EIB to lead supras into 30yr euros despite weak market

The European Investment Bank will begin marketing its first 30 year bond next week, even though some bankers believe it should wait for calmer weather in the bond markets.

  • 29 Apr 2005
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The EIB has been inspired by several of its sovereign members, including France, Italy, Spain, Greece and most recently, the Netherlands, which along with some large companies like Telecom Italia have opened up a new space at the ultra-long end of the euro bond market, whose potential is still largely unexplored.

So far, the growth of issuance has only seemed to stimulate the latent demand for high quality, long duration assets from European insurance companies, pension funds and asset managers.

Despite their impeccable credit quality, supranational and agency borrowers have been slow to follow the sovereign issuers into this space, but they are beginning to do so now.

The EIB has awarded a mandate for the issue to Barclays Capital, BNP Paribas, HSBC and Morgan Stanley and hopes to launch it during the week of May 9, if market conditions are suitable.

The bank has not announced a size for its first Euro Area Reference Note (Earn) of the year, but, as with its debut 15 year issue last July, the market is expecting an initial Eu3bn, which could be increased if demand is strong.

Barbara Bargagli-Petrucci, head of the EIB's capital markets department in Luxembourg, told EuroWeek the deal would be priced appropriately. "Our 15 year issue will of course be a reference point and it trades around Euribor flat," she said. "However, we cannot decide on the pricing of the 30 year until we meet with investors next week, when we are conducting a short roadshow."

As recently as two years ago, the standard maturity for sovereign and supranational borrowers in euros was five to 10 years. The push to issue longer dated debt came from concerns about the health of European pension funds.

In particular, the spotlight fell on the Dutch pension sector, which has some Eu500bn of defined benefit pension plans with an average duration of approximately seven years. The government has compelled pension funds to address this mismatch new regulations to be implemented as soon as January 2006 will oblige them to buy more long dated assets.

Because of this and similar moves in other countries, as well as changes in accounting regulations forcing investors to adjust their asset-liability management, has allowed governments to find keen demand — and tight pricing — at the long end of the curve.

The Hellenic Republic's Eu5bn 30 year deal in March garnered a book of Eu9bn and the Kingdom of Spain's 32 year bond in January raised Eu6bn after books reached Eu19bn.

In the 30 year bracket, Spain trades at mid-swaps minus 9.5bp, Germany at minus 14bp, and Belgium at less 6bp. Lower rated Italy pays a Libor positive spread of 15bp while Greece trades at plus 18bp.

Bargagli-Petrucci said that 30 years made a lot of sense for the EIB. "We will be able to extend our yield curve and create a reference point at the long end," she said. "We will not increase the issue but once we have a 30 year benchmark, we will build the curve by filling the gaps according to investor demand."

Views differ on best maturity

The EIB has been considering a 30 year bond since the beginning of the year. But while some bankers were recommending the long dated option, others were adamant that 10 years would be a better choice as the supranational has not issued a new 10 year Earn since June 2003, when it launched a Eu5bn October 2013 transaction.

However, Bargagli-Petrucci said that many bankers who had originally favoured a 10 year deal changed their minds, especially after the success of the Dutch 30 year bond, auctioned last week.

"The fact that the Dutch transaction was announced played a role in our decision-making," said Bargagli-Petrucci. "We were informed about the book achieved by the Dutch State Treasury Agency and, having investigated the deal bilaterally, we were reassured by the market that a 30 year EIB would be preferred by investors.

"It makes sense for us also, as the consolidated European sovereign, to match sovereign market convention by extending our curve."

The Dutch issue pulled in Eu17bn of orders in two hours, enabling the DSTA to allocate Eu5.228bn of the bond at 4bp over Bunds, from 4bp-7bp guidance. This equated to 8.5bp through mid-swaps.

The EIB was also encouraged by the success and performance of its own 15 year transaction, issued in July last year, when it became the first of its peer group to enter the super-long liquid euro benchmark sector.

The Eu4bn issue, maturing in April 2020, was priced at mid-swaps plus 2bp and now trades in the region of Euribor flat.

Another advantage will be the relatively steep yield curve between 10 and 30 years, currently around 55bp, which, although lower than its recent high of 60bp, is seen as a trigger point for many investors.

Some bankers still feel that the time is not ideal for the EIB to bring its longest dated transaction yet.

"The market has rallied a lot and 30 year Bunds yield below 4%, so the success of an EIB deal will depend very much on price," said one public sector syndicate head. "If they pay 1bp or 2bp over mid-swaps, it should work and that is a spread they could live with. If investors ask for 3bp or even 4bp over, it will be difficult for them to justify the exercise to their board."

Austria enjoys space at 10 years

The Republic of Austria this week took advantage of the relative lack of supply in the traditional benchmark 10 year maturity of the euro market to overcome challenging market conditions and price a Eu5bn RAGB.

The focus on the very long end of the curve by EU sovereigns means that Austria's was only the third syndicated 10 year euro zone government bond this year.

The republic itself launched a Eu3.5bn 15 year benchmark in January.

Although yields are at historic lows, Austria was able to attract almost Eu10bn of demand for its benchmark, enabling it to increase the issue from the Eu3bn minimum.

After going out with price guidance of 7bp-10bp over the January 2015 Bund, leads ABN Amro, Goldman Sachs, Nomura and UBS re-offered the paper at 8bp over. This was equivalent to 2.5bp over the German curve and 5.5bp through Euribor — in line with Austria's old July 2014 benchmark.

"In these difficult markets, especially with yields so low right now, to build a book of nearly Eu10bn for a Eu5bn deal at this level was an amazing achievement," said a spokesperson for the leads.

Helmut Eder, managing director of the Austrian Federal Financing Agency, told EuroWeek he was very pleased with the transaction.

"The order book was very strong at almost two times oversubscribed," he said, "with demand coming from the investor community worldwide, so this was a great result."

Eder said the republic had no plans to enter the 30 year maturity. 

  • 29 Apr 2005

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