Updates throughout with quotes
The European Union's debut SURE trade made bond market history on Tuesday with demand for the two-part social benchmark passing €233bn, the biggest order book ever seen, giving the borrower the strong foundations it needs for the large-scale funding spree ahead.
The transaction, the most hotly anticipated deal of 2020, sets the stage for what will be the biggest force in the region's capital markets in the coming years.
And while not quite the jointly and severally liable Eurobonds that arch Europhiles have long dreamt of, it is as close to them as can be.
"This marks the beginning of a wave of supply that will hit the market and tees it up nicely for 2021, it's a very firm footing on which the EU can build," said Peter Goves, fixed income research analyst at MFS Investment Management.
"They needed demand to be strong given the supply that's coming. It underpins the market and gives it a degree of confidence. It's a substantial enhancement to the European fixed income landscape, not least because it provides investors with high quality bonds at a spread."
Leads Barclays, BNP Paribas, Deutsche Bank, Nomura and UniCredit started marketing just before 8am UK time at 6bp area over swaps for the 10-year leg and 17bp area for the 20-year.
After less than an hour books had topped €150bn, split between orders of €95bn-plus for the shorter tranche and over €55bn for the longer - a level of demand that exceeded even the voracious appetites often displayed for blockbuster sovereign syndications.
"When the process started in May, there was a bit of cynicism about what really could be achieved," a lead said.
"We're now in October and they're doing their first trade. That's incredible progress and I think we'll be even more impressed by the end of the year. This is a fantastic name. The quality of the credit and what it means, I think investors are reacting along those lines."
The European Commission, via the EU, is expected to raise at least €87.4bn of social bonds under its SURE programme by the end of 2021, and another possible €800bn between 2021 and the end of 2026 under its Next Generation EU programme.
To put the scale of the increase into perspective, the EU has raised just €500m year-to-date and only printed €400m in 2019. No other issuers in Europe have ever seen an increase of this magnitude in funding needs.
The emergence of the issuer is the most meaningful step yet for the region in acting as one as it looks to tackle the economic devastation caused by the Covid-19 pandemic.
SWIFT EXECUTION
With so much riding on the trade, leads were keen to give investors clarity on pricing as soon as possible, swiftly setting the spreads at plus 3bp and 14bp.
Those levels suggested respective new issue concessions of 1bp and 2bp, leads said, though some bankers away put them closer to 3bp.
"When you have a book in hand like this and investors have done a great job, what they want to see is clarity on what they're getting in terms of price and you need to move quickly," the lead said.
"I think everyone will appreciate that, issuer and investors. You see what the size of the programme is and what they need to do in record time, yet the premiums we needed to use were modest."
Final terms were fixed after less than two hours in all, the 10-year sized at €10bn and the 20-year at €7bn. Pre-rec books at the time stood at over €145bn and €88bn.
"HUGE MOMENT"
While the premium was modest in context of the EU's own curve - which had widened versus peers' since the upscaled programme was announced - there was a bigger margin compared to EIB, which has €5bn 2030s quoted at 8.5bp through swaps.
"It would be easy to have a crack at it and say it was too cheap, but I disagree," said a senior DCM banker away from the deal.
"This is a huge moment for the EU and future issuance. If it hadn't worked, then what? The proof of concept here was always going to be more important than the deal itself."
A head of syndicate agreed.
"It was the right trade, the right strategy," he said. "Could they have started a bit tighter? Maybe. But this was about making a statement, this was about saying that they had unlimited access to the market, which is what they achieved here."
It helps that the ECB is standing behind the market, ready to buy bonds under its various asset purchase programmes.
"Broadly, the ECB in 2020 has been the overriding driver of the market, it's completely overwhelmed fundamentals," said Goves.
"The signal that's coming from monetary policy and fiscal policy coordination is what's new and ramped up confidence in 2020. The ECB is a very credible backstop and this has been enhanced by fiscal coordination – and fiscal support is manifest in this EU supply today."
WHAT NEXT?
Having been so eagerly anticipated, bankers had always expected the first deal to do well.
"The first is arguably the easiest one: you know everyone is going to turn up, and they will end up with a large book," a banker away said.
"It sort of sells itself. It's more the second, third trade which are likely to be more challenging when some of the froth has gone and investors think: oh Christ, here they come again!"
Another syndicate banker echoed that view.
"Looking into the future, the big questions are: how quickly do they return, in what size, in what maturity, how quickly does the market get saturated, how quickly do lines get full?"