NextGenerationEU: European Commission completes second successful bond issuance to support Europe’s recovery

(Credit: Unsplash)

This article is brought to you in association with the European Commission.


The European Commission has today, in its second NextGenerationEU transaction, raised €15 billion to finance Europe’s recovery from the coronavirus crisis and its consequences. This was a dual-tranche transaction, consisting of a €9 billion 5-year bond due on 6 July 2026 and a €6 billion 30-year bond due on 6 July 2051.

Both tranches attracted a very strong interest by investors across Europe and the world. The transaction was more than 11 times oversubscribed and with bids exceeding €170 billion. As a result, the Commission has obtained very favourable pricing conditions, building on the successful first NextGenerationEU issuance earlier this month and the excellent performance of the SURE programme.

Commissioner in charge of Budget and Administration, Johannes Hahn, said:”This is the second time the Commission has gone to the markets to borrow under NextGenerationEU and again we have received a strong vote of confidence from our investors. I am glad that the money raised today will help build a greener, more digital and more resilient Europe”.

This is the second transaction under the NextGenerationEU programme, following the €20 billion 10-year bond that the Commission issued on 15 June 2021 on behalf of the EU. The first bond was the largest-ever institutional bond issuance in Europe, the largest-ever institutional single tranche transaction and the largest amount the EU has raised in a single transaction.

Following today’s transaction, the Commission has so far raised €35 billion under NextGenerationEU. The funds will now be used for the first payments under the scheme, including under the Recovery and Resilience Facility and various EU budget programmes financed by NextGenerationEU. The first disbursement under NextGenerationEU took place already yesterday. On 28 June, the Commission disbursed €800 million to REACT-EU. This programme finances targeted measures for the green and digital transitions to quickly address the negative consequences of the outbreak, for example, through investments in energy efficiency, urban greening and digitalisation.

By the end of 2021, the Commission expects to raise some €80 billion in bonds, to be complemented by short-term EU-Bills, as per the funding plan published in June 2021. The exact amount of both EU-Bonds and EU-Bills will depend on the precise funding needs, and the Commission will revise its initial assessment in the autumn. In this way, the Commission will be able to fund, over the second half of the year, all planned grants and loans to Member States under the Recovery and Resilience Facility, as well as cover the needs of the EU policies that receive NextGenerationEU funding.

Background

NextGenerationEU is a temporary recovery instrument of some €800 billion in current prices to support Europe’s recovery from the coronavirus pandemic and help build a greener, more digital and more resilient Europe.

To finance NextGenerationEU, the European Commission – on behalf of the EU – will raise from the capital markets up to around €800 billion between now and end-2026. €407.5 billion available for grants (under RRF and other EU budget programmes); €386 billion for loans. This will translate into borrowing volumes of an average of roughly €150 billion per year.

Given the volumes, frequency and complexity of the borrowing operations ahead, the Commission will follow the best practices used by large and frequent issuers, and implement a diversified funding strategy.

This strategy presents a diverse range of instruments and techniques, going beyond the back-to-back approach that the Commission has used so far to borrow from the markets, including in the framework of the SURE programme. Over the past 40 years, the European Commission has run several lending programmes to support EU Member States and third countries. All of these lending operations were financed on a back-to-back basis, mainly through syndicated bond issuances.

Technical section

The 5-year bond carries a coupon of 0% and came at a re-offer yield of -0.335% providing a spread of -11 bps to mid-swaps, which is equivalent to +22.0 bps over the five-year Bund due in April 2026. The final order book was in excess of €88 billion, which meant that the bond has been nearly 10 times oversubscribed. The 30-year bond carries a coupon of 0.7% and came at a re-offer yield of 0.732% providing a spread of +22 bps to mid-swaps, which is equivalent to 39.9 bps over the 30-year Bund due in August 2050. The final order book was in excess of €83 billion, which meant that the bond has been nearly 14 times oversubscribed. On a standalone basis, the orderbook of the 30-year tranche was the largest ever in that maturity for a supranational issuer in the euro market. The joint lead managers of this transaction were Credit Agricole, Deutsche Bank, JP Morgan, UniCredit and Goldman Sachs. BBVA and Erste bank acted as co-lead managers.

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