The European Financial Stability Facility (EFSF), which will help fund part of Ireland’s €85 billion bailout, issued €5 billion of five-year bonds in its inaugural benchmark issue Tuesday, attracting an order book of €44.5 billion. That’s a record for any sovereign bond in Europe, and €24.5 billion more than the European Financial Stability Mechanism (EFSM), a separate European Union funding vehicle, garnered with its €5 billion issue in the first week of January.
The transaction priced at 6 basis points over the mid-swaps benchmark rate, after earlier indications in the day of 8bp to 10bp over mid swaps. As an indication of the pent up demand for these bonds, the EFSM’s bonds, which were sold at 12bp over mid swaps, were recently trading at 1bp over mid swaps.
“The capacity for the EFSF to raise money in the capital markets is huge,” says Frederic Gabizon, head of sovereign debt capital markets at HSBC and sole lead manager on the EFSF and the EFSM transactions. “The mechanism is well understood and well recognized, because you don’t take in more than €60 billion of orders in these two separate deals if you don’t believe in the credit.”
The issue was most notable for the make up of investors; the government of Japan bought 20% of the transaction – Asian investors being the largest investor constituent – followed by the UK, and then Germany, HSBC said. Central banks bought 42% of the paper, while fund managers took 31%.
While the level of demand indicates that the EU and EFSF will have no problem funding their €34 billion financing target this year, the wider implications of this are less clear for Europe’s peripheral sovereigns, says one head of sovereign debt syndication at a London-based bank. “It is a clear strong signal around the process of EU support; that’s a good thing, but I don’t think it signals wider investor buying for the countries that need it. I don't see that real money will buy Portugal just because EFSF did so well – the opposite might happen.”
The EFSF has some unique characteristics. Its AAA-ratings are derived from the its ability and willingness to honour claims on a timely basis; each bond will have an over-guarantee of 120%, an upfront cash reserve equal to the net present value of the margin of the EFSF loan and service fee, and a cash buffer, ensuring full AAA cover of liabilities.