The European Financial Stability Facility is returning to the tried-and-tested method of announcing a transaction the day before execution, in a bid to navigate a difficult market backdrop that saw rates markets sell-off aggressively on Monday.
In earlier years, the EFSF would announce a deal on Monday afternoon for execution the following day, thereby giving the market enough time to prepare. However, buoyant market conditions helped by ECB support had made that tactic unnecessary in recent times and instead the supranational would be done and dusted by early Monday afternoon.
But the picture is changing dramatically, even for the safest of asset classes that is public sector debt. The ECB confirmation last week that it was ending its Asset Purchase Programme and would be raising rates in July, as well as a higher-than-expected inflation reading in the US last Friday, threw capital markets off course at the end of last week, with the sour mood continuing into Monday. Germany's 10-year yield hit 1.535%, its highest since 2014, while the two-year passed 1%, its highest since 2011, Reuters reported.
"It's been a tough morning," a senior syndicate banker said. "We didn't see the EFSF trade. They have a track record of doing nice intraday Monday trades, the RFP helps that process. I'm sure they would have looked at the market, but it was not the open that people had been looking for, so it looks like they reverted to the more traditional approach."
The freshly upgraded issuer has mandated Citigroup, HSBC and Societe Generale for a 10-year transaction. It now carries a Triple A rating from Moody's. It is still Double A with S&P and Fitch.
On Friday, Moody's upgraded it to Triple A, citing the increased robustness of European crisis-fighting architecture – which includes the EU and the ECB – which, in its view, reduces the risk of a systemic crisis with a high default correlation among EU member countries.
"The dependence of the ESM's rating on a single shareholder's rating – namely France – has declined in Moody's view," the agency said.
The borrower has picked a 10-year, which had been widely expected by market participants, given there was a gap in the issuer's curve. It is also seen as one of the safer tenors given that the long end of the euro market has not been easy, even for best-in-class issuers such as Germany.
EFSF has raised €8.5bn year-to-date out of a €19.5bn funding target for the year.
"A lifetime away"
While the EFSF will be closely watched to gauge the market's temperature, a much bigger event is in preparation, with bankers putting the final touches to their European Union RFP responses on Monday, the task made all the more difficult as a result of market volatility.
The issuer sent out the request on Friday with a view of taking advantage of its next issuance window earmarked for the week of June 20. Including auctions and syndications, the borrower has raised around €42.5bn of benchmark long-term funding, leaving it €7.5bn short of its €50bn target for the first half of 2022 under NGEU.
"They have the benefit of doing these RFPs which help the market adjust to find the right clearing level, although next week feels like a lifetime away, a lot can change by then," the banker said.
As well as whipsawing markets, the euro sector will have to contend with a glut of eurozone government supply. An estimated €36bn is due to be raised this week, according to Commerzbank, making it the third highest weekly level year-to-date, and up from €15bn last week. Germany, France, Italy, Finland, Spain and the Netherlands are all due to come to market.
Any deal will have to accommodate this supply glut as well as the widening seen in the EU's spreads in recent weeks.
"There's been a lot of widening across a lot of names, but it does seem a bit more pronounced for them given we've yet to see what second-half funding will look like. That seems to be coming up a lot in investors' comments," the banker said. "People want clarity and the volatility is not helping."
The issuer's curve has been under pressure. The 1% July 2032, which it has tapped through auction and private placement, was quoted at less 4bp on Monday, some 20bp wider than where it was in early May.
"That's been under massive pressure," another banker said. "Swap spreads have been tightening, which has partly caused it, but it's not just that. KfW has cheapened up a bit but the EU has cheapened up a lot, especially that bond. KfW and EIB are well advanced in their funding, so there may be an element of EU-specific supply dynamics."
The borrower's recent 0.8% July 2025 has also widened, quoted at less 34.5bp from its less 41bp pricing around a month ago, while its 0.7% July 2051, which came at 22bp, was quoted at 38bp.
Bankers have suggested a shorter deal would be easier and safer to execute. Another option could be for the EU to tap the April 2043 green bond priced in early April, a tactic that would help drum up specific green interest while reducing execution risk by merely adding to an existing line.