DZ Bank demonstrates its market expertise on bumper EU issuances

The EU dazzled capital markets in June with its first recovery bond, which has become the largest-ever issuance from a supranational. DZ Bank, which has long-standing close relationships with EU institutions, was a joint lead manager and bookrunner.

Frankfurt-based DZ Bank is Germany’s second-largest bank by assets and third-largest by Tier 1 capital. It acts as the central bank, corporate bank and holding company for the DZ Bank group — a network of 814 co-operative banks. It also has significant insurance and asset management subsidiaries.

“We are one of the three major banking sectors in Germany, alongside private banks and savings banks,” says Frank Scheidig, DZ Bank’s global head of senior executive banking. He adds that, of the three, co-operative banking makes the strongest contribution to the German economy, thanks to its relationship with medium-sized business.

DZ Bank is rated A+/AA-/Aa1 by Standard & Poors, Fitch and Moody’s, respectively. “It is one of the best-rated banks in the world and is perceived as a very stable institution,” says Friedrich Luithlen, the bank’s head of debt capital markets (DCM). As a mutual, it enjoys the stability of freedom from short-term performance pressures.

Home strengths

Where the DCM team brings particular value to transactions is in providing access to the DZ Bank network. “Some of the banks are very small, and have little manpower for research,” explains DZ Bank syndicate manager Christian Mundt. “They depend on us to give them access to primary markets and to provide what they want in their treasury portfolios.”

The team’s strong suit is the sovereign, supranational and agency (SSA) sector, where it maintains contacts around the globe. “We are very strongly focused on the euro bloc,” Mr Scheidig says. “We have done some US dollar transactions, but our strength is in the euro, where we are seen as experts.”

Some of the bank’s most enduring SSA contacts are with the EU and European Commission, though this was not always a source of much activity. “Before the financial crisis, the EU was a comparatively small borrower,” Mr Scheidig notes.

That has now changed dramatically, particularly since the Covid pandemic. The EU’s €100bn ‘Temporary support to mitigate unemployment risks in an emergency’ (SURE) programme provides loans to member states facing sudden increases in expenditure to protect jobs.

Since the inaugural issue in October 2020, SURE social bonds have raised €89.6bn from seven transactions (in 12 tranches). A total of 19 different banks from the EU, UK, US and Japan were mandated across the deals. Germany’s largest bank Deutsche Bank was mandated on six tranches — more than any other bank — followed by DZ Bank and Landesbank Baden-Württemberg (LBBW) with five each. Deutsche Bank also led by deal value (€45.1bn), followed by LBBW (€36.6bn) and DZ Bank (€36bn).

Habit of borrowing

The SURE programme merely whetted the EU’s new appetite for borrowing to support member states. It has been followed by a much larger €800bn ‘Next Generation EU’ (NGEU) recovery plan. That sum will be raised by 2026, at a rate of €150bn per year, although this will include some short-term funding. Slightly more than half of the sums raised will be available for grants under the recovery and resilience facility and other EU budget programmes, with the balance available as loans.

It was the debut NGEU bond that resulted in the biggest supranational issuance ever. Mandated as joint lead managers were DZ Bank, BNP Paribas, HSBC, Intesa Sanpaolo and Morgan Stanley. The EU excluded some of the market’s biggest names from the list, including Deutsche Bank, citing breaches of antitrust rules.

The other banned banks were Bank of America, Barclays, Citigroup, Crédit Agricole, JPMorgan, Natixis, NatWest, Nomura and UniCredit. Although eight of them were subsequently cleared for future transactions, Natixis and NatWest continued to be blackballed until they could show evidence of “remedial measures”.

Following a European Central Bank (ECB) meeting the week before, the EU announced the inaugural NGEU transaction early on a Monday morning in June. “That gave officials the opportunity to talk about it at a joint conference by the EU, the European Stability Mechanism (ESM) and the European Investment Bank (EIB) the same day,” says Jenny Lale Petersen, who is a senior SSA originator at DZ Bank.

The maturity had already been set at 10 years but, as interest gathered, the size was a moving target, Ms Petersen reports. While there had been no specific NGEU roadshow, investors had familiarised themselves with the issuer on two calls during 2020 in preparation for SURE issues.

The message was that the EU, via SURE and now NGEU, was the closest approximation to true European risk. “The ESM, the EIB and other peers serve more specific purposes,” Mr Mundt notes. “The EU, on the other hand, especially under NGEU, serves a broad mandate with a diverse use of proceeds.”

He adds that, thanks to the programmes’ initial size, and the ability of the EU to grow them in future, investors were looking at a highly liquid asset. Another positive comes from the ECB’s secondary market purchasing activity, which gives the whole SSA sector strong support and potential for performance.

Bonds bought by the ECB are no longer available for trading, which reduces the free float of available paper. “So investors focus a lot on fulfilling their demand in the primary markets,” Mr Mundt says. “They were quite happy, therefore, to see a ‘new kid on the block’ providing them with a new investment opportunity.”

Raising capital

Initial price thoughts for the NGEU deal were released at mid-swaps plus 1 basis point (bp). Shortly afterwards, the transaction was already quoted 4bps tighter versus fixed price re-offer in the broker market.

By the following morning, indications of interest worth more than €76bn allowed the orderbook to open with guidance of mid-swaps flat area. With an outstanding SURE 10-year bond trading at mid-swaps minus 6bps, that suggested a new issue premium of 5–6bps depending on adjustments for curve steepness.

The spread was finally fixed at mid-swaps minus 2bps. A rush of orders in the closing stages resulted in a final orderbook of €142bn from more than 600 accounts. Coupled with the high-quality of the book, which allowed the zero-coupon deal to be sized at €20bn, this created the largest syndicated euro-denominated non-sovereign SSA bond ever. The spread tightened to minus 7bps in subsequent trading.

Distribution by investor type was 37% fund managers, 25% bank treasuries, 23% central banks, 12% insurers and pension funds, 2% banks and 1% hedge funds. Most of the bonds — 87% — went to investors in Europe, including the UK, with 10% going to Asia and 3% to the Americas. The Asian uptake was a source of some satisfaction.

“It’s important to bring the EU closer to Asian investors,” Mr Luithlen says, noting that their participation in the SURE issues was around 6%.

Asian interest is important if the EU is to realise its ambitions for the euro to rival the dollar as a safe-haven currency. Mr Scheidig argues that the volumes and liquidity of fixed-income markets, especially in sovereign debt, are key to becoming a leading reserve and trading currency. The sheer size of the SURE and NGEU programmes can only help in this regard.

Finance becoming greener should also benefit the euro, which is “the currency of sustainability” according to Mr Luithlen, who notes that 50% of all sustainable issuance is in euros.

Sustainable bonds will make up 30% of NGEU issuance, and will commence once a green bond framework is published in September. “That should further establish the euro as a reserve currency,” says Mr Luithlen.

DZ Bank will doubtless continue to assist in this process as a quietly dominant player. In Dealogic’s bookrunner league table for all EU and Euratom transactions since 2016, DZ Bank is the leader by transaction value, ahead of Deutsche Bank and BNP Paribas. It also comes equal first (with HSBC) by the number of deals, and it has never had a mandate from Euratom.