The European Financial Stability Facility (EFSF) has mulled over banks’ ideas on what trade to bring in its issuance window this week. The bail-out vehicle faced a choice between cashing in on the bid for duration that exists in euros to lock in some long-dated funding, or going for a shorter-dated, bigger deal. With a five year mandate now on screens, it has made the right choice.
With the European Stability Mechanism (ESM) set to begin benchmark issuance later this year, as well as the traditional autumn flurry of issuance — not to mention German federal elections that could throw the eurozone debt crisis into the forefront of investors’ minds again — the issuer has done the right thing in not attempting to extend maturities. Instead, it is aiming to pick up as much cash as possible.
The supranational has not managed to access the long end all year, and so it would have been tempting to push for a longer dated print. That is certainly what many banks recommended.
It isn’t under pressure to raise a €5bn deal, having done one just the other week. But the issuer cannot afford to sit back and rest on its laurels. It may be 73% through its €58bn funding requirement for the year, but that still leaves it €15.5bn to print. Plus it is about to be joined by the ESM, which has around €9bn-€12bn to fund this year.
The ESM, when it begins its benchmark career — expected in September or October — will have to make a splash. A five year is the obvious first choice maturity for it.
That means the EFSF should avoid shooting its sister issuer in the foot by printing a five year later in the year, when it would risk being too close to the ESM’s debut deal. If it needs to come then, it should instead opt for longer-dated trades that will take advantage of institutional investors’ need for yield.
In any case, a long-dated print right now hardly looks attractive. The steepness of the French OAT curve — a key marker for EFSF pricing — and the Luxembourg-based supranational’s long absence from the further reaches of the yield curve deals mean that it could well have to pay up for access. A double digit new issue premium looks likely for any print beyond the 10 year point.
The EFSF is understandably keen to build up its presence in long dates again, but this week’s window is not the ideal time for it to do so. Much better to rake the cash in now and leave the opportunistic deals to later in the year.
