In November 2009, the world was reeling from the global financial crisis. Unédic became a capital markets regular in earnest, raising raised a €4bn bond in order to cope with the demands that booming unemployment were making on its balance sheet.
The deal was the issuer’s first from its EMTN programme. Jun Dumolard said: “That was a big step forward in terms of transparency and governance, because it meant we were committing to regular forecasts for investors and the public."
Just over 10 years later, with the coronavirus pandemic forcing economically catastrophic lockdowns, Unédic has stepped up again. It recently equalled its 2009 effort with a €4bn six year deal. The bond was also Unédic’s first ever social bond, marking the issuer’s transition to entirely social bond funding.
GlobalCapital: Tell us about how the coronavirus crisis has affected your funding requirements?
Jun Dumolard, Unédic: The Covid-19 pandemic has put huge strains on businesses, so the French government is providing the wages of those unable to work up to €4,500 per month for more than 12m people. Unédic is providing the funding for one third of this programme.
In addition to providing wage support, those on short term contracts are falling into the social protection net. The level of demand for our services is unprecedented and, in addition, we’re facing revenue delays because employers can delay their contributions. Some of those revenues will never be recovered.
As a result, we’ve increased our explicitly guaranteed funding requirement from €2bn to €10bn and will print an extra €1bn from our neu MTN programme. In total, we’ll print €13bn, up from our original estimate of €4bn. However, these numbers are still fluid.
In the short term market, we increased our CP programme from €10bn to €18bn in mid-April.
Obviously, it’s a heavy hit to our finances. The French government is taking note and there has been a great deal of productive discussion on the role of the state and how Unédic should be supported.
And you’ve just launched a social bond framework.
Yes, from now on all our bonds will be social bonds. Unédic is a pure social player. Many funds already identified us as fulfilling the criteria of a good social investment. Over the past few years, we’ve been inspired by the success of environmental, social and governance principles. The way they have been embraced by the market forced us to up our commitment.
That doesn’t mean all of our expenses will be funded by social bonds, because we get contributions as well, so our social bond committee will be determining which expenses are funded by our bonds. Obviously, a lot of what we do is eligible, but they’ll also be selecting themes and highlighting some of the most effective, high impact measures as recipients for social bond funding.
And you also launched the framework with a €4bn six year bond on Friday?
Yes. We’d seen the strength of demand for other issuers, but we didn’t know if it would translate for us. Fortunately, this crisis has really highlighted the function of our institution in sustaining the labour market and steering the capital we raise in the most intelligent and effective way.
Conditions have really improved. We didn’t see anything like the same level of demand for our guaranteed EMTN trade in early March. Rates have been moving around a lot though. We looked at other bonds from agencies, peers and more distant references.
Our usual experience with non-guaranteed and guaranteed bonds is that we pay about 5bp-6bp more for non-guaranteed funds. We approached the market cautiously and offered a premium of around 4bp over that.
What difference does the social bond framework make for you as an issuer?
There are two main differences. First, we’re working on a lot of analysis to understand our population and find the areas that are not covered well enough. It’s not about negative discrimination of our expenses, but highlighting the most positive ones.
This aligns with the rise of big data. We’ve invested in a platform to collaborate and share information with other agencies. One example of this is that, because we operate with individuals, we have good data at that level, but very little on revenue at a family level. By sharing this sort of data, we can improve our understanding of poverty and find the best ways to fight it.
It’s a mechanism that highlights the work we’re doing in this crisis and gives investors the confidence that we have appropriate forecasts and measuring tools to deploy capital efficiently. It’s ideal this year, as we have a record funding requirement.
The other big difference is investors’ engagement. Usually, with investors, we’re discussing levels, pick-ups, premium, maturities, that sort of thing. When we published this framework on Thursday, we were just flooded with calls from people engaging with the content.
We had to explain that we were not segregating funding — separating one expense from our usual expenses. We have a methodology that applies to our whole borrowing programme.
Initially, some analysts thought this was a challenged, but when we explained that it actually means more transparency over all our activities, they actually liked the format a lot. It’s a commitment where we tell investors: “this is what we’re going to do and this is how we’ll measure it.” We’re complying with the methodology, but also improving on it.
It was great to get investors asking about the relative impact of projects like professional training and replacing revenue. Of course, professional training has a great impact, but you can’t train someone unless you’re also replacing the revenue. It’s great to see investors really engaging with these mechanisms.
The improvement in data and the improvement in oversight from investors actually means we are better able to fulfil our role. It’s not just an exercise in giving investors information about their investment. It actually helps us improve on our performance on the operational side.
Do you think other borrowers should follow this example and make all their funding eligible for frameworks like this? With new borrowers, this seems to be the way they’re going.
Yes. Of course it won’t be possible for every borrower. But for those that can, it seems the most appropriate method.
In a sense, it seems strange that debt markets have had so little in the way of oversight on how their investment is spent. Equity markets typically enjoy a lot more.
All these financial analysts have just been spending time looking at curves are now getting to work on analysing the impact of investments in the real world.
The process was already happening, but this crisis is really accelerating it, adding a new sense of urgency to the innovation.
