The European Investment Bank (EIB) confirmed its status as one of the world's most prolific and innovative borrowers, issuing nearly €50 billion in 15 currencies last year.
The key components of the triple-A rated borrower's funding strategy are the markets of central and eastern Europe.
EIB, the European Union's financing arm, regards developing the capital markets in new and future member states as a cornerstone of its funding strategy.
It is taking its role seriously. In 2004 the bank issued €1.2 billion equivalent of bonds denominated in central and east European currencies, making it the biggest issuer in these markets aside from
local sovereigns.
"In 2004 we established a number of benchmark bonds across a range of
matuities in central and eastern European currencies," says Rene Karsenti, the
director-general of finance at the EIB,
in Luxembourg.
The bank strengthened liquidity, offered a wider range of maturities, and also issued in three new currencies; Maltese lira, Slovenian tolar and Bulgarian leva. It
also issued bonds in two synthetic
currency transactions, Turkish lira and Russian roubles.
first in the market
In each case the EIB was the first
triple-A rated or sovereign class issuer, other than local governments, to tap
these markets.
"Although the EIB's issuance in these markets may seem a relatively small proportion of our total borrowing, [accounting for between 2% and 3%], we are the leading non-resident issuer in the region. In each instance we are responding to market demands for these currencies," says Karsenti. He adds that when the EIB issues in these markets it is like a stamp of approval for the infrastructure that they have in place. Improving market infrastructure in these developing markets is one of the rationales for EIB's local currency borrowing.
The aim is to help upgrade the legal framework and corporate governance standards in these countries and to encourage product diversity and attract new investors.
"We help to raise the regulatory standards of these markets so that they are comparable to those in the rest of the European Union. As a supranational borrower we can help improve liquidity, transparency and infrastructure. As part of this we look at developing swap and derivative markets," says Karsenti.
malta deal
He cites, as an example of how the bank improves local infrastructure, EIB's Maltese lira issue in March last year. The LM10 million (€23.4 million), five-year offering, via the Bank of Valletta, represented the first time a triple-A rated borrower had issued in Malta's public bond market. "This is a small market and it was a small-sized issue, but it did provide the opportunity to introduce settlement through delivery-versus-payment for the first time in Malta. The hope is that this issue will encourage other global borrowers to bring deals in Maltese lira."
Karsenti says that the bank may return to the market if further borrowing opportunities arise.
Although in 2004 the bulk of issuance in the new member state currencies continued to be in Hungarian forint, (75% or €880 million equivalent) and Polish zloty (17% or €203 million equivalent) the bank did diversify into new currency markets.
One singled out for EIB's attention was the Slovenian market. In April last year the bank issued a 2014 SIT4 billion bond with a coupon of 4.75%. This deal represented the first SIT issue by a triple-A
borrower, and with a maturity of 10
years, the longest-dated SIT issue in
international markets.
quality alternatives
"This Slovenian tolar-denominated bond demonstrates the EIB's commitment to supporting the development of EU-acceding countries' debt markets by offering investors high-quality and innovative alternatives," says Karsenti. "In this case we are offering an especially long maturity to investors in Slovenian tolar in the international markets."
He says that extending the yield curve is essential to ensuring the sustainable development of these countries.
In its more established markets EIB contributed to market liquidity by building selected issues towards benchmark size. This included a new HUF50.5
billion (€179 million) three-year benchmark issue that gives the EIB the three biggest issues in the Hungarian forint international market and a strong maturity range from 2006 to 2012. A new
Polish zloty five-year issue was also
built towards a liquid size of Zl700
million (€148 million).
"Another example is our issuance in Turkish lira. We have extended the yield curve to 10 years in Turkish lira, five
years beyond that of government bonds," says Karsenti.
The bank also opened the Eurolev market in 2004. The 2009 Lev100 million (€51million) issue was the EIB's first issue in Bulgarian leva and the first by any triple-A rated or supranational issuer.
"As the first Bulgarian leva issue in the international markets, the EIB has again demonstrated its pathfinder role in the markets of the region and added to the range of quality alternatives available to investors in Bulgarian leva bonds," says Barbara Bargagli-Petrucci, head of funding at the bank.
"Local as well as international investors have responded favourably to this opportunity, in terms of product, timing and diversification."
Diversified borrowing
The bank will look to further diversify its local currency borrowing. The Romanian market is on the radar. "This is a market of great interest to us and the authorities are continuing to ease market restrictions. Croatia also presents very good prospects. I hope that we will debut in both these markets within the next 12 months," says Richard Teichmeister, the deputy head of funding in Europe ex-euro.
Teichmeister adds that it is not a one-way process. "It is not only us that has to give the green light to these projects. It only makes sense if we have sufficient investor demand and an understanding with local government. We would not want to interfere in any way with their borrowing strategy."
More than half of the proceeds of the EIB's local currency borrowing is used for on-lending projects in the region, supporting long-term development in these countries. The EIB acts as a catalyst for channelling international and domestic savings into these long-term project finance plans.
"The transformation of savings is one of the major benefits of our programmes," says Karsenti.
The EIB also maintains liquidity pools in the bank's treasury in currencies of four new member states (Czech koruna, Hungarian forint, Polish zloty and Slovakian koruna). This facilitates on-lending in local currency and enhances the EIB's ability to respond to investor demand.