SURE thing: EU jobs scheme funding a template for heftier recovery fund issuance
By Yoruk Bahceli and Dhara Ranasinghe
LONDON (Reuters) - The sale of debt to fund Europe's pandemic unemployment system will begin later this month. This is a test run of groundbreaking plans to turn the European Union into one of the world's largest bond issuers in less than a decade.
A Europe-wide program unveiled earlier this year aims to increase the bloc's mountain of debt by more than 15-fold over four to six years to € 900 billion (£ 816 billion), an annual borrowing of more than means one hundred billion euros from next year.
It's an ambitious plan for a company whose € 50 billion outstanding debt more or less matches the outstanding debt of tiny Slovakia and which raised just € 420 million last year. But there will be a kind of dry run - donations for an EU-wide unemployment system of 100 billion euros, which market participants see as a template for the 750 billion euros recovery fund.
The unemployment plan - known as SURE - is expected to see the EU issue bonds worth five billion euros every two weeks through the end of 2021 with a maturity of three to 30 years.
"The SURE program is really going to give the EU the roadmap that it needs to investigate in more detail next year," said Neal Ganatra, who operates overseas state, supranational and agency debt consortia at Deutsche Bank.
Not only is the fund an important step towards European cohesion, but it should also enhance the attractiveness of the euro as a reserve currency that competes with the dollar.
EU finance ministers disagree on how the recovery fund money should be paid out, but debt officials are already on the rise on the logistics front - from issue formats, volume and frequency to target investor base.
EU budget and administration commissioner Johannes Hahn told Reuters on Tuesday that SURE was the focus, but the bloc was considering all options to choose the optimal issuing strategy.
The super of the Supras? The issuance of EU bonds is expected to increase https://graphics.reuters.com/EUROPE-BONDS/yxmpjbxzlpr/chart.png
The sheer size of the upcoming issue means plenty of choice for investment banks to manage the business, whichever format the EU chooses - bank syndicates selling direct to investors or auctions where banks acting as dealers take the debt buy, sell to investors and trade for liquidity.
Syndications are the more lucrative format for banks which, according to a European government, can earn fees of around 0.175% of the issue volume for a 10-year state transaction.
SURE bonds - like most supranational debt - are largely syndicated, but Commissioner Hahn said Reuters auctions could ultimately be part of the mix.
Using a combination would make EU debt look more like government bonds backed by liquid trading, says Zoeb Sachee, who oversees trading in government bonds and supranational bonds in European markets at Citibank.
"The question is whether the EU, as a major issuer, needs liquidity in the form of government bonds." Said Sachee.
SAFE, SUSTAINABLE, SPEED
In a world in which first-class and sustainable securities are in demand, the EU with its AAA rating offers both. SURE will include "social" bonds of the type from development banks, which will be sold to fund COVID spending, while green bonds will make up a third of the recovery fund.
EU joins the largest borrowers in the euro zone https://fingfx.thomsonreuters.com/gfx/mkt/gjnpwjzynvw/FseE6--nbsp-eu-to-join-euro-zone-s-biggest-borrowers.png
To maximize investor participation, they may only need to offer marginally higher returns initially. Fund managers told Reuters that they expect up to 15 basis points above the lending rates implied by outstanding issues.
"If they got closer to where they are currently marked, we would be of no interest (unless there is a concession)," said Nick Sanders, portfolio manager at AllianceBernstein.
New issue premiums should go down as bonds become easier to trade. Above all, sustainable bonds tend to pay lower yields than conventional bonds. However, the returns will continue to exceed the other AAA debt as the EU includes exposure to lower-rated southern and eastern European countries.
EU bonds with a term until 2031 currently offer a yield of -0.15% compared to -0.5% for German 10-year bonds.
"It is positive to have another issuer that is coming onto the market at a premium on top of Bunds," said Nicola Mai, head of PIMCO's European government credit research.
EU bonds traded like France are offering a rally over Germany. Https://fingfx.thomsonreuters.com/gfx/mkt/nmopawrakpa/eu%20france%20germany.png
(Reporting by Dhara Ranasinghe and Yoruk Bahceli; additional reporting by Abhinav Ramnarayan; graphics by Yoruk Bahceli and Dhara Ranasinghe; editing by Sujata Rao and Susan Fenton)
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