Rating: Aa1/AA+/AA+
Amount: €1bn
Maturity: June 9, 2025
Issue/reoffer price: 99.56
Coupon: 0.75%
Spread at reoffer: mid-swaps minus 16bp; 15.9bp over the 0.5% February 2025 Bund
Launch date: Tuesday, June 2
Payment date: June 9
Joint books: Crédit Agricole, Goldman Sachs, HSBC, Morgan Stanley
Borrower’s comment:
We began monitoring the market at the end of last week. It stabilised and we felt there could be a good opportunity for issuance in the short window of Monday-Tuesday this week. Inflation figures released on Tuesday sparked some volatility but with the European Central Bank meeting on Wednesday, a Germany holiday on Thursday and a Greek negotiations deadline and US unemployment figures at the end of the week we couldn’t come later this week. We felt next week risked more market volatility if the Greece situation wasn’t resolved. We also heard there was potential competing supply from our peers if markets were good.
We knew Spain was also planning to take the Monday-Tuesday window this week but we weren’t too concerned as we felt the market could absorb the supply. We decided the execution would work best intraday on Tuesday and on Tuesday morning conditions were strong so we announced the mandate.
We felt there was a good pocket of demand in 10 years. We felt that mid-swaps minus 16bps was the appropriate level even if the pricing wasn’t that easy to determine as we don’t have an outstanding curve for 10 years and longer and there is an important distortion between primary and secondary. The book built quickly to €850m including €125m from the joint lead managers. It began to slow a bit so we decided to fix the spread at 16bp through and that encouraged accounts that were still hesitating so the book build momentum picked up again and finished at €1.1bn.
We are happy with the demand, which was quite granular with 39 accounts involved. We have an upper ceiling of €4.6bn to print this year and we don’t expect to do much more before the summer.
We felt the market stabilise a bit over the last two weeks but I’m not sure how it will continue as we’ve had a lot of volatility this week. We were very happy to get done at the beginning of this week. It’s difficult to price when Bunds are that volatile so we’re very happy with a slightly oversubscribed deal.
Bookrunners’ comment:
It was a trade-off between waiting for a window and going this week to get it out the way.
This went quite well given the high volatility. You can see Spain paying a healthy new issue premium and getting €5bn done. That tells us how fragile the market is.
Borrowers were fully aware of what they were getting into this week. Conditions might get worse before they settle down. Looking at the response from investors on the Council of Europe and Spain deals they were right to come early.
We announced with guidance at mid-swaps minus 16bp area and were able to price at 16bp through.
We had the 2024 at minus 24ish bid. Adding on a few basis points for the curve looking at the EIB and EFSF curves means that fair value was about minus 19bp-20bp. So the new issue premium at minus 16bp was 3bp-4bp. In line with what the EFSF paid on a shorter but bigger deal.
We don’t know what will happen with Greece next week — we might have a flurry of new issuance if a decision is reached. So issuers avoided competing supply or disaster by coming this week.
The book held together quite well under challenging market conditions. The pick up to Germany was more like 20 when we started. It had tightened 4bp.
We closed books in excess of €1.1bn.
Geographical distribution
France 32%
Asia 17%
Switzerland 14%
Germany 14%
Benelux 13%
Other Europe 9%
Other 1%
Distribution by investor type
Banks/private banks 53%
Funds/insurance companies 27%
Central banks/official institutions 19%
Other 1%
Market appraisal:
“…this didn’t set the world alight but it did the job. The Council of Europe April 2024s are minus 24bp bid, so there’s a 9bp premium not accounting for curve.”
“…if you look at the EIB and EFSF curves — it’s so widely dislocated in 10 years. Where you might price a Council of Europe is anyone’s guess. Levels in primary don’t make sense given the relative value to governments. It’s a hard week and maybe not the best time to bring a deal but when is there going to be a better time? Maybe in retrospect they could have offered more of a concession and had more of a price discovery exercise but they got €1bn done.”
“…the level looked OK, but Council of Europe tends to price at the tighter end of the range.”
