The €32bn-plus final orders for the European Union's €5bn February 2048 green bond last Tuesday was a welcome sign to bankers that a pocket of stability had returned to the euro SSA market.
Bond and credit markets had been subjected to a massive price upheaval as primary and secondary levels dislocated on fears of spiralling inflation. They remained vulnerable, though last week rates moved the other way as recession fears took over.
The response to the EU's deal, though, was welcome, with orders dropping by just €2bn through the execution process.
“The market was looking to this trade with some anticipation in terms of getting a sense of direction after a challenging couple of weeks,” said a syndicate banker away from the deal, after the initial update of a €34bn book.
“I think it’s exactly what everyone wanted to see,” he said, referring to the initial book size, which came as the leads set the spread on the no-grow deal at 28bp over mid-swaps, having begun marketing at plus 30bp area guidance. Bank of America, Deutsche Bank, DZ Bank, Societe Generale and TD Securities were lead managers.
The banker placed the new issue's concession at guidance at 5bp–6bp, a level that some market participants expected ahead of the deal to help generate momentum. “It feels like they pitched it at the right sort of level,” he said.
Fair value was at mid-swaps plus 24.5bp with a 1.5bp greenium, according to a source at the European Commission, confirming a 5.5bp NIP at guidance that tightened to 3.5bp by landing.
A second banker pointed to the lack of green paper this year to partly explain the deal’s success.
The €5bn size was as expected, though the tenor was longer than what some bankers thought the EU might have come out with. Rumours prior to the mandate suggested the EU was planning a tap of its 1.25% €6bn April 2043 green bond.
The maturity was clearly not designed to ease the transaction through the market: the swap curve has been inverted beyond the 15-year mark for weeks but it did help plug a gap in the issuer’s curve, a lead manager said. The Commission source said the EU was looking to extend its green curve and launch its first 25-year NGEU bond.
To explain the €2bn drop in the books before pricing, the source pointed to declining grey-market prices: falling from reoffer plus 25 cents to plus five cents.
The fall "could be indicative of a lowered expectation of NIP and after-market performance of the bond. Some accounts pulled their bids out of the book at this stage, resulting in a drop of the total book. However, a high quality order book remained, with most real money accounts leaving bids unchanged, resulting in a strong final allocation and a bid-to-cover ratio of slightly over six-times."
The new deal came ahead of the EU's much-anticipated second-half funding plans. On Friday, it announced that the Commission will issue €50 billion of bonds in the last six months of 2022 "to finance the recovery” through the NextGenerationEU. That programme will be complemented by bills.
Alongside funding for NextGenerationEU, the Commission said it may also be called upon to issue up to €9bn for loans to support Ukraine under a new exceptional Macro-Financial Assistance (MFA) programme and up to €6.6bn for loans under the SURE programme, subject to member states' requests and completion of relevant procedures.
In the first half of 2022, the Commission had issued €47.5bn of bonds, as of Friday, just shy of its €50bn funding target. A further bond auction is planned for June 27.