The European Investment Bank (EIB) has achieved a breadth of funding sources that few borrowers can rival. It is the only supranational issuer with benchmark programmes in three currencies – euros, dollars and sterling – and it is also the largest non-resident borrower in central and eastern Europe. Rene Karsenti, EIB’s director general of finance, says: “We have a strategic presence in the accession states as we lend in these countries. It’s also important to contribute to the development of these local bond markets in the run-up to EU accession, as we did with Portugal, Greece and Spain before their own accession.”
Barbara Bargagli-Petrucci, head of the bank’s capital markets department, adds: “The EIB is unique in that it has domestic bond issuance programmes in the accession states, as well as access to Eurobond markets in these currencies. Our issuance here is driven by our lending in these states, and we expect this to grow as the EIB funds bigger projects as these states near entry to the EU.
Hopefully we will broaden our investor base here as our funding needs expand.” The EIB has already set up programmes worth e600 million in Polish zlotys, Hungarian forints and Czech koruna, and continues to borrow heavily in Swiss francs and the Scandinavian currencies.
The bank’s euro, dollar and retail sterling programmes will provide about 90% of 2003 funding. Things started well in 2003 with a three-year $3 billion global early in January, extending the success the bank enjoyed in 2002. Its dollar benchmark programme has taken advantage of pressure on US agencies. The bank’s success in diversifying its investor base from Europe has been impressive.
Last year, almost half of issuance was placed in the US. But Bargagli-Petrucci also emphasizes the importance of smaller, tailored transactions. In 2001, these accounted for just 4% of total funding. Last year, the figure was 9%, and growth is expected to continue in 2003. She says: “There is more and more demand for structured deals. We have been prominent in dollars, particularly with callable structures, and now we are seeing increasing demand in euros. The EIB has also done deals in Taiwanese dollars – we issued a new quanto inverse floater structure here – and in structured yen. And we have also focused on private placements tailored to fit investors’ asset-liability matching needs.”
Last year, the bank issued in 14 currencies, including rand and various Asian currencies, as well as executing three uridashi (non-yen-denominated bonds offered to Japanese retail investors) deals worth e 1.3 billion.
Karsenti expects the Asian central bank bid to strengthen in 2003, bringing benefits for the EIB and its peers. “There’s increasing demand for euro assets from Asian central banks. Many could diversify between 10% and 20% of their reserves; Hong Kong has indicated a diversification of 15%. Asian central banks and Japan’s total forex reserves are around $1 trillion, so even a small diversification into euro would create huge demand.”
EIB’s issuance style has been the subject of much debate over the years. Although all bankers acknowledge the treasury team’s professionalism and skill, many say off the record that the supranational could ultimately save itself a basis point or two on its yearly funding costs if it was prepared to leave a little more on the table in the primary market.
Compared with German development bank Kreditanstalt für Wiederaufbau, EIB comes to market relatively quickly and tends to be a little more aggressive on price. The two issuers’ latest benchmarks were both well received but KfW’s was marketed over about five weeks, starting before Christmas, whereas EIB’s book was built over a few days. Some bankers say the first approach makes investors a little more comfortable and tends to lead to better performance and tightening levels in the long term. They add that, in theory, with its pan-European imprint, the EIB might be expected to trade slightly tighter than KfW, with its traditional base in Germany, but that no such pattern can be seen.
Neither Karsenti nor Bargagli-Petrucci accepts this argument. With a record e 40 billion to raise in 2003, both are keen to emphasize the bank’s focus on bookbuilt transactions that are fairly priced. Karsenti says: “I wouldn’t agree that we are very aggressive on pricing, although that may have been the perception for a few deals. We are a frequent issuer and need to meet investors’ needs, but we can’t afford to be generous. Pricing is an art, not a science, and involves balancing the needs of issuer, intermediary and investor. Sometimes a single basis point can be the difference between too generous and too tight a deal.”
In any case, the EIB never seems to have trouble getting a deal done.
One priority for 2003 is to add to its euro yield curve. This runs from three to 12 years, and Bargagli-Petrucci says that if conditions allow she would like to extend this with a longer deal.
