Demand for the the first ever European Union bonds issued last month far exceeded expectations as investors sought to diversify country risk and tap into the safe haven credit rating.
The €17bn (£15.3bn) issuance, split between a €10bn 10-year and a €7bn 20-year tranche, is the largest social bond ever and with an order book exceeding €233bn, it attracted more demand than any other bond in history, according to independent market data provider Refinitiv.
The transaction marks the EU’s debut issue from its €100bn Support to mitigate Unemployment Risks in an Emergency (Sure) programme, which will provide loans to help member states reduce unemployment during the Covid pandemic.
Around €30bn of the approximately €100bn Sure scheme is expected to be funded this year, with the remainder due next year.
The EU has said it will increase its debt issuance further in 2021 as it starts to finance its larger programme, an €800bn recovery fund agreed in July.
The programme is set to make the EU one of the region’s biggest debt issuers.
‘Entering the major league in global debt capital markets’
While there has been bond issuance at regional level in Europe, these social bonds represent the first big EU-wide issuance, and of such high quality – with AAA ratings by several credit rating agencies.
David Zahn, head of European fixed income at Franklin Templeton, thinks many investors, both inside and outside of Europe, will buy these bonds to diversify individual country risk and will consider them as “safe havens” given the high credit rating.
He says: “All in all, we think the EU is on the right track in providing relief efforts to stabilise the economy in the wake of the pandemic.”
Hans van Zwol, senior portfolio manager, LDI and rates, at NNIP, agrees that as a supranational, the credit quality of the EU is very strong. And at the same time, there has for many years been a general shortage of high-quality liquid assets.
“This combination of credit quality and expected demand gives comfort in terms of market interest,” he says.
European Commissioner for Budget and Administration Johannes Hahn called the issuance the “first step toward entering the major league in global debt capital markets”.
Shape of things to come
One inevitable question is; will the new EU debt become the benchmark bond for Europe?
“Maybe,” is Zahn’s initial response; but he adds: “Most benchmark issuers issue bonds on a regular basis, whereas the EU issues bonds in response to programmes.
“The EU is only planning on issuing large amounts of debt over the next four to five years; but, if successful, this approach could be considered longer term. After all this issuance, the EU will become the fifth-largest bond market in Europe behind Germany, France, Italy and Spain.”
As he goes on to point out, this one deal doesn’t change the global credit landscape too dramatically for investors but does represent an extremely high-quality issuer in a world with few high-quality assets.
“It should take some pressure off European countries in that they will get economic relief and not need to issue more debt themselves, which is positive. The pandemic has hit Spain and Italy particularly hard, so these and other countries that need support should benefit.”
European unity
Van Zwol, is equally positive. “Together with the EU recovery fund, the Sure programme is of great importance as a signal of European unity in face of the current Corona crisis. Moreover, in the longer term, these EU programmes will provide the weaker eurozone countries some relief in terms of future market funding, which can bring net issuance of the individual countries down.”
He adds: “Both the positive sentiment signal and the funding support has already resulted in significant tightening of risk premia and funding costs especially for the weaker eurozone countries.”
Dutch-based asset manager APG has so far invested €170m in social bonds to help European Union (EU) member states protect employment and avoid layoffs in sectors shaken by the Covid-19 pandemic.
Oscar Jansen, credit specialist at APG Asset Management, insists the abundant issue of green and social bonds by the EU will provide a significant boost to the further development of the ESG market.
“We encourage the efforts made by the EU and want to further stimulate sustainable investing.”
Trisha Taneja, head of environmental, social and governance (ESG) advisory at Deutsche Bank echoes these sentiments.
“Three or four years ago there were barely any Sovereign Supra Agency (SSA) ESG issuers. The fact the EU has achieved such a successful outcome is a sign of how far this market has come in such a short time.”
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