European Investment Bank to borrow €70 billion in 2013

European Investment Bank in Luxembourg

The European Investment Bank (EIB) is one of the long-term lending institutions of the European Union and it is owned by its Member States. It makes long-term finance available for sound investments in the real economy, in order to contribute towards EU policy goals. Its creditworthiness measures almost exactly the degree of trust that financial markets formulate for the European Union in its entirety.In 2012, the EIB was funded with more than the equivalent of €70 billion and plans to borrow another €70bn in 2013. EIB regularly offers bond issues in euro, but it participates also in the capital markets of other major currencies, like the British Pound (GBP).The Bank’s issues and the kind of acceptance they meet in the market are considered as benchmarks.

On Thursday 3 January 2013, the EIB launched its first benchmark bond issue of 2013 with a new 5-year GBP 1bn loan maturing on 15 January 2018. The bond carries a coupon of 1.375% (annual return for the holder) and it was priced at 40 basis points (100 basis points = 1%) over the relevant United Kingdom Treasury bond due on March 2018. The price of a bond is usually negotiated around parity, meaning around the 100% of its nominal value.

If a bond is of high creditworthiness its price exceeds the par and it is sold above 100% of nominal value, analogically reducing its yield for the holder.According to the EIB, the order book for this issue  opened at 8:25 am London time on Thursday, with a minimum deal of no less than GBP 500 million and price guidance based on the  United Kingdom Treasury bond maturing on March 2018 + 40/42 basis points (bps).

The offer was met with strong UK demand from the outset. The book closed at 10:30 am, having reached offers of around GBP 2 billion. It allowed EIB to price a capped deal of GBP 1 billion at a final spread based on the United Kingdom Treasury bond maturing on March 2018 + 40 bps. That is at the narrow end of the initial price guidance. At GBP 1bn, this is the joint largest ever new 5-year GBP issue from EIB. In reality investors accepted a lower yield (United Kingdom Treasury bond maturing on March 2018”+40 basis points), given that EIB was ready to pay an interest rate up to +42 basis points for this loan.

The transaction enjoyed very strong support from UK investors, who took 80% of bonds sold. Bank treasuries were the powerhouse of demand, accounting for 74% of allocations, with solid support coming from central banks and official institutions (16%), fund managers (7%), insurance and pension funds (2%) and private banks (1%).

Geographical composition of demand

As noted above the vast majority of demand for this EIB new bond issue came from UK investors. Then it was Asian buyers who accounted for 15% of the bond, followed by Middle East and Africans with 2%, Europeans (ex. UK) with 2% and others with 1%.

After the conclusion of the transaction Bertrand de Mazières, Director General of Finance at the EIB, said: “The first sterling benchmark in 2013 was well received and emphasizes a continued and widespread market acceptance for the EIB’s strategic issuance approach. The lion’s share of demand originated from UK based investors together with Asian accounts and also capitalised on improved market sentiment towards Europe which builds a solid base for the EIB’s 2013 funding activities.”