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.
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.
EU investor relations website: http://ec.europa.eu/economy_finance/eu_borrower/