Tackling the challenges posed by a post-Libor world is no mean feat, but the European Investment Bank took a bold step in 2018 when it priced the first ever bond linked to the newly reformed sterling overnight index average (Sonia).
The £1bn five-year FRN set the blueprint for further issuance in the market, which went on to grow to £6.3bn in just over four months, spurring not just other public-sector issuers such as the World Bank and the Asian Development Bank but also financial sector borrowers.
A previous attempt in 2010 to open the market did not go far, as only a few investors could settle Sonia-linked bonds.
However, this time around, the stakes were higher. Libor, used to price US$350trn of financial contracts, will be phased out completely by the end of 2021, after being undermined by a rigging scandal.
There is therefore very little time left for the market to make the transition to the new reference rate, which is set to become the new benchmark not only for bonds, but also loans and derivatives markets.
Unlike Libor, which is determined by bank quotes, Sonia is based on actual transactions and therefore harder to manipulate.
The supranational left little to chance and started work on the project in April 2017. The Bank of England is Sonia’s administrator and has offered its support for all initiatives to step away from Libor, including the EIB’s bond.
Before going live with the deal, the issuer had to amend the documentation multiple times and adjust the index calculations.
It also engaged with the Bank of England, the Financial Conduct Authority, working groups and investors on the topic.
Finally, NatWest Markets and TD Securities (structuring advisors) together with the other joint leads, HSBC and RBC, conducted a dummy £2m new issue run to make sure everything worked.*
This was followed by a week-long marketing period, starting with the deal announcement on Monday and culminating with pricing on Friday, giving the market enough time to put the final touches to the preparations.
The supranational printed the £1bn June 2023 at 35bp over Sonia, in line with initial pricing thoughts, and offering a 3bp premium over EIB’s Libor curve.
EIB’s effort paid off handsomely: final books for the trade were in excess of £1.55bn, with 51 investors onboard. Since then, more and more buyers have joined the fray, increasing the investor base to more than 120.
The increased familiarity with the product also means marketing time has gone down, reducing execution risk considerably and putting the market in good stead for 2019.
*Clarifies banks’ roles