The European Investment Bank needs little introduction to debt market professionals it has existed since the Treaty of Rome in 1958, and had Eu305bn of outstanding debt securities at the end of 2009. It is a frequent borrower in nearly all international markets, funding across 16 currencies in 2010, and tapping innovative funding sources such as Schuldscheine and co-operative bond markets. This wide base of funding sources and long history with debt investors has served EIB well through the credit and sovereign crises.
"We didnt need to change our strategy in 2010," says Barbara Bargagli-Petrucci, head of capital markets department at EIB. "Weve maintained our market share as ever, and our funding costs have substantially improved. Our issuance plans are stable."
EIB is 100% owned by European Union member states, with the largest shareholders, in descending order, Germany, France, Italy, the UK and Spain. EIB also has a solid capital base of its own, independent of shareholders, which means that despite the sovereign fears that stalked Europe in May and June, EIB spreads were firm.
"Its been business as usual," says Bargagli-Petrucci. "We refrained from issuing large benchmarks in May and June, but we could do that, because we had front-loaded our funding programme and because a large proportion of our issuance was targeted, as opposed to benchmark format."
Nonetheless it has been unable to stop investors spooked by eurozone sovereign worries from demanding a larger spread to Washington supras and to KfW during the crisis months.
"To get dollar funding, weve certainly had to pay a spread over the non-European supras, and to a lesser extent over a certain German agency with a German guarantee," says Bargagli-Petrucci. "Spreads are moving in now though our last dollar five year is already tighter to KfW."
Eila Kreivi, head of funding for the Americas and Asia Pacific at the bank, adds that at one point during the year EIB was trading some 30bp wide of World Bank in dollars, which was almost equivalent to one rating notch. EIB still trades wide of World Bank in 10 year dollars, but spreads have come in sharply since May and June. Kreivi also notes that a favourable basis swap going from dollars to euros means all-in funding costs are still competitive for EIB.
Since the credit crisis, EIB has been paying a spread to mid-swaps to borrow in euros, which has attracted a wider investor base. While EIBs funding team does not expect EIB to return to sub-Libor borrowing in the near future, they are positive about the medium term outlook.
"As long as we are a Libor-positive borrower, well still see higher granularity in our order books more investors per billion," said Bargagli-Petrucci. "Demand for our bonds will return to a pre-crisis pattern when we go sub-Libor again. I cant see it happening this year, but spreads have come in a lot already, and our three year dollar secondaries are at Libor flat already, from 16bp over at issue in July."
EIB does most of its funding in euros, which have accounted for 40% of issuance in 2010, against 34% in dollars this year, and 8% in sterling. Australian dollars are a close fourth place, accounting for 7.3% of funding this year. EIB is the largest issuer of Kangaroo bonds.
EIBs benchmarks have accounted for 51% of total issuance so far this year, against 68% total last year.
EIB expects that it will have an issuance programme of around Eu70bn in 2011, despite increased competition from other agencies and sovereign issuers. EIB will continue to diversify its funding sources, and front-load its funding programme. As of September 7, EIB had done Eu56bn of the Eu68bn it needs this year.
Carlos Ferreira da Silva, head of euro funding, EIB says: "Of course concentrations of issuance create challenges. Other issuers have printed huge amounts in narrow execution windows, and we need to think about orderly management of issuance. At the beginning of the year, we had a strong focus on targeted issuance in smaller sizes, to get around volatility and avoid execution risk."
Peter Munro, head of investor relations, says investors are now distinguishing at the bank between triple-A issuers on fundamentals to a greater extent, and that this worked to EIBs advantage. "EIB is strong as a standalone bank, with a Basel II capital ratio of around 29%," Munro says. "EIBs lending is very prudent, with close to 0% non-performing loans. If investors perform a bank-style analysis on EIB, we come out very well."