When you have six benchmark deals to do before the end of the year, developing your investor base is understandably high on the agenda.
It is therefore no surprise that Christophe Frankel, chief financial officer of the European Financial Stability Facility (EFSF), is eyeing the potential across the Atlantic with intense interest.
“We want to sell bonds to the US domestic market,” he tells Euromoney. “We know there is demand there – even in euro.”
Investor appetite is something that the EFSF will need as it expands its original mandate to encompass financial support for Portugal as well as Ireland. Details of the terms and conditions of this extra support were revealed in late May: Portugal will receive €78 million, €52 million of which will come from the European Financial Stabilisation Mechanism (EFSM) and EFSF (€26 million apiece) and the rest from the IMF.
In addition to the €5 billion already raised this year, the EFSF will issue two benchmark bonds in the second quarter and a further four deals before the end of the year. Borrowing operations by the EFSF and EFSM between May 23 and July 15 will cover the first disbursements to Portugal and Ireland for a total of €15.3 billion.
Judging by the reaction to the five- and 10-year trades launched by the EU in late May, there is no shortage of appetite for this type of risk. The EU deals raised €9.5 billion but attracted orders of €23 billion, despite pricing at its tightest-ever level of 14bp over mid-swaps for the 10-year trades and mid-swaps flat for the five-year, respectively.
The EFSF plans to issue €8 billion in June and should expect a similarly enthusiastic response. “Ireland and Portugal have been provided with programmes of loans with average maturities of 7.5 years,” Frankel explains. “The main range of maturities we will issue will therefore be between five and 10 years, but we are able to go from five years to 12 years.”
While the EFSF trades will probably pay a slight premium over the EU, Frankel is confident that investors are now very familiar with the issuer. “The EFSF structure is now very well understood,” he says. “Investors understand that the EFSF’s quality is based only on triple-A countries and any questions they have about Ireland and Portugal have no impact on their approach regarding the quality of the bonds.”
| "We want to sell bonds to the US domestic market. We know there is demand there – even in euro" |
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When the bail-out fund was launched, some commentators compared it unfavourably with a collateralised debt obligation due to its pooling of guarantees from euro-area countries. This suggestion was angrily rebuffed by EFSF chief executive Klaus Regling, who claimed that the comparison was invalid as the EFSF is not tranched and all investors have exactly the same rights. Frankel confirms that this is unlikely to change. “We don’t need to increase our capacity to place bonds and I don’t therefore see any need for tranching. We will only issue one type of bond and all bonds will be triple-A,” he says.
The EFSF may not be looking to develop a subordinated investor base, but Frankel is very focused on development of the buyer base for its triple-A rated paper. “We have made efforts to expand the investor base,” he explains. "There are still a few central banks and funds that are not able to buy bonds because of internal processes.”
But his main priority seems to be tapping into appetite in the US. “We need to address qualified purchasers and then expand to the whole qualified investor base. It is important for the market to know that we can add QIBs [qualified institutional buyers]. The next issue might be too soon for this but maybe [we can do so] after the summer,” he says.
Despite his ambitions to tap new pools of money, Frankel is keen to emphasise that the EFSF can easily meet its funding obligations through its current programme. “If we enlarge the investor base, we can diversify the instruments we issue. For example, issuing FRNs [floating-rate notes] would target a different investor base and we could do private placements as well. But for the time being we want to concentrate on fixed-rate European issuance,” he says.
He adds that while issuing outside the euro is available for EFSF, it is not needed at the moment, although it could help increase the investor base in the long term. “There are not only new investors but also new portfolios,” he says. “Many central banks have portfolios in dollars and euro. We would increase the target size.”
One thing that Frankel does not expect to increase, however, is the scope and remit of EFSF operations. The fund itself is due to be superseded by the EFSM in 2013. Suggestions have been made that it should expand into other roles – such as buying government bonds directly – but Frankel confirms that buying in secondary has been discussed and rejected.
“We are large enough to fund the two countries we have and also large enough to expand elsewhere if needed,” he says. “But we don’t expect to have to get involved in further jurisdictions. Spain was supposed to be our first client but now it is decoupling.”
Buiter: ECB must now buy Italian and Spanish paper to avert catastrophic sovereign default
July 13 2011
