The issuer and its banks discussed the possibility of marketing the bond versus Eonia, but eventually decided to price at an absolute yield level.
“Together with the issuer we decided that it would make more sense to market this bond with yield levels instead of the usual practice of spread versus mid-swaps,” said an SSA syndicate official at one of the leads, which were Bank of America Merrill Lynch, HSBC and UniCredit.
“The alternative would have been to look at a spread versus Eonia but investors are not ready for that. That’s more for bank treasuries — asset managers and official institutions do not look at that type of spread.”
But as the European Central Bank’s public sector purchase programme pushes yields further into negative territory, more negative yielding deals are likely — and issuers are open to a switch in marketing approach.
“As it was new to issue a bond with negative yield, we decided to stick with something investors are familiar with,” said Siegfried Ruhl, head of funding at the ESM.
“For the future, I wouldn’t rule out marketing pricing against Eonia but it depends on further developments in the market and what is required by investors.”
SSA bankers believe the ESM’s €3bn October 2017 is the first euro benchmark with a negative reoffer yield, minus 7bp in this case. But there was little sign that investors feared the unknown as they flooded the syndicate with orders and filled the book to more than three times over.
The leads already had more than €3bn of indications of interest — excluding lead orders — before opening books on Tuesday morning, after circulating initial price thoughts of minus 4bp area absolute yield the day before.
Guidance was minus 5bp area as books were opened at 8am London time on Tuesday, and even when revising guidance further into negative territory there was little price sensitivity as the book grew to more than €9bn, said the syndicate official.
“We are happy to have priced the first euro bond in negative yield territory but frankly speaking €9bn for such a yield is better than expected,” he said.
“The European Central Bank said last week that it would only buy bonds with a negative yield down to minus 20bp and sooner or later we’ll see all paper move in this direction.”
Syndicate bankers away from the mandate agreed.
“There’s a lot of investors that clearly think yields are going to go more negative,” said an SSA syndicate official.
“The high demand is probably partly from that. Other factors might be people stocking up to sell to the ECB, and bank treasuries and central banks that have to own this paper. Regardless of rates, clearly the euro is going to be a reserve currency for all central banks.”
According to the ESM’s Ruhl, few of the bonds went to investors that were potentially looking to sell at an immediate profit to the ECB.
There was “a very limited amount going to fast money wanting a quick win”, he said.
The final spread equated to a new issue premium of 1bp, the syndicate official on the deal said.
