EU’s biggest funding test yet to come
By all measures, the first two transactions of the European Union’s arrival as a supersized issuer in the capital markets were tremendous successes. The order books were world beaters, the new issue premiums were tiny despite the huge deal sizes, and the secondary performance has been incredible. But while it has been plain sailing so far, there are bigger tests ahead.
One of the main reasons why the EU’s first two deals for its SURE programme went so well was that there was very little competing supply.
The issuance was well flagged and so other borrowers steered well clear of ending up head to head with the EU. That made investors, who had amassed cash in anticipation, a captive and enthusiastic audience.
But while borrowers were able to carefully manoeuvre around the EU’s deals this year, that won’t be the case come January. Instead, every borrower, from sovereigns to supranationals and agencies, will be keen to press on with their new funding programmes, particularly in the first quarter.
In addition to competing supply, the EU will also be navigating a far bigger borrowing need next year. According to some estimates, the EU could raise as much as €200bn in 2021 alone, taking into account the programmes for its SURE fund and Next Generation recovery fund, the latter of which is facing obstacles on its way to achieving member state approval.
Of course, the EU may still breeze through its funding next year. It may be an extraordinary programme, but these are extraordinary times and the central bank bid for bonds similarly so.
But although there is undoubtedly strong demand for a liquid safe asset even beyond the European Central Bank, there will be too many competing priorities for every EU deal to be a syndicate banker’s dream.