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Wednesday, 13 December 2017

No mean feat

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The EU has achieved its goal of lengthening its maturity profile, despite the fractious market – last year the average maturity was just under 8.5 years, so far this year it is more than 21.25 years – certainly no mean feat.

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This year has seen the European Union more than double the average maturity of its benchmark issuance from last year. In volatile times, where some have sought solace at the short end of the curve, this could be seen as a risky strategy. But careful planning and a well-communicated strategy ensured investors were not only aware of what to expect but actively welcomed it.

If there is one thing investors like – especially in uncertain and volatile markets – it is a borrower that communicates its intentions and presents a coherent plan.

This is what the EU has done throughout this year and it has been rewarded with solid well-subscribed benchmark deals as a result.

The stated intention was to extend its maturity profile and it set its stall out early in the year. It sold €3bn of 30-year paper on January 9 in an issue that more than doubled the length of its existing curve. The EU took advantage of a new ruling that superseded the previous one (which capped issuance at the 15-year mark) and which lent further support to sentiment following a three-year deal of the same size on January 5 from the eurozone’s rescue fund, the European Financial Stability Facility.

The two issues helped to calm any new year nerves – it was notable that the EU’s choice of tenor marked the first SSA trade in that maturity since a €4bn bond for Belgium in April 2010.

“Starting out with a 30-year sent out a strong statement,” said Daniel Koerhuis, senior borrowing manager at the EU. “Even so, some of our banks and peers doubted we could do it as it would have been the first 30-year syndication in the SSA sector since April 2010.”

“The success of this deal should improve market sentiment, and this will help other SSA issuers access the market over the coming weeks,” said Robert Whichello, global co-head of syndicate at BNP Paribas at the time. BNP Paribas acted as lead manager on the transaction along with Barclays, Deutsche Bank and Goldman Sachs.

Investors were obviously receptive to the approach, given that the order book had topped €4.5bn just over an hour after opening and reached €5.2bn by the time it was closed, with insurance companies and pension funds accounting for a significantly large chunk.

This easily accommodated a €3bn transaction, which was larger than many had expected.

“The issuer’s funding need for January was €3bn and with this deal it was covered in one single transaction,” said Torsten Elling, co-head of rates syndicate at Barclays. He added that the deal was a strong signal for Europe, especially as it priced 17.5bp through the 3.25% French OAT due April 2041.

Naturally, this had an effect on the level of French investor participation, something that has been repeated in subsequent issues, although the magnitude of the order books the EU has attracted without their sponsorship demonstrates that it is well able to survive in their absence.

On its next visit, for instance – a €3bn 20-year priced on February 27 through Citigroup, Deutsche Bank, DZ Bank, RBS and UBS – there was no French participation whatsoever. Even so, the order book topped that of the 30-year, breaking through €5.5bn.

“The EU continues to cement itself on the very top rung of the SSA world,” said a syndicate official involved in the transaction. “It has now established a liquid curve across 10s, 20s and 30s and this deal demonstrates that the depth of demand persists.”

Filling the gap

It was not long before it started filling in the gaps, mid-April saw it target the 26-year part of the curve.

The transaction came shortly after the EU announced its intention to raise €4.5bn in maturities between seven and 30 years by the end of May. This itself followed a statement from the previous September which said it was aiming to increase the average weighted maturity of all loans to Portugal, but not to exceed 12.5 years. That meant that the latest transaction was capped at €1.8bn.

The restricted size meant that lead managers Barclays, Deutsche Bank, DZ Bank and HSBC were able to close the book after less than one and a half hours, by which time it had already topped €2.6bn.

The slightly off-the-run maturity in no way discouraged investors, the decision to opt for that tenor being largely dictated by the fact that Portugal already has a redemption in 2037 and there is an outstanding EIB issue.

If the strength of demand for a transaction that was always capped at a relatively modest level proved that the real money investment community remained more than willing to continue to sponsor the EU’s issuance at the longer end – 94% of the bonds were allocated to insurance companies, asset managers, pension funds and central banks and official institutions – it was the 10-year deal that followed hot on its heels that caused more surprise. 

The week after the 26-year, the EU returned to cap off its stated €4.5bn pre-June fundraising with a €2.7bn transaction lead managed by Credit Agricole, DZ Bank, JP Morgan, Morgan Stanley and SG.

It attracted €7.8bn of demand in just 35 minutes, which was in itself noteworthy. However, it was the make-up of the book – which contained 150 accounts – that made for interesting reading.

Investors consider the EU to be one that they can buy, hold and love”

French return

The real money accounts that had dominated the longer transactions proved themselves willing to venture further down the curve, just 18% being placed with banks, far less than would normally be expected to be the case in a 10-year trade.

And the deal also welcomed French investors back into the fold, in spite of EU paper continuing to trade through OATs. They accounted for 13% of the paper, having been largely absent on all the previous transactions. One theory was that they were willing to accept the situation in the relatively shorter 10-year part of the curve in exchange for a reasonable spread over Bunds – the mid-swaps plus 56bp reoffer level equated to 119.3bp over the German government equivalent.

“Clearly, the EU name is very well-supported compared to other European issuers like the EFSF. That’s mainly because investors are more comfortable about the EU story. It only has €2bn left to fund this year and only €8bn overall for 2013 and 2014,” said an official on the trade.

“So, for the top-tier names, investors are clearly differentiating and in some cases have even become yield-insensitive. Investors consider the EU to be one that they can buy, hold and love.”

And for the EU’s Koerhuis, that is something that is not arrived at by accident. “We always want to be very transparent. We constantly update our investor presentation and our approach is simple, with no structured transactions and only syndications, no auctions. There is also certainty about the amounts,” he said.

It is notable that even in a fractious market, the EU has achieved its goal of lengthening its maturity profile. Over the course of 2011, the average maturity was just under 8.5 years; so far in 2012 it is more than 21.25 years. This is certainly no mean feat and a testament to its approach.

 

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