Tranche 1: €5.25bn Reg S only (EFSM/MFA)
Maturity: 22 April, 2031
Issue/reoffer price: 100.420
Spread at reoffer: mid-swaps minus 6bp; 30.1bp over the February 2031 Bund
Tranche 2: €10bn Reg S only (NGEU)
Maturity: 4 July, 2041
Issue/reoffer price: 99.601
Spread at reoffer: mid-swaps plus 7bp; 53.1bp over the July 2040 Bund
Launch date: Tuesday, July 13
Payment date: July 20
Joint books: Bank of America, Barclays, BNP Paribas, Citi, Commerzbank
SURE had an additional guarantee to protect the budget, but all our programmes have the same backing and have the same solidity, so there’s no difference in how the EFSM and NGEU programmes trade.
On a request of the beneficiary country, the proposed maturity was 10 years, maturing in April 22. That was convenient because it is away from our usual date of the fourth of the month. The macro-financial assistance (MFA) maturities are typically 15 years, but the recipient was happy to take 10 years because the alternative would have been to wait until after the summer. It’s not the final instalment, so we can increase the average maturity when they receive that.
There was some volatility in the market last week, but towards the end of the week, things calmed down and Friday [July 9], Monday and Tuesday were much more stable. We fixed the size of the NGEU tranche at €10bn. If that had been much bigger, we wouldn’t have been able to do the EFSM tranche as well. Combining the deals meant we could finish this week for the summer, avoiding a trade next week.
We’d done 10 years, five and 30 years, so 20 years was a logical point in between that was still missing. Shorter than five years wouldn’t have made sense. Fifteen years is another possibility, but we’ve done a lot of 15 year paper this year, so 20 was the most logical. Also, 10 and 20 years is a good combination. It’s a good spot on the curve for investors since the curve gets flatter beyond that.
We saw fair value for the 10 year at minus 7bp to minus 7.5bp and the 20 year at 4.5bp-5bp. It did move tighter during the day, but the final new issue premium was 1bp-1.5bp for the 10 year and around 2.5bp for the 20 year. Given the quality of the book, we could have considered moving another basis point tighter on the 20 year, but we didn’t want to stretch it too much.
It was a really extraordinary response, particularly that we received almost €100bn of orders in mid-July for the 20 year.
The quality of the book has always been remarkably high for our SURE and NGEU deals. Allocations to traders are very low. It’s difficult to give them much when there’s such a good quality book. Pension funds and central banks and the like get more, but they have also seen rather low allocations for their categories in many deals.
We’re very pleased with the deal, having priced at fair levels and combining the EFSM and NGEU deals didn’t seem to cause any confusion or problems for investors.
Market conditions changed quite a bit between the RFP being sent and the execution of the deal. The market was volatile Tuesday through Thursday last week [July 6-8], with the curve flattening substantially because of changes in market participants’ expectations regarding inflation.
That stabilised on Friday and Christine Lagarde’s dovish comments over the weekend helped to consolidate the market this week, so it didn’t affect our strategy with the deal.
For the 20 year, looking at the NGEU’s history, it’s done 10 years, and the five and 30 year dual tranche. The 10 year was a given for the EFSM tranche, so the remaining choices were three and 20 years. The EU listened to our recommendations for the longer end of the curve where there’s ongoing demand.
We had a really outstanding reception. There was good feedback throughout the RFP process. Plenty of big investors still had large limits available for the name and the 30 year OAT gave us confidence that there was a good appetite for longer tenors.
For the 10 year, fair value was fairly easy. The €20bn 10 year line was quoted at mid-swaps minus 7bp, so that was where we saw fair value. At minus 6bp, there was a 1bp new issue premium. For the 20 year line, we interpolated the two most recent lines: October 2040 and May 2046. That gave us fair value of mid-swaps plus 4.5bp, so a 2.5bp new issue premium at 7bp.
In the course of the afternoon, the whole EU curve performed very well. It was clear from the book that allocations were smaller than expected so there was buying across the whole curve.
You never expect such a large order book, but we and everyone else have a lot of confidence around the EU as an issuer that can consistently raise these amounts of cash several times in a short period.
It wasn’t just the size of the book that was noteworthy. Of course, there were a lot of hedge funds and intermediaries there, but the quality overall was excellent with a lot of pension funds and asset managers in there too.
There was good participation from Asia in the 10 years. The 20 years was too long for many Asian accounts, or the yields were too low.
One of the key takeaways was that the EU can combine its programmes like this, treating an issuance opportunity as a liquidity window. The feedback from large investors is that they prefer to have dual tranches come at once rather than having two bonds a week or two apart. There was no confusion around the combination of the programmes.
Tranche 1 (EFSM/MFA): Geographical distribution
Other Europe 12%
Tranche 1 (EFSM/MFA): Distribution by investor type
Bank treasury 34%
Central banks and official institutions 26%
Fund managers 20%
Insurers and pension funds 14%
Hedge funds and others 3%
Tranche 2 (NGEU): Geographical distribution
Other Europe 15%
Tranche 2: Distribution by investor type
Fund managers 37%
Bank treasury 24%
Insurers and pension funds 18%
Central banks and official institutions 17%
Hedge funds and others 2%
“…it’s impressive. They’ve done €45bn in less than a month.”
“…we were a bit surprised with the 20 year tenor for the second tranche. We were expecting a short tenor like a three year, but apparently they found some demand.”
“…it was more expensive than we were expecting. For a trade this size, you have to start with some concession to get some momentum going, but we thought they’d start with more and finish with 3bp or so at least. They must have had good feedback on Monday.”