Taking it to the next level:
In 2021 the European Union completed its metamorphosis from second-tier issuer to sit side by side with the largest and most established borrowers in the SSAR space. Its funding operations increased substantially in volume and scope, with multiple size and demand records smashed along the way. For the second year running, the EU is IFR’s SSAR Issuer of the Year.
Since the onset of the Covid-19 pandemic the European Union has transformed into a behemoth of the euro SSA market, raising huge amounts of capital, first to provide funds to soften the blow of the immediate fallout and then to finance the recovery.
The initial response in 2020 involved raising €39.5bn for its “Support to mitigate Unemployment Risks in an Emergency”, or SURE, programme, including a record-breaking dual-tranche debut. That offering included a €10bn 10-year bond, which attracted the biggest order book for any public bond offering in history – more than €145bn.
It was a tall order to top all of that in 2021 but the EU, whose borrowing is arranged by the European Commission, managed it. It notched up multiple milestones over the course of the year, which made the further €50.5bn of SURE funds raised appear little more than an appetiser ahead of the main course.
The EU broke size records with its NextGenerationEU programme debut, ESG size and demand records with its green debut and in conducting its first auctions left little doubt it has achieved quasi-sovereign status.
A €20bn 10-year note that kick-started funding for the NGEU programme made capital markets history in June by becoming the largest ever plain-vanilla single-tranche euro deal – IFR’s SSAR Bond and Euro Bond of the Year.
For EU officials, it was their defining transaction of the year, even more than the green bond issued later.
“The adrenaline levels were a little bit higher for the NGEU debut than for the green debut as it was the first deal for the programme,” said Gert Jan Koopman, the European Commission's director-general for budget.
Not only was the size significant, the overall outcome set the tone for what will be the biggest funding programme ever seen in Europe, with as much as €800bn to be raised by 2026 to finance the EU's response to the pandemic.
“It put us in a different league. SURE was an important and big programme but NGEU is eight times bigger,” said Koopman. "The debut was vastly oversubscribed and very strong. Being able to raise such an important amount of money right at the start made a big difference and was also a clear vote of confidence from the market."
Limit up
The size of the debut July 2031 bond hit the issuance limit for a single tranche under its NGEU programme, while an order book of more than €142bn came within a whisker of beating the issuer’s own demand record of €145bn, set by the debut 10-year for SURE.
“A lot was riding on the first NGEU bond issuance, so we wanted to ensure it was a success,” said Koopman. “When we were discussing it in terms of market appetite, we thought maybe we would get something in the low teens with regards to volume. So when we saw the book we were frankly blown away by the interest.”
The deal was also a big step in helping the EU in its transition from a supranational in the market’s eyes to a government-equivalent reference point. It hasn’t completed the journey yet but it’s arguably only a matter of time before it does.
The deal was also highly sought after in the banking community. “The most salient transaction of 2021 was the first NGEU transaction from the EU,” said Jamie Stirling, global head of SSA debt capital markets at BNP Paribas, which led the transaction with DZ Bank, HSBC, IMI-Intesa Sanpaolo and Morgan Stanley.
Fund managers (37%) dominated allocations, followed by bank treasuries (25%), and central banks and official institutions (23%). Insurance and pension funds (12%), banks (2%), and hedge funds (1%) took the rest of the paper.
“It is only when you are in the deal that you see whether the systems you have designed for the programme will stand up to the test. They did. That was a powerful moment,” said Niall Bohan, director for asset, debt and financial risk management in the European Commission’s budget department.
“We were able to pay out the funds very quickly. Five days after the relevant administrative procedures had been finalised, member states received the funding in their bank accounts. Being able to deliver that result was very gratifying.”
The EU followed up with four more NGEU transactions, two of which were dual-tranche offerings, thus raising €66bn via syndications for the programme by the end of 2021. Another €5bn for NGEU was raised through two auctions.
Jolly green giant
The milestones didn’t end with the debut NGEU deal. In October, the EU printed the largest green bond yet, priced after attracting an order book unprecedented in the asset class’s history. The €12bn 15-year deal is IFR’s Sustainable Bond of the Year.
It’s a key strand of the NGEU’s pandemic recovery initiative and the start of a journey that will see the EU bring 30% – roughly €250bn – of its planned NGEU issuance in green format. This €250bn undertaking underscores the initiative’s focus on creating a greener, more digital and more resilient union, EU politicians argue.
“Member states’ decision to issue a common debt to finance the recovery is a historic moment,” said Koopman. “It implies greater unity. The markets, especially internationally, see this as a sign of solidarity between the 27 EU countries.”
The NGEU programme's scale dwarfs all previous green bond activity. Key credits France and KfW have each issued between €40bn–€50bn of green bonds since entering the market in 2017 and 2014, respectively. The EU should reach this level by the end of 2022 – perhaps even within the programme’s first 12 months as it expands distribution by adding auctions.
Against this highly strategic background, the issuer and lead managers Bank of America, Credit Agricole, Deutsche Bank, Nomura and TD Securities met their goal of inaugurating the programme with a visibly successful transaction.
With a no-grow size set during marketing and only limited allocation preference granted to dedicated ESG accounts to maximise participation, a raft of real-money investors submitted a record-breaking €135bn of orders. That almost equalled the combined books for Italy and Spain’s debuts earlier in the year – and was only €10bn short of the first 10-year SURE issue’s all-time high.
Demand also surpassed the £100bn record set the previous month by the UK’s first green gilt, whose 2.5bp greenium it equalled.
The deal’s success came despite having to navigate significant uncertainty over two crucial EU ESG measures. With neither the taxonomy of sustainable activities nor its Green Bond Standard finalised at launch (the former may not become law until 2023), the Commission had to take a view on their likely eventual form.
Accordingly, it excluded natural gas and nuclear power as eligible use of proceeds for the money raised.
It also committed to not change the framework after launch. While that means its programme may not be fully aligned with its own market standards, it reassured investors.
“Buyers needed clarifications about the differences and similarities between the NGEU green bond framework, the taxonomy, and the proposed EU Green Bond Standard,” said Koopman. “Our teams invested a lot of time and energy to explain the principles of the NGEU green bond framework, clarify any outstanding points and thus reassure investors.”
Koopman was always confident the green debut would be a success. “We knew we would pull off the green debut deal and ahead of it we had received very, very good feedback,” he said.
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