The European Financial Stability Facility (EFSF) — unlike many of its supranational and agency peers — still has much funding to raise by the end of the year. For a borrower whose fortunes are so closely allied to the unprecedented volatility gripping European sovereign bond markets, that does not seem a welcoming prospect.
By early September, the EFSF had raised €8.5bn of its third quarter long term funding target of €13.2bn. It intends to raise a further €12.5bn in Q4. It will auction bills on top of that on a fortnightly basis.
It is the European political environment that will continue to have the biggest influence over what the EFSF can issue and at what price. As early as this month, the EFSF is likely to be affected by the German Constitutional Court’s verdict on the European Stability Mechanism — the new institution whose work will dovetail with the EFSF to resolve Europe’s debt crisis.
Indeed, the same people will run both organisations. "[It] is the best strategy for full co-ordination," says Christophe Frankel, CFO and deputy CEO of the EFSF.
Then there is the wider macroeconomic and political context to consider. How those countries under the EFSF’s remit fare will determine the success of the institution for some time to come, says Frankel.
"It is important to see countries with EFSF programmes doing well," he says. "Ireland is a great success. Portugal is improving. Greece will get there, although this is a special case and it will take time. The EFSF is an instrument which can raise money in a volatile environment and is part of the international effort to fight the sovereign debt crisis."
Communication will also be critical. The EFSF established itself as a borrower by taking on epic quantities of investor relations work. But its ever changing responsibilities and size have undermined those efforts. Once the ESM and EFSF are established in tandem, the borrower will need to communicate its task and the size of that task as openly as it possibly can to win full investor
confidence.
If one were to look for precedents of how the EFSF will fare going into a volatile autumn, then last year — the EFSF’s first as a borrower — does not set an encouraging one. Last November it closed the supranational and agency new issuance market.
The borrower took two attempts to bring a 10 year bond to the market and spooked investors already keen to shut their books for the year, to the extent that no benchmarks from any other SSA names followed until January of 2012. By that time, the European Central Bank had pumped markets so full of long term refinancing operations cash that virtually every new issue looked a rampant success.
It was an ignominious end to the borrower’s first year, which had begun with a blockbusting debut deal that attracted €44.5bn of orders in January.
As a result, 2012 became the year when the EFSF not only had to cement its own position as a frequent borrower, but also assist the market in which it operated.
That was no easy task, but with a range of new issuance techniques, the EFSF — a borrower which it must be said only enters the stormiest of markets — has worked to enhance its reputation and reduce its borrowing costs.
Over the summer of 2012, as SSA borrowers withheld supply, the EFSF managed to shave 25bp off of its secondary curve.
"The EFSF has succeeded in establishing its name even though we are only 18 months old," says Frankel. "My impression is that the EFSF’s spread volatility has decreased despite the persistent global volatility."
The issuer’s benchmarks continued to be something of a mixed bag in 2012. A prime example was its 10 year €3bn offering in late August, which struggled to subscription, if indeed it got there at all, and was priced at the wide end of guidance before widening further.
But it has fared much better with the new techniques in its arsenal such as its bills programme. The EFSF made its debut bills auction last December, issuing €1.97bn of three month paper that came at a comparable yield to French sovereign paper. Further auctions in 2012 have come below 0% yield, in line with Europe’s most desirable sovereign credits.
"We have developed a wider range of securities and techniques. No technique or instrument has been particularly singled out but we managed to become a very flexible issuer, which is what the market likes."
The issuer also started to auction taps of existing benchmarks in May rather than opting for syndications. It first did this with a €960m tap of its 2% May 2017s. The borrower had targeted a €1bn increase but at the time, dealers said the investor demand in the auction was higher than they had anticipated.