The EIB has continued to develop its role as the consolidated sovereign of Europe by issuing 30 year euro debt. At the same time, the supranational is able to maintain its dollar and sterling funding targets where others have struggled, while also developing new currency sectors. Jo Richards reports.
With a borrowing requirement of Eu50bn this year, the European Investment Bank needs to explore all markets. That it does so with transactions that are innovative and for the most part successful is testament to the borrower's responsiveness to investor needs and product and currency diversification, which directly leads to a continual expansion of the EIB's investor base.
The supranational works hard at its relationships with investors, which in 2005 has led to improved penetration in the US, in selected European markets and Asia, as well as enhanced reach among specialist market segments, including the long dated investor base.
Barbara Bargagli-Petrucci, head of EIB's funding team, says that around Eu40bn has been raised so far this year.
"As in previous years, currency diversification continues to be an important aspect of our strategy," she says. "This year we have issued in 13 different currencies, some of them new for us, like the Turkish lira and Mexican peso. Nonetheless, 85%-90% is in the three core currencies, euro, dollar and sterling."
Product diversification and the ability to respond to investor requirements with tailor-made instruments remains an important element of EIB's funding strategy.
"Structured products comprise about a quarter of our issuance so far this year," says Bargagli-Petrucci. "This is ahead of our achievement last year, notably in euros, where we have already issued around double the volume of structures issued last year. CMS-linked and Tarn transactions have been a major development for us this year."
While the EIB has recourse to several products and currency segments to balance out the cyclical fluctuations in various markets, the euro remains a vital funding currency for the borrower. So far this year it has raised over one-third of total funding in the sector.
And undoubtedly the pinnacle of its 2005 calendar is the October 2037 Earn launched in May. While many bankers had been calling for a 10 year issue, EIB went ahead with the 30 year, becoming the first supranational to break into ultra-long territory. And its choice was vindicated by over Eu11bn of orders for what was initially a Eu3bn transaction. An increase to Eu5bn was soon instigated and pricing was set at the tight end of the 2bp-3bp over Bund guidance.
Aldo Romani, deputy head of the euro funding team at EIB, describes the 30 year as not only being an important transaction in itself but as a significant indication of the further development of European capital markets.
And indeed its importance was symbolised by the May 9 launch date, Day of Europe and the anniversary of French foreign minister Robert Schuman's speech in 1950, that laid down the ideas inspiring all progress in European integration ever since.
"In times of uncertainty, for example around the constitution debate, the markets have shown that they attach great importance to the co-ordination of governments," says Romani. "And the EIB has profited from that perception. For a couple of years now, many investors have looked on EIB products as a complement to those offered by individual governments as the EIB is less exposed to the volatility that is created by facts or events that may have an impact on individual countries."
The EIB hopes to complete its Earns programme for 2005 with a 10 year transaction with a launch date pencilled in for September.
Sticking to the plan
The dollar market has become more difficult for all borrowers this year as issuing windows have become increasingly rare and demand from investor bases — other than Asia — increasingly elusive.
But, while other borrowers have found it necessary to reduce the size of their global bonds, the EIB has managed to stick to its $3bn minimum size for its benchmarks, of which it has issued two three year bonds and two five year deals. Two Eurobonds, a seven year and a two year, completes the EIB's public dollar issuance so far this year.
Eila Kreivi, head of dollar funding at EIB, believes the institution has conducted a successful issuance programme in 2005.
"This year the market has been a little tougher but we have been fairly successful as we have chosen our timing well. The curve is flat so it has been difficult to get investors enthusiastic — correct timing is so crucial."
Issuance in the sterling market has been largely restricted to taps but, out of a funding target of £6bn, EIB had raised £5.1bn by the end of August. "This is a very good result and compares well with £6.5bn in the whole of 2004 and £4.9bn in 2003," says Thomas Schroeder, senior funding officer at the EIB.
The EIB has established two new sterling lines this year, the 2012 and 2015, and brought its 2010 and 2013 issues to £1bn. "The 2015 maturity was something we really wanted to get done to introduce a new 10 year line, particularly as the 2014s and 2017s are quite high coupon bonds. We have already increased the 2015 so it is already on the way to becoming a benchmark. The 2012 is also going well and has been increased three times," says Schroeder.
The EIB's non-core issuance in 2005 included a yen global bond — a market the borrower had not visited since 1999. In addition, the EIB has continued to explore funding possibilities in local currencies.
"Over the past 18 months, we have introduced issuance in the Maltese lira, synthetic Turkish lira, Slovenian tolar, Bulgarian lev, synthetic Russian rouble and new Turkish lira," says Richard Teichmeister, deputy head of the funding team for European (non-euro) currencies at the EIB.
"Closer to year end we hope to introduce other new currencies from eastern Europe. Our longer term strategy involves issuance in currencies of EU partner countries in the Mediterranean and African regions."