The European Union returned to syndicated bond issuance for the first time since the summer break on Tuesday, raising €5bn via a deal the market said was judiciously priced given the uncertainty in the euro SSA segment.
The €5bn no-grow 3.125% December 2030 came at 2bp over mid-swaps, 2bp inside guidance of mid-swaps plus 4bp area. This translated to a final yield of 3.217% or 60.1bp over the 2.4% November 2030 Bund. Bankers off the deal said it landed with a final new issue concession of approximately 3bp.
Demand soared to €35bn on Tuesday morning and leads Bank of America, Crédit Agricole, Morgan Stanley, Nomura and UniCredit had hauled in €46bn of demand by the time they closed the books, including a €2.5bn of their own orders.
“It should be pretty clear that the EU’s premium is in the context of 5bp at the start,” said an EU lead. “We had a lot of conversations about where to start and thought this would give the transaction some momentum. The EU is a predictable issuer and doesn’t like to over-tighten deals. And we thought this would give investors reasons to get involved."
A banker away from the deal said he saw fair value at minus 1.5bp, meaning the EU had “clearly acknowledged the slightly weaker backdrop”, and that a final new issue concession of around 3bp was “absolutely prudent”.
Though leads managed 1bp more of tightening on the EU’s last syndication, the second banker said that deal had been a “special transaction”. The EU has typically tightened by 2bp during deal execution this year.
“Price discovery is not as straightforward as it was,” the banker continued, “and the risk appetite of investors is not as straightforward. From that point of view it seems the EU stuck with what the investor base was most likely expecting."
Notwithstanding the European Central Bank meeting on Thursday jeopardising this “minor uplift in sentiment”, the banker said he would expect the market to stabilise from here, adding that he expected trades to be more robust.
“I don’t see any significant reason why trades would perform much better in secondaries,” he warned, “however, I see the widening in swap spreads diminishing as we speak.”
Other bankers off the deal agreed the EU had opened books at a wider spread than usual, deviating from its tried and tested method of starting 4bp back from fair value.
A third banker reaffirmed that the EU had gone out with a “sensible approach in this market”.
“Things have been trading more on the bid side these last few weeks," he said. "I think this was the trade the market had been waiting for – one needs to pay more attention to starting point and concession now. While many of it’s peers are done with funding this year, or nearly done, the EU still has a few deals to come, despite the smaller funding programme.”
The lead manager echoed these sentiments, adding that Tuesday's deal was "so fundamentally important for the market for the EU to demonstrate strong access".
"The EU also only funds in euros and it’s not an option for them to walk away for a couple of months and fund in dollars instead," he continued. "I would pay full kudos to the EU for being eminently sensible throughout the execution to make it a really smooth process. I think they deserve a big pat on the back."
