Punishing original sin
Does Europe need its own?
Tuesday, January 25, 2011
by Hamish Risk
The European Financial Stability Facility (EFSF), which will
help fund part of Irelands 85 billion bailout,
issued 5 billion of five-year bonds in its inaugural
benchmark issue Tuesday, attracting an order book of 44.5
billion. Thats a record for any sovereign bond in Europe,
and 24.5 billion more than the European Financial
Stability Mechanism (EFSM), a separate European Union funding
vehicle, garnered with its 5 billion issue in the first
week of January.
The transaction priced at 6 basis points over the mid-swaps
benchmark rate, after earlier indications in the day of 8bp to
10bp over mid swaps. As an indication of the pent up demand for
these bonds, the EFSMs bonds, which were sold at 12bp
over mid swaps, were recently trading at 1bp over mid
The capacity for the EFSF to raise money in the capital
markets is huge, says Frederic Gabizon, head of sovereign
debt capital markets at HSBC and sole lead manager on the EFSF
and the EFSM transactions. The mechanism is well
understood and well recognized, because you dont take in
more than 60 billion of orders in these two separate
deals if you dont believe in the credit.
The issue was most notable for the make up of investors; the
government of Japan bought 20% of the transaction Asian
investors being the largest investor constituent
followed by the UK, and then Germany, HSBC said. Central banks
bought 42% of the paper, while fund managers took 31%.
While the level of demand indicates that the EU and EFSF will
have no problem funding their 34 billion financing target
this year, the wider implications of this are less clear for
Europes peripheral sovereigns, says one head of sovereign
debt syndication at a London-based bank. It is a clear
strong signal around the process of EU support; thats a
good thing, but I dont think it signals wider investor
buying for the countries that need it. I don't see that real
money will buy Portugal just because EFSF did so well
the opposite might happen.
The EFSF has some unique characteristics. Its AAA-ratings are
derived from the its ability and willingness to honour claims
on a timely basis; each bond will have an over-guarantee of
120%, an upfront cash reserve equal to the net present value of
the margin of the EFSF loan and service fee, and a cash buffer,
ensuring full AAA cover of liabilities.
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