The €32bn-plus final orders for the European Union's €5bn February 2048 green bond on Tuesday was a welcome sign to bankers that some stability may finally be returning to the euro SSA market following several days of rates market volatility.
Bond and credit markets have been subjected to a massive price upheaval as primary and secondary levels dislocated on fears of spiralling inflation. But the response to the EU's deal has provided some relief, with orders dropping by just €2bn through the execution process.
“The market was looking to this trade with some anticipation in terms of getting a sense of direction after a challenging couple of weeks,” said a syndicate banker away from the deal, after the initial update of a €34bn book.
“I think it’s exactly what everyone wanted to see,” he said, referring to the initial book size, which came as the leads set the spread on the no-grow deal at 28bp over mid-swaps, having begun marketing at plus 30bp area guidance. Bank of America, Deutsche Bank, DZ Bank, Societe Generale and TD Securities were lead managers.
The banker placed the new issue's concession at guidance at 5bp–6bp, a level that some market participants expected ahead of the deal to help generate momentum. “It feels like they pitched it at the right sort of level,” he said.
Fair value was at mid-swaps plus 24.5bp with a 1.5bp greenium, according to a source at the European Commission, confirming a 5.5bp NIP at guidance that tightened to 3.5bp by landing.
A second banker pointed to the lack of green paper this year to partly explain the deal’s success.
The €5bn size was as expected, though the tenor is longer than what some bankers thought it might come out with. Rumours prior to the mandate suggested the EU was planning a tap of its 1.25% €6bn April 2043 green bond.
The maturity is clearly not designed to ease the transaction through the market: the swap curve has been inverted beyond the 15-year mark for weeks but it does help plug a gap in the issuer’s curve, a lead manager said. The Commission source said the EU was looking to extend its green curve and launch its first 25-year NGEU bond.
To explain the €2bn drop in the books before pricing, the source pointed to declining grey-market prices: falling from reoffer plus 25 cents to plus five cents.
The fall "...could be indicative of a lowered expectation of NIP and after-market performance of the bond. Some accounts pulled their bids out of the book at this stage, resulting in a drop of the total book. However, a high quality order book remained, with most real money accounts leaving bids unchanged, resulting in a strong final allocation and a bid-to-cover ratio of slightly over six-times."
A reopened market?
With the EU’s outing, hopes will be that more euro SSA deals will follow. There’s already a visible pipeline that includes Swedish Export Credit and Bpifrance.
Bankers broadly had been expecting the EU’s deal to be a success. But how other SSAs perform in the euro market will show how much of an impact the deal really had on wider investor and issuer confidence.
A third banker said he would tell his clients to pause before jumping in. “I would let the market digest this one first before really going out with a transaction in a [possibly] shaky environment.” He said that “there are just way too many surprises”.
The green bond may be just too exceptional to mean much for the average SSA deal.
The outing is “definitely not” enough to fully reopen the euro SSA market, said a fourth source, a DCM banker away from the deal. “A green EU bond is about the safest thing you can do. As we saw with the EFSF last week, there’s still a lot of nerves out there. I think we’re a long way from having this indicate a healthy market for euros.
“You’ll still need to be brave to move ahead at the moment.”
What’s to come
The new deal comes ahead of the EU's much-anticipated H2 funding plans. The goals for NGEU funding are due in the coming days, said European commissioner for budget and administration Johannes Hahn, speaking at the Euromoney Global Borrowers and Bond Investors Forum in London, along with a "comprehensive overview of the total funding needs for the EU”.
"We're committed to hav[ing] regular and transparent communication to the market,” he said.
Ukraine will likely remain the centre of the commission's attention, Hahn said. It is planning €9bn of loans for the country, and the European Council is due to decide on this by the end of the week.
(additional reporting by Helene Durand)
Updated story: Adds additional information from a European Commission source