Like the consequences of the pandemic, competition for funding and bond market volatility is not dissipating any time soon. EIB’s franchise sees it well placed to navigate the growing queue of SSA bond issuers during Covid-19.
The onset of the coronavirus pandemic led to sovereign, supranational and agency borrowers rushing to the bond markets to finance the enormous sums required to mitigate the impact of Covid-19 on the world’s public health and economic well-being.
Alongside its peers, the European Investment Bank Group – including specialist provider of risk finance to small and medium-sized enterprises, the European Investment Fund – in cooperation with the European Commission and national partners, moved quickly to roll out measures in support of European companies, health expenditure and the wider EU economy.
The package consisted of immediate deployment of dedicated guarantee schemes to banks based on existing programmes, mobilising up to €8bn of financing; dedicated liquidity lines to banks ensuring additional working capital for SMEs of €10bn; and dedicated asset-backed securities purchasing programmes to promote transference of SME loan risk, mobilising another €10bn.
“Learning from our previous experiences of crises, we knew we had to act quickly and to provide targeted support,” said Eila Kreivi, head of capital markets at EIB.
“In the financial crisis, it was a case of providing liquidity to banks. In the sovereign crisis, it was about tackling the ability of banks to take on risk, trying to kick-start lending. But with Covid, it’s affecting everything. We focused on SMEs and fast-track lending into healthcare as well as other areas of the private sector. We used existing funds within the EIF to support small entrepreneurs.”
An enhanced response came over the summer with approval by member states of the €25bn European Guarantee Fund, which, in partnership with local lenders, intends to scale up support, primarily to SMEs, by mobilising up to €200bn from the private sector and other institutions. It complements support instruments available through other European Union bodies.
“The EGF is a facility, in the footsteps of EIB’s landmark initiative EFSI, and is particularly useful for viable companies having short-term problems with financing,” said Kreivi. “It provides a safety net.”
All projects financed are aligned with the bank’s core principles of addressing climate change and recognising the importance of biodiversity, social inclusion and sustainable development. Something that becomes ever more important as economies rebuild.
Guaranteed response
New loan commitments slowed during the first half of the year but disbursements have been very brisk. New lending is picking up in the second half and 2021 will be a relatively big year but, as an unfunded product, the EGF puts no great pressure on the bank’s funding plans.
“The overall liquidity impact of the EGF is quite small,” said Kreivi.
In any case, the bank was already well prepared to cope with any potential additional demands on finances heading into the year, having received approval to raise an additional €5bn in 2020 on top of the €65bn initially approved funding authorisation. And it was also well prepared in its journey towards reaching that target as the first wave of Covid-19 hit.
By mid-February, it had completed over 40% of its funding plan and, even with Covid-related borrowing within its SSA peer group ballooning, the bank had all but hit its entire target by mid-September. By the time of writing, the year’s total is close to €70bn.
Guaranteed approach
Financing the increase is little problem for the issuer, given EIB’s reputation in the bond market and its popularity with investors.
“EIB is a benchmark borrower for capital markets,” said Philip Brown, managing director, global sustainable debt capital markets at Citigroup. “Europe has faced and overcome a series of crises over the years, but investors have learned to be confident that EIB can be relied upon to preserve capital and its credit rating.”
Its popularity is reflected in the demand for its new issues. Benchmark bonds in euros and US dollars in 2020 have attracted well-oversubscribed books.
“[EIB] has an amazing investor franchise,” said Brown. “Investors know that each deal will be well prepared. There is a confidence in EIB’s secondary curve which gives confidence in new issue pricing. Consistently well-oversubscribed order books leave investors wanting more, which in turn always results in an impressive performance on the break.”
EIB often takes the role of ‘first mover’ and can be relied upon to be quick off the mark in reopening markets after a natural break or period of volatility. Many issuers therefore find it a good strategy to follow the EIB.
And it played the first-mover role in March, launching the first benchmark SSA issue following the Covid-related bond market volatility: a €3bn three-year deal on March 24.
“There is no doubt it was a challenging time for new issues,” said Brown, “but it still uncovered €4bn in orders and it served to reopen the market.”
EIB also set a marker for pricing in August amid increasingly excited talk of the looming borrowing programme from the European Commission and its possible impact on secondary market spreads. The €3bn 10-year attracted books of €10.5bn.
“There was a concession paid but it was useful in establishing the market clearing level for Triple A new issuance,” said Brown.
“Asset swap levels cheapened in advance of the EU’s bond issue,” acknowledged Kreivi, “but prices recovered. And, although it looks like 2021 will be a very busy year for SSA issuance, the presence of another significant borrower won’t make life impossible and it won’t have a major impact on our borrowing approach.”
EIB’s reputation for preserving capital, meticulous preparation of its benchmarks, its use of a variety of funding options in different currencies and, increasingly this year, its use of Climate Awareness Bonds and Sustainability Awareness Bonds, mean investors and borrowers alike can be confident that EIB issues will be well executed, well supported and will set the standard for SSA deals in 2021.
“We’re pretty predictable with our benchmark visits to the market and we’ll use our multi-currency programme to get the best possible cost to our funding,” said Kreivi.
“There may be increasing competition for the issuance calendar next year, but we’ll focus on keeping nimble when it comes to accessing the market.”
This article was produced in association with EIB
