Supranational/Sovereign/Agency Bond
No supranational or agency had ever dared to tackle the 15-year tenor prior to the European Investment Bank in 2004. The EIB’s innovative approach and responsiveness to structural changes in the shape of demand from the European pension funds industry have won it IFR’s Supranational/Sovereign/Agency Bond of the Year.
Prior to the EIB’s April 2020 transaction, anything beyond the 10-year tenor had been the exclusive playground of sovereign borrowers. No supranationals or agencies had ever tried their hands at a 15-year for a number of reasons.
This was mainly for the fact that these would have had to print above Libor in order to see a deal succeed – something that only a very few would have been prepared to accept – but also the fear of a lack of demand. Even 10-year paper had often proved to be difficult to get away, so a 15-year looked even more daunting.
“By doing this issue, we wanted to reinforce the message that we are a consolidated sovereign issuer. As a long-term financing institution, the deal made a lot of sense in terms of asset/liability management. We were keen to price where investors saw value,” said Barbara Bargagli-Petrucci, head of the capital market department at the EIB.
In order to enter sovereign territory, the EIB was prepared to show pricing flexibility. The €4bn transaction – via ABN AMRO, Citigroup and Deutsche Bank – was marketed at 1bp to 3bp over mid-swaps and priced in the middle of this guidance. This was equivalent to 0.5bp over Libor on an asset-swapped basis, or 13.2bp over the OAT.
Pricing was indeed a key element. EIB’s 2013 paper was trading around less 2.5bp–2bp at the time of pricing, making the EIB curve between 10 and 15 years worth around 4bp. Italy’s curve was worth around 3.5bp at the time, while France’s was flat.
“The funding team should be applauded just for getting the deal approved internally. This was no mean feat for the borrower to come in such a tough part of the curve while breaking the optical barrier of a Libor flat level,” said Mauricio Noe, former head of public sector origination at ABN AMRO.
One market participant away from the transaction had said at the time that by adopting this strategy, and giving itself a reasonable guidance, the EIB had given itself the means to do a strategic, successful issue.
“No other supra has been able to do a deal of this size and place itself ahead of future flows. This puts the EIB in a class of its own. This was not a slam dunk by far!” said Philip Brown, head of frequent issuers origination at Citigroup.
“The deal is an endorsement of EIB’s strategic approach to offering sovereign class liquidity, given that the tenor and size was previously the preserve of a select group of EU sovereigns. Investors trusted us in testing a new maturity, and we felt we could do the deal at a cost more or less equivalent to a 10-year,” said Bargagli-Petrucci.
While the deal was inspiring by its innovative quality and the fact that it put the EIB on a closer par with its sovereign owners, its responsiveness to market demand was also crucial.
“EIB responded to evidence of structurally-driven growth in demand in this maturity area, with drivers including pension fund reform and accounting changes – in a context of limited benchmark outstandings and moderate growth in sovereign supply in this maturity bracket,” said Charles Berman, head of frequent issuers syndicate at Citigroup.
Indeed, the final placement figures showed that the bonds were sold to the target audience. Insurance and pension funds took 37% of the issue, fund managers 17%, banks 22%, hedge funds 15%, central banks 8% and retail 1%. European investors accounted for the bulk of placement, but the US and Asia were also present.
“The real money accounts came in first, the leverage accounts came after. The hit ratio with the accounts the EIB had visited on the roadshow was very high, around 80%,” said Paul White, head of European syndicate at ABN AMRO.
Demand exceeded both the borrower’s and the leads’ expectations, and what had originally been thought of as a €3bn issue quickly grew to €4bn on the back of a €7bn order book. The borrower’s approach to investors had been one of introducing them to the new concept of “think long, think EIB.”
“Insurance and pension fund companies really drove the issue and gave the deal great momentum,” said Bargagli-Petrucci.