Views: 34
According to the EU basic law, the European Commission is capable of borrowing on the international capital markets (on behalf of the EU) to finance EU integration programs. The EU has already a well-established name in debt securities markets, with a track record of bond issuances over the past 40 years. Borrowing by syndicated transaction is guaranteed by the EU budget supported by the states’ contributions.
Background
Since January 2023, the EU funds its different policy programs by issuing single-branded EU Bonds rather than separately labeled bonds for individual programs. This follows the creation of a unified funding approach, extending the diversified funding strategy first established in 2021 for the NextGenerationEU (NGEU program) followed by other EU-wide policy programs funded by the EU borrowing procedures.
Efficient and effective financing the EU policies depends on the Commission’s structured semi-annual funding plans and borrowing issuances. In parallel, a framework to incentivize the EU “primary dealers” to provide quotes on EU securities on electronic platforms has been adopted in November 2023; a new repurchase facility is now available to EU “primary dealers” from 7 October 2024 to support the secondary market liquidity through the use of EU Bonds in repurchase agreements. The Primary Dealer Network (presently consists of 37 financial institutions) reinforces the Commission’s capacity and ensures transparent relations with banks that support the placement of EU borrowing.
On “primary dealers” in: https://commission.europa.eu/strategy-and-policy/eu-budget/eu-borrower-investor-relations/primary-dealer-network_en
The Commission is also publishing annual reports about funding plans, as well as on allocation of proceeds from the issuance of NGEU Green Bonds and their estimated and expected climate impacts.
Note. Regularly updated information about the EU funding, green bond expenditures and the NextGenerationEU in: https://commission.europa.eu/strategy-and-policy/eu-budget/eu-borrower-investor-relations/funding-plans_en#latest-funding-plan
Through the new transaction, the EU has now issued €426.58 billion in EU Bonds under the unified funding approach: i.e. of the proceeds raised, almost €262 billion has been disbursed to the states under the NextGenerationEU Recovery and Resilience Facility. A further €67 billion has been allocated to other EU programs benefitting from NextGenerationEU funding.
In addition, over €10 billion has been disbursed to Ukraine in 2024 so far under the Ukraine Facility that will finance up to €33 billion in loans to Ukraine between 2024 and 2027. This support complements the €18 billion disbursed to Ukraine under the Macro-financial Assistance+ policy in 2023.
The EU’s total debt outstanding now stands at about €596.46 billion, of which around €22 billion in the form of EU Bills.
Source and reference to: https://commission.europa.eu/strategy-and-policy/eu-budget/eu-borrower-investor-relations_en
Borrowing facilities
The European Commission is empowered by the EU Treaties to borrow from the international capital markets on behalf of the European Union. The EU is a well-established name in debt securities markets, with a strong track record of successful bond issuances over the past 40 years; all EU-Bond issuances executed by the Commission are denominated exclusively in euro.
The European Commission uses the proceeds of EU-Bond issuances as additional source of financing the EU-wide integration policy programs. For example, a landmark policy program currently funded by EU-Bonds is the NextGenerationEU recovery plan, under which the EU is expected to raise up to €712 billion (out of a maximum program envelope of €806.9 billion) by 2026. The EU also issues EU-Bonds to finance loans for Ukraine: e.g. under the Ukraine Facility, the EU will raise up to €33 billion in EU-Bonds between 2024 and 2027 to finance these loans.
EU borrowing is executed using multiple instruments, including EU-Bonds, EU-Bills, and NextGenerationEU Green Bonds. The Commission also makes use of different funding techniques, such as syndications and auctions.
The Commission communicates its planned funding volumes to the market through bi-annual funding plans covering the next six months of operations.
Source: https://commission.europa.eu/strategy-and-policy/eu-budget/eu-borrower-investor-relations_en
Syndicated transaction
Generally, “loan syndication” occurs when two or more lenders come together to fund one loan for a single borrower. Syndicates are created when a loan is too large for one bank or falls outside the risk tolerance of a bank. The banks in a loan syndicate share the risk and are only exposed to their portion of the loan. Hence, syndication is the process by which banks and investors join to make a loan to a company (creating a syndicate of banks). Together with their client, the banks define the characteristics of the loan and work on key points to enhance the project.
More in: https://wholesale.banking.societegenerale.com/en/video/video/what-syndication/
On 19 November 2024, the European Commission has raised €7 billion of EU Bonds in its 10th syndicated transaction for 2024; about €3 billion of which in the form of NextGenerationEU (NGEU) Green Bonds. The dual-tranche transaction concerned a €4 billion tap of the EU Bond maturing on 4 December 2031, as well as €3 billion tap of the NextGenerationEU Green Bond maturing on 4 February 2043. The 7-year bond was priced 98.618% with a re-offer yield of 2.719%, while the 18-year bond was priced at 72.739%, with a re-offer yield of 3.260%.
Bids received were in excess of €66 billion on the 7-year bond and in excess of €80 billion on the 18-year bond; this equals oversubscription rates of approximately 17-times and 27-times, respectively.
The proceeds of the transaction will be used to finance EU policy programs (most notably in the context of NextGenerationEU and support to Ukraine) as well as green projects in Member States’ national Recovery and Resilience plans (RRPs) – the roadmaps to spending under NextGenerationEU. All NGEU Green Bond issuances are guided by the NGEU Green Bond Framework, which is aligned with the Green Bond Principles of the International Capital Market Association (ICMA).
Source: https://ec.europa.eu/commission/presscorner/detail/en/ip_24_5927
The Commission has now issued approximately €60 billion of its €65 billion funding target for the second half of 2024. A full overview of all EU transactions executed to date is available online. A detailed overview of the EU’s planned transactions for the second half of 2024 is also available in the EU funding plan. The next transaction in the EU’s indicative issuance calendar is an EU Bond auction on 25 November 2024.
Present bond syndication
There are two “taps” in present syndication:
= 7-year tap: due on 4 December 2031, this bond carries a coupon of 2.5% and came at a re-offer yield of 2.719%, equivalent to a price of 98.618%. The spread to mid-swap is 47 bps, which is equivalent to 58.3 bps over the Bund due on 15 August 2031 and 8.1 bps below the OAT due on 25 November 2031. The final order book was of over €66 billion.
= the 18-year NGEU Green Bond tap: due on 4 February 2043, this bond carries a coupon of 1.25% and came at a re-offer yield of 3.260%, equivalent to a price of 72.739%. The spread to mid-swap is 95 bps, which is equivalent to 73.2 bps over the Bund due on 4 July 2042 and 11.5 bps below the OAT due on 25 May 2043. The final order book was of over €80 billion.
The joint lead managers of this transaction were: BofA, CA-CIB, Deutsche Bank, HSBC and Nomura.
More on EU debt securities in: https://commission.europa.eu/strategy-and-policy/eu-budget/eu-borrower-investor-relations/eu-debt-securities-data_en