SSAR Issuer: European Stability Mechanism

IFR Review of the Year 2015

5 min read

Steady hand

The European Stability Mechanism was given the immense task of raising billions of euros in extremely volatile markets. For not only succeeding, but also turning the challenge into an opportunity, the ESM is IFR’s Sovereigns, Supranationals, Agencies and Regions Issuer of the Year.

The summer changed everything for the European Stability Mechanism. Until then, Europe’s crisis resolution fund had been on course for a steady – if unspectacular – year, well on its way to completing its funding programme with little to write home about along the way.

But the flaring up of the Greek crisis and a subsequent €86bn third bailout for Athens agreed with the Syriza-led government in August changed all that. The deal saddled the still-young ESM with new, large funding needs.

Siegfried Ruhl, head of funding at the ESM, told IFR ahead of the bailout agreement that it was the fund’s duty to always be prepared “like fire-fighters”. Still, the challenge was a mammoth one: overnight, the body’s funding target shot up from €5bn for the last four months of 2015 to €18bn.

Despite ongoing market volatility, the ESM took the increased target in its stride – and even decided to use it as an opportunity to fill out its curve. Until then, many investors had complained about a scarcity of paper and limited curve, and it seemed like a good time to rectify that issue.

Over a three-month period between September and November, the ESM acted, filling out its curve through the issuance of new benchmark three-year, five-year, 10-year, 21-year and 30-year bonds, raising a whopping €17.5bn in the process.

“As soon as we knew what would be the magnitude of the new programme for Greece, we updated our strategy,” said Christophe Frankel, chief financial officer and deputy managing director of the ESM.

“The market wants liquidity. It wants to be able to give a fair price to each bond which is traded. So by providing large benchmarks from one to 30 years, I think we precisely provide the market with what it wants,” he said.

Of all the deals priced during 2015, the three-year stood out for printing a €6bn size on storming demand of over €7bn, and the 30-year was also noticeable for its comfortable oversubscription despite the tenor.

The 21-year was the only minor black mark: it was the last of the deals and raised just €1.5bn when the issuer needed €2bn to complete its programme. However, the ESM redeemed itself by using the meagre remainder to establish a 40-year line in what was a clever deal, which was done just outside the award period.

Opinion is divided on whether the ESM’s strategy of publishing an issuance calendar every year is a help or a hindrance. Two senior bankers who both advocated the agency for this award were torn over precisely that issue.

The rigid adherence to the issuance calendar has had its critics in the past – IFR among them. During 2015, however, it could be argued that the unusually high level of transparency helped when the market was fretting about how it would deal with its massively increased funding needs.

To an extent, the issuer rode its luck: its bonds had widened in anticipation of the increased issuance, which in turn made it attractive relative to other European supranationals.

Also, from September onwards, the euro primary market took a sharp turn for the better – at least for investors – with spreads in general widening to more palatable levels.

Reflecting on a successful five-year deal in late October, Ruhl said: “The secondary market has shown a little bit of widening of ESM; this may reflect fears of over-supply. Now we have completed €16bn out of the €18bn and have done it in a smooth way. We expect some normalisation of the curve going forward.”

And if it did err on the side of caution, that is understandable: the stakes are high for the ESM. As the eurozone’s crisis mechanism fund, it has a duty to the European taxpayer to fund at an optimal rate while causing minimal disruption to the market.

It is the vehicle by which the future of the eurozone will be preserved. For dealing with these heavy responsibilities with aplomb, the ESM is IFR’s SSAR Issuer of the Year.

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