Propping up Europe

IFR Top 250 Borrowers Report 2011
4 min read

The European Financial Stability Facility entered the Top 250 list in its first year as a formidable presence in the global debt market, supplementing the already considerable borrowing of the European Union to assist in the financing of Europe’s distressed sovereigns. Their prominence is likely to last for many years to come. Michael Winfield reports.

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Following the Irish bailout in late 2010, many thought the increasing presence of the European Union, on behalf of the European Financial Stabilisation Mechanism and the European Financial Stability Facility, might be relatively short lived. But with Portugal joining the list of sovereign borrowers requiring assistance, the EU and the EFSF combined would make the top 35 issuers by volume and is set to rise fast.

The final terms of the Irish bail-outamounted to €85bn, with €17.5bn being provided by the newly formed European Financial Stability Facility. The European Financial Stabilisation Mechanism’s contribution was set at €22.5bn, to be raised by bond issues from the European Union itself over a three year time frame.

The International Monetary Fund assumed responsibility for a third of the Irish rescue so the EU and EFSF financings were relatively small. In addition, the borrowing previously undertaken by the sovereign was replaced with debt of issuers with a much higher credit rating: both European agencies were rated Triple A.

The EFSF sold its inaugural transaction after the first benchmark deal for the European Union had appeared early in January. Contrary to some expectations, both issues tightened significantly as investors scrambled to add the new high quality assets to their portfolios.

The EU had previously used its Balance of Payments Facility as an issuer on behalf of Hungary, Latvia and Romania, and coordinated its new requirements as an existing issuer with those of the EFSF. It already had a secondary curve off which new debt could be priced, albeit of somewhat smaller issues which were less liquid. In September 2010 the EU had sold a €1.15bn September 2017 bond, the proceeds of which were to cover a loan disbursement to Romania.

The first of the larger deals for the EU was a trickier proposition: although the issuer was rated at the same level as some of the SSA market’s most frequent issuers, it hadn’t previously needed to compete for funds on the same scale. The resulting €5bn five year issue was sold at mid-swaps plus 12bp, a level from which it tightened by as much as 20bp in the weeks that followed, after attracting an order book of over €20bn.

Later in the month it was the EFSF’s turn. It came with a €5bn long five-year issue. It was another deal that had to work. A failure, or even a lukewarm response, would have been a disaster. Ultimately the final book approached €45bn, again sending a powerful message to the market and helping to reaffirm faith in the eurozone’s ability to resolve its problems.

The EU’s second issue was a €4.6bn seven year issue sold in March 2011, with €1.2bn of the proceeds being used for Romania but the majority going to Ireland. The deal was priced at mid-swaps plus 8bp, a level it has continued to trade at since being priced.

While Greece, as the first to bow to market pressure, had organised its rescue through loans from the European Union and the IMF, Ireland was the first to tap the joint resources of the EFSF and the EFSM. Portugal joined these ranks in the spring of 2011 with the final details of its €78bn rescue finalised by mid-April.

Earlier in the year Portugal had still been trying to prove it was in no need of external help before being forced to recognise that – like Ireland and Greece before it – the game was up. The progressive widening of the €3.5bn February 2016 issue it sold at mid-swaps plus 360bp was signalling that any further financing would be at a prohibitive cost – if it could be achieved at all.

Facing significant coupon payments as well as a maturing bond issue in June, Portugal had no choice other than to ask for assistance. Accordingly, the EU and the EFSF were left with the need to complete at least two more benchmark transactions each before the summer.