The EU's first EFSM deal achieves record oversubscription

The European Financial Stabilisation Mechanism (EFSM), established in the wake of the Greek crisis in early 2010, allows the EU to borrow up to €60bn to lend on to any member state that needs the money. The EFSM is an integral part of a broader €750bn European financial stability package, the very creation of which was designed to reassure financial markets about the stability of the EU's troubled peripheral countries, and the mechanism was conceived more as a prevention than a cure.

As European Commission director for finance Gerassimos Thomas says: "We were hoping we would not have to issue any bonds, so the communication we had with potential investors was in the form of non-deal-related presentations."

That was in the summer of 2010, before Ireland's financial frailty escalated into a full-blown crisis, requiring intervention from the EU and the International Monetary Fund. Now the EFSM has sprung into action.

"Finance ministers have said that up to €22.5bn can be on-lent to Ireland from the EFSM and, on November 28, we communicated that to the market," says Mr Thomas.

The capital will be raised via a series of large benchmark issues and, as markets returned to work following the long Christmas break, the inaugural deal was launched. At €5bn, it was a big, bold transaction, one of the first in 2011 and certainly a first for the EFSM. As such, Mr Thomas admits that he and colleagues were far from complacent.

"In this troubled market, there is always uncertainty about timing, terms and maturity, and the challenge was that this was the first issue and it was substantial," he says.

Strong demand

The order book for the five-year deal opened at 9am Central European Time on January 5, with a price range of 12 basis points (bps) to 15bps above mid-swaps. Demand was such that within 45 minutes, book-runners Barclays Capital, BNP Paribas, Deutsche Bank and HSBC had received orders of more than €20bn and the deal was priced at a spread of 12bps, the tight end of initial guidance but still more generous than an existing EU deal, trading at a spread of 10bps. Nonetheless, the EU was "extremely happy" with the pricing.

"This was record oversubscription for a supranational deal. As it was our first time and it was such a big issue, we knew we would have to pay a small premium and 2bps is not unusual.

"When you go to market on the second [working] day of the year, there is an element of caution," says Mr Thomas.

Most of the demand came from Europe but, encouragingly for the EU, institutions from Asia, the Americas and the Middle East made up nearly 30% of the final book.

"We saw strong interest from central banks and investors in geographies that have not bought EU paper before. This is a strong sign of confidence in the EU and the euro," says Mr Thomas.

"Over the past two years, we have helped countries with balance-of-payment problems, such as Hungary, Latvia and Romania, but interest has come mainly from Europe. This time, 6% of the bonds were bought by North and South American investors and more than 20% from Asia, which is an important and positive development," he adds.

The EU works with about 20 top banks operating in Europe and this deal included not just the four book-runners but eight co-managers too: Bank of America Merrill Lynch, Credit Suisse, Goldman Sachs, JPMorgan, Morgan Stanley, Société Générale, UBS and UniCredit.

"We were very pleased with the performance of the whole group. All the banks made a real commitment at the highest level to the success of this deal," says Mr Thomas.

EU guarantee

Borrowings through the EFSM carry the guarantee of the EU budget and of the 27 EU member states. So investors are exposed to EU credit only, which is AAA rated and zero-weighted. Some non-European institutions find the various EU borrowing mechanisms perplexing, however. "International investors are still a bit confused about Europe and everything it means. They want to know more about the EU, the EFSM and the European Financial Stability Facility, and they want to know how Europe differs from a single country. Once there is clarity about what the EU is, they understand that it is an attractive borrower," says Mr Thomas.

The €5bn will be passed directly to Ireland and the EU expects to issue another €3.4bn deal within the first quarter, followed by three or four further benchmark issues this year and next.

"We hope this deal will make it easier for investors to understand the merits of forthcoming issues," says Mr Thomas. But he points out that, while Ireland will undoubtedly benefit from the EU's financial aid, the money is just one element in a wider recovery programme. "For me, the best way to calm investor fears is through hard economic measures," he says.