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Wednesday, 01 October 2014

Currency soup

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The European Investment Bank has traditionally acted as a role model for other issuers in the European capital markets with its multi-currency based approach to funding its borrowing requirement. Central to this is a core focus on the role of financing in US dollars, euros and sterling, while continuing to push the frontiers in the less frequently used currencies. Mike Winfield reports.

With an annual borrowing requirement of €52bn–€55bn for 2008, there is little change from last year's €55bn financing outcome and, "based in particular on current projections relating to the loan business as well as the known schedule of redemptions, this is not expected to change significantly until 2010," said Barbara Bargagli-Petrucci, head of capital markets. What has changed this year has been the currency composition of EIB's borrowing, and the maturity profile of the €27bn of this year's financing completed by late April.

During the first four months of 2008 the EIB had already accessed funding through no less than twenty different currencies (including four in synthetic format). It also remains a key player in the currency markets of Australia, New Zealand and Japan, the largest non-core currencies of the EIB, where it managed to tap the longer end of the curves. There has been no let up in the debt issued in emerging African currencies, among which South African rand remained the largest, this year. "We remain committed to these markets, as well developing new markets where the EIB has a natural need to lend, for example, some Mediterranean markets," said Richard Teichmeister, head of funding for Europe (excluding euros) and Africa.

The US dollar, however, remains the mainstay of the bank. By April 2007 the EIB had issued three Global US dollar deals, in three, five and 10-year maturities which were priced between the equivalent of swaps less 17bp and less 19bp, reflecting the homogeneity of the borrower's credit curve. In the same period this year it has priced four global transactions: two three-year and two five-year deals, as tight as swaps less 26bp. This change in the shape of the credit curve, and the reduced borrowing cost that has resulted, has seen the US dollar programme take on a greater significance in relation to other currencies – currently accounting for 42% of its funding.

"Renewed vigour in the demand for highly rated, liquid product along with wider swap spreads have enabled new issues to be priced at historically advantageous levels, whilst offering attractive spreads to US Treasuries. The psychological street-led resistance to the less 20bp re-offer was accordingly discarded", said Sandeep Dhawan, the EIB’s deputy head of funding for the Americas, Asia and Pacific.

"Some of these phenomena may however turn out to be transitory as capital market conditions improve", added Dhawan. In keeping with the EIB's objective of achieving a sustainable reduction in its cost of funding, "we have continued to price deals to clear and yet be attractive to us. We have also issued more over comparable periods than in previous years, albeit not with indecent haste", he said of the four deals it had so far priced.

The longer end of the market has offered less in the way of opportunities given the current shape of the curve. For that reason the EIB had not issued any new euro or US dollar benchmarks of over five-years in the first four months of 2008, instead adding €2bn to its outstanding EARN October 2014 and EARN October 2013 deals at mid-swaps less 17bp and less 18bp respectively. "Despite the concentration on issuance at the shorter end of the curve there has been only a modest reduction in the overall duration of our liabilities," said Bargagli-Petrucci. This is partly because in sterling, long dated funding has been more significant, partly with taps of its 2018 to 2025 issues. The EIB maintains a comprehensive sterling yield curve extending out to October 2054, with a programme which is the largest in the non-Gilt market. During 2007 it tapped 12 different maturities, including its outstanding 50-year issue, and added a new 2044 point to its curve.

In 2007 euro-denominated issuance accounted for 38% of the debt raised with the addition of four new EARN trades. The reduced supply so far this year is, however, also expected to be a temporary phenomenon. "Given the recent improvement in euro-market sentiment following, we are seeing the first signs that the longer part of the market may re-open as an economically viable area for new issuance," said Carlos Ferreira da Silva, head of euro funding. In addition, he said that several ideas were currently being examined for tailor-made issuance, including innovative structures, of which the €600m climate awareness bond issued in May 2007 is one example of what just one sector – the SRI market – could prompt.

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