiming for. Last year, for example, 38% of all our new financings were for climate and environmental protection projects, but while we look for green investments, the other two dimensions of sustainability, social and economic development, are important.
Apart from financing the sustainable economy, we are on our own and in close cooperation with other financial market participants striving to set benchmarks and standards in capital markets — we want to act as a driving force for national and international initiatives. For example, we have been active in the executive committee of the Green Bond Principles for a couple of years now, and we also offer our expertise to political decision-makers in Germany, Europe and worldwide. We were also part of the EU Technical Expert Group for the new sustainability taxonomy.
When it comes to our funding activities, we have a strong focus on green bonds. But we believe in a holistic ESG approach and always recommend to investors that they look at the credibility of the issuer, not only at the green bond itself. So we pay a lot of attention to our ESG ratings — this is even one of our few strategic targets, to be top among our peer group of national and international promotional banks, and indeed we are. We believe that makes KfW a very credible issuer of green bonds. At MSCI, we have the top rating, at Sustainalytics and imug we are among the top three in our peer group — only at ISS ESG is there a little more room for improvement, and we are working hard on that. We are quite proud of those ESG ratings — last year, we started to integrate the ESG ratings into the screen announcements and term sheets for our new green bond issues and this was very well received by the market.
Armbruster, KfW: Looking into the SSA space, I think what everybody should aim for in our universe is SDG-compliant programmes, which create more flexibility for issuing and also satisfy the various criteria for different themes. With the mapping of our entire new business onto the 17 SDGs that KfW introduced last year, we believe we have an interesting instrument on board that paves the way for going in the right direction.
SDG-mapping of entire KfW Group’s new business 2019
Focus SDGs: 7, 8, 11 & 13
Day, Sustainabonds: Once the immediate, imminent threat to health and businesses eases, more attention will turn to the nature of the recovery. My understanding is that elements of the government in Germany — as in some other countries and the EU — have called for a green recovery, with lending support in some countries has being linked to the transition. What are your thoughts on this?
Armbruster, KfW: It’s fair to say that it is a challenge to find the right balance between climate protection, society’s prosperity, and a sustainable economy. Indeed, it remains one of the biggest challenges, especially in the political arena. Linking Covid-19 lending support or recovery measures to a sustainable transition is first of all a political decision. But were the German government to pursue such a strategy, they could rely on excellent support from KfW, as has been the case in the crisis. KfW has been an instrument of structural economic policy for the German government for more than 70 years and the current Covid-19 crisis is another excellent example of this cooperation working very successfully.
The LBBW Interview Series: As a supporter of Sustainabonds, LBBW is facilitating a series of interviews with leading players in ESG and the green, social and sustainability bond markets.
Photos credits: Tim Armbruster by Alex Habermehl, Jürgen Köstner by Lena Gauß, both for KfW Bankengruppe