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According to the EU law, the European Commission is empowered to borrow from the international capital markets on behalf of the 27 member states. The EU has a well-established name in the global securities markets with a positive track record of bond issuances over the past 40 years. All issuances executed by the Commission are denominated euros; the EU borrowing is guaranteed by the EU-wide budget, and the states’ contribution to the budget is unconditional legal obligation of all the member states.
Background
The European Commission uses the proceeds of its bond issuances to finance select EU policy programs and the EU-wide integration, in general. A landmark policy program currently funded by the EU borrowing is the NextGenerationEU recovery program; besides, the EU is also using bond issuance to finance up to €33 billion in loans to Ukraine under the Ukraine Facility between 2024 and 2027. The Ukraine Facility provides stable financial support for Ukraine’s recovery, reconstruction and reforms on its EU accession track.
In January 2023, the EU launched the unified funding approach, extending the diversified funding strategy first established for NextGenerationEU to all other policy programs funded by EU borrowing. Due to such so-called “issuing-borrowing” approach, the EU is able to finance numerous integration and socio-economic development programs by the single-branded EU-bonds rather than separately labeled bonds for individual programs.
Based on the member states’ requests for funding under the Recovery and Resilience Facility, RRF and the funding needs of other EU programs supported by NextGenerationEU, the EU expects to raise up to €712 billion (out of a maximum program envelope of €806.9 billion) by 2026.
Under the RRF, up to €338 billion of grants will be financed through borrowing operations; the member states will also receive additional RRF grants of €17.3 billion financed under the Emissions Trading System, ETS and €1.6 billion under the Brexit Adjustment Reserve, BAR.
To best address its funding needs, the Commission uses a combination of auctions and syndications; the Commission uses auctions to issue both EU-Bills and its EU-Bonds.
Source: https://commission.europa.eu/strategy-and-policy/eu-budget/eu-borrower-investor-relations/nextgenerationeu_en
Present EU-bonds
Through the present transaction, the EU has issued €362 billion in EU-bonds under the unified funding approach, of which €55.9 billion in the form of NGEU Green Bonds. Of the proceeds raised, almost €235 billion has been disbursed to the EU member states under the Recovery and Resilience Facility. A further €57 billion has been allocated to other EU programs benefiting from NextGenerationEU funding.
In addition, over €6 billion will be disbursed to Ukraine under the Ukraine Facility during 2024, complementing the €18 billion disbursed to Ukraine under the Macro-financial Assistance+ in 2023.
The European Commission is engaged in short-term liquidity management operations to smooth upcoming funding needs; hence, the amounts raised will be also used to cover the EU’s total debt which is presently equals to about €529 billion, of which around €20bn in the form of EU Bills.
Source: https://ec.europa.eu/commission/presscorner/detail/en/IP_24_3230
To finance EU policies as efficiently and effectively as possible, the Commission’s issuances are structured by semi-annual funding plans and pre-announced issuance windows. To support the secondary market liquidity of EU-Bonds, the Commission introduced a framework incentivizing EU Primary Dealers to provide quotes on EU securities on electronic platforms in November 2023. In addition, the Commission will support the use of EU-Bonds in repurchase agreements by introducing a repurchase facility later in 2024.
The Commission is funding up to 30% of NextGenerationEU by issuing NextGenerationEU Green Bonds; it is making the European Commission the largest green bonds issuer in the world.
More on “green bonds” in: https://commission.europa.eu/strategy-and-policy/eu-budget/eu-borrower-investor-relations/nextgenerationeu-green-bonds/dashboard_en
There are the following EU-wide policy programs funded by the EU issuances facilities: – NextGenerationEU; – SURE, – MFA programs (including Ukraine), – European Financial Stabilisation Mechanism, – Balance of Payments, – EURATOM, and – Ukraine Facility.
Source: https://commission.europa.eu/strategy-and-policy/eu-budget/eu-borrower-investor-relations_en
The European Commission will raise €6 billion of EU-Bonds in its 6th syndicated transaction for 2024; the transaction concerned a new €6 billion bond due on 4 October 2039. The new 15-year bond came at a re-offer yield of 3.477%, equivalent to a price of 98.818%.
The bids already received were in excess of €37 billion; this equals an oversubscription rate of over 6-times. Due on 4 October 2039, this bond carries a coupon of 3.375% and came at a re-offer yield of 3.477%, equivalent to a price of 98.818%. The spread to mid-swap is 52 bps, which is equivalent to 65.2 bps over the Bund due on 4 July 2039 and 2.8 bps through the OAT due on 25 October 2038.
The joint lead managers of this transaction were Barclays, Deutsche Bank, HSBC, JP Morgan and Nordea.