The European Union today issued a
€2.6 bn 10 year benchmark bond. This will be lent onwards to Ireland
(€0.8 bn), and to Portugal (€1.8 bn), as part of their financial
assistance programmes. This was done by the European Commission on
behalf of the EU under the European Financial Stabilisation Mechanism
(EFSM).
For Ireland, it is the last EFSM
disbursement under the financial assistance programme which
successfully concluded last December. For Portugal, only one further
disbursement is now outstanding. Market access at favourable conditions
has recently been confirmed for both countries.
This 10 year bond is the first
of two EFSM funding transactions planned for 2014, following an absence
from the market since 2012. The further funding plan is €2.1 bn for EFSM
and up to €2 bn under the Macro-Financial Assistance (MFA) Programme,
including funding for loans to Ukraine.
The bond amount was determined
by the loans to Ireland and Portugal. The 10 year maturity was decided
as the best re-entry point for the borrower due to its prolonged market
absence and as the EU reference curve missed a 10 year bench mark point.
In addition, the 10 year maturity was expected to bring in both demand
from the shorter term investors like official institutions and bank
liquidity portfolios and the longer term investors from the insurance
sector and pension funds. The bond maturity does not determine the
ultimate loan maturity as all bonds maturing until 2026 can be
refinanced to extend initial loan maturities.
Books were opened at 9am CET
with a price guidance of mid-swaps +10 area and closed at 11am,
containing orders with 140 investors involved and more than 110 order
allocations. Total book size excluding lead interest was above €4.7 bn.
Price was fixed at mid-swaps +9 basis points, tighter than the initial
pricing thoughts at +11 area.
The €2.6 billion bond matures on
4 April 2024, pays a coupon of 1.875%, lowest coupon ever achieved by
the EU, and yields 1.919%. Funding costs will be passed on to the
beneficiary countries without any margin. The disbursements are foreseen
for 25 March 2014, settlement date of the bond.
Geographically, Germany/Austria
had the highest allocation with 45% of the bonds, followed by the
UK/Ireland (6%), France (6%), Benelux (3.5%), Switzerland (3%), and the
Nordic countries (3%). 33% was allocated to Asia.
In terms of investor type, bank
treasuries were in the lead with 46.5% of the allocation, followed by
Central Banks/Official Institutions (34%), fund managers (11%),
insurance/pension funds (6%) and private banks (2%).
Joint lead managers were BNP Paribas, Credit Suisse, HSBC, J.P. Morgan and UniCredit.
Co-leads were BBVA, Commerzbank, Crédit Agricole, DZ Bank, ING, LBBW, Natixis and Royal Bank of Scotland.
Background...
Since 2011, Ireland and Portugal
have received loans from financial assistance programmes, jointly
provided by the EU (EFSM), the European Financial Stability Facility
(EFSF) and the International Monetary Fund (IMF). The agreed external
assistance for Ireland amounts to up to €67.5 billion over 3 years, of
which the EFSM contributes €22.5 bn. The agreed assistance for Portugal
totals to up to €78 bn with an EFSM share of €26 bn.
So far, including today’s
issuance, the EU via the EFSM has disbursed the entire agreed amount of
€22.5 bn to Ireland and €23.9 bn to Portugal. Complementary
disbursements have been made by the EFSF and the IMF.
Since January 2011 the EU has
raised in total €47.6 bn from the bond market, used mainly for the EFSM
(€46.4 bn) and the remainder for a Balance of Payments loan programme.
Further EFSM funding of €2.1 bn
is planned for 2014, concluding the EFSM funding programme for Portugal.
Additional amounts will be placed under the BoP and the MFA, notably
€1.6 bn for planned MFA loans to Ukraine.
Following the April 2013
decision by the Eurogroup and the EU's Council of Economic and Finance
Ministers (ECOFIN), maximum weighted average maturity of EFSM loans can
be increased from 12.5 to 19.5 years. Maximum weighted average maturity
can be reached if a beneficiary country requests so, by refinancing
bonds and successive prolongations of initial loan maturities while
maintaining the back-to-back funding at all stages of the process. The
Commission will determine the maturity of any new bond or refinancing
depending on funding strategy and market availability. The lengthening
of maturities is expected to keep the EU active as a benchmark issuer
under the EFSM programme until 2026.
The EU is rated AAA/Aaa/AA+ by
the major rating agencies, all rating outlooks are stable. AAA/Aaa has
recently been re-affirmed by Fitch and Moody’s, with Moody's having
revised the outlook from negative to stable. The EU funds its loans by
issuing debt instruments in the capital markets. Issuances by the EU are
executed by the European Commission's financial operations department
located in Luxembourg.
