European Investment Bank (EIB) has always been a big, important issuer. But in recent years its funding needs have swollen to record levels. In 2002 it raised e38 billion – e2 billion of it pre-funding for 2003 – and this year it is expected to issue about e41 billion. Its funding officials have had to step up their efforts to widen their debt’s distribution and tap every available source of demand. Over the past year it has probably been the benchmark issuer for its peers.
EIB used to be considered comparatively opportunistic and aggressive on price and timing, but recently it has been concentrating more on transparent investor relations and fair pricing. With its funding needs as big as they are, and with the investors’ choice of AAA credits wider than ever, the bank cannot risk alienating investors by issuing at the wrong price. Bankers acknowledge the shift. One originator says: “I remember a few deals in the past being challenging to do because people heard the name EIB and assumed they were about to get ripped off. The EIB has worked very hard to dispel that image lately, and over the past year they’ve succeeded brilliantly.”
The clearest sign of this was the e5 billion five-year benchmark that the bank launched in March, in the midst of uncertainty in the run-up to the invasion of Iraq. On the advice of lead managers Barclays Capital, Morgan Stanley and BNP Paribas, the bank chose the five-year maturity as the most neutral tenor in order to attract the widest possible range of investors. But, despite nervous markets, there was never any question of postponing the deal, says Barbara Bargagli-Petrucci, the EIB’s head of capital markets. She adds that investors of all kinds appreciated the strength of the bank’s credit: “The rush into the transaction was immense, and confirmed the EIB as a sovereign-class borrower. I have never seen a better book than the one we ended up with – it was as diversified as you could wish for.”
One syndicate official says: “The EIB really impressed me with its responsible approach to the market. This was a fantastic deal, and it had a very positive impact on the whole EIB curve.” Over the course of the year, the EIB’s consolidated European credit story, giving investors the chance to buy exposure to a diversified basket of sovereign names, has looked more and more attractive. “It’s definitely been the right selling-point this year,” says another syndicate banker. “Their deals have consistently been oversubscribed, and have all left enough on the table to keep investors happy.” These bankers praise the issuer’s clarity and consistency, adding that it is scrupulously careful to keep investors informed of what it is doing and not to pepper the market with unexpected deals.
KfW, last year’s winner of the agency and supranational borrower award and one of EIB’s biggest rivals in the market, has found the going marginally tougher this year, as investors have looked more carefully at the fundamentals of its guarantee from the German government.
Despite its higher risk weighting and lack of an explicit state guarantee, the EIB priced its five-year deal about three basis points through its German rival’s curve. In fact, its bonds are now trading tighter than KfW’s across most maturities.
The syndicate official says: “EIB has been exemplary in managing big funding needs while remaining consistent, and in balancing the need to develop markets strategically with the need to raise large amounts at a reasonable cost. Always strong in dollars, the EIB has made huge strides in euros and is clearly now the benchmark for the European sub-sovereign market.”
The bank’s achievements with its euro-denominated benchmark issues have been striking. The currency makes up around a third of its funding, with another third in dollars and about 15% in sterling, through a largely retail-targeted programme. Bargagli-Petrucci says this, started in 2001, found great success in its second year.
In dollars, the EIB’s strides have been smaller. But Bargagli-Petrucci says that her team’s attempts to attract new investors with the bank’s $3 billion benchmarks have been highly successful. She says: “We have diversified and intensified our US investor base – recently as much as 30% of our dollar issues has been placed there.”
Bargagli-Petrucci also expresses pride in the EIB’s innovations in the callable market. Previously short-dated calls have been the focus, but this year the bank has issued bonds with two-year call periods in dollars as well as in euros. Along with KfW, the EIB has been a pioneer in this market, and bankers expect growing issuance from a wider variety of names this year.
Tailored deals worldwide The EIB’s flexibility in providing smaller, tailored deals in local currencies is also notable. Structured yen deals have been an excellent funding source, as well as uridashis in Australian dollars, euros and dollars. The bank has been a pioneer in structured placements in non-core markets too – a recent multi-tranched reverse quanto structure in New Taiwanese dollars was the first deal of its kind.
The EIB has also been active in EU accession states’ local currency markets, fulfilling its mandate to support the development of capital markets. It has focused on Polish zloty, Czech koruna, and Hungarian forints. Last year it more than doubled its issuance, and is now the number one issuer in these currencies.
Over the next year, Bargagli-Petrucci wants to extend the curve in euro benchmarks further out – at present the longest-dated bond matures in 2012. A 10-year benchmark to extend the curve to 2013 looks a possibility. The plan for the next year also includes tightening the EIB curve still further. Bargagli-Petrucci says: “Our spreads are now in single digits over Bunds on a curve-adjusted basis. The challenge for us now is to find out just how close to sovereigns the market is prepared to let us trade. At the shorter dates we’re already very close or flat – sometimes even through – Bunds but now we need to tighten spreads at the long end of the curve.”
