Last Tuesday, 20 October 2020, the European Commission issued a €17 billion inaugural social bond under the EU SURE instrument. This represents the Commission’s largest ever bond issuance and a favorable debut of the SURE program, a scheme designed to provide up to €100 billion of loans to Member States to support their efforts during the Covid-19 crisis. The so called ‘joint-bookrunners’, i.e. the banks for the syndicated issuance, were selected through a formal “Request for Proposal” procedure. As a result, Barclays, BNP Paribas, Deutsche Bank, Nomura and UniCredit were chosen to handle this deal.
More precisely, Tuesday issuing consisted of two bonds, one worth €10 billion with repayment due in October 2030 and the other €7 billion due for repayment in 2040. In order to reflect the high level of interest, both bonds were issued on attractive terms: the final new issue premiums have been estimated at 1 bps and 2 bps for the 10-year and 20-year tranches respectively. It is worth saying that these yields are higher than safe-haven German bonds, which have the same top credit ratings as EU ones (both rated AAA by two of the three main rating agencies), and also higher than French bonds, which are instead rated lower.
This clearly encouraged investors and led the EU to record the highest demand ever for a bond sale: the shorter bond on its own attracted €145 billion (which is also a record for a single European bond tranche), whereas the 20-year one reached a demand of over €88 billion, for a total of about €233 billion. Tuesday's sale might be taken as a starting point to evaluate how successful the EU might be at building its borrowing at such speed and how much it would cost.
More precisely, Tuesday issuing consisted of two bonds, one worth €10 billion with repayment due in October 2030 and the other €7 billion due for repayment in 2040. In order to reflect the high level of interest, both bonds were issued on attractive terms: the final new issue premiums have been estimated at 1 bps and 2 bps for the 10-year and 20-year tranches respectively. It is worth saying that these yields are higher than safe-haven German bonds, which have the same top credit ratings as EU ones (both rated AAA by two of the three main rating agencies), and also higher than French bonds, which are instead rated lower.
This clearly encouraged investors and led the EU to record the highest demand ever for a bond sale: the shorter bond on its own attracted €145 billion (which is also a record for a single European bond tranche), whereas the 20-year one reached a demand of over €88 billion, for a total of about €233 billion. Tuesday's sale might be taken as a starting point to evaluate how successful the EU might be at building its borrowing at such speed and how much it would cost.
As it is clearly visible from the graph above, the expected EU debt sums up the €100 billion of issuance to finance SURE and €800 billion to finance the recovery fund to the €54 billion of bonds currently outstanding. Nevertheless, as mentioned before, the transaction gathered notable investor demand, reaching an oversubscription of over 13 times, This is a clear sign of the market interest and high level of trust towards the European Union as an issuer and in the EU SURE program, and it shows EU will be able to command extremely low borrowing costs to raise money for its Member States.
The funds raised with this program will be transferred to the beneficiary Member States in the form of loans, thus helping them to cover the costs directly related to the financing measures adopted as a response to the pandemic, such as national short-time work schemes. The precise amounts distributed to each Member State will only be decided after a number of subsequent steps have been concluded. These include the allocation to investors and the pricing of the bond, which will determine the total amount raised by the EU on the market.
Last but not least, one of the remaining key questions to answer concerns the timing of the next bond issuances under the EU SURE. Firstly, the selection of a bank syndicate will again follow a formal Request for Proposal procedure and, once this is launched, market participants will be publicly informed by the EU. Secondly, it goes without saying that the exact timing of each emission cannot be predicted beforehand, as it will be decided according to a set of conditions, including market conditions, competitive supply, investors' behavior and the outcome of previous SURE transactions. However, the total volume foreseen for 2020 is around €30 billion. Following the successful dual tranche and supposing that all procedures are concluded on time, there is enough confidence that the above-mentioned borrowing amounts will be definitely obtained.
Annamaria Palmieri