EFSF Scales Back Irish Rescue Bond
Bankers have warned that the eurozone rescue fund might face lackluster demand this week for a planned bond issue designed to finance Ireland’s bail-out.
The offering will provide a key test of investor sentiment after the announcement last week of new plans to tackle the eurozone debt crisis.
The bond from the European financial stability facility will seek to raise 3 billion euros ($4 billon) and will be in 10-year bonds rather than a 15-year maturity because of worries over demand, say bankers. A 10-year bond is more likely to attract interest from Asian central banks than a longer maturity.
Bankers familiar with the issue said the EFSF had been considering a 5 billion euro issue. However, the EFSF has denied this, saying it had always sought a 3 billion issue.
One banker said: “There is so much uncertainty over the EFSF that it will be much harder to sell than it was earlier in the year, when we saw massive demand from European funds and Asian accounts. Japan and China bought in big size earlier in the year. We are not sure we are going to see that type of demand this week.”
Bankers said the bond, which is expected to price on Wednesday, may see weak demand in spite of Klaus Regling, the head of the EFSF, launching a charm offensive in Asia last week to encourage interest.
EFSF officials decided to price this week because market conditions might deteriorate if they hold off any longer, according to bankers.
The bond is expected to price at yields of about 3.30 percent, about 130 basis points over Germany, the European market benchmark. This represents a big mark-up since the middle of September, when existing 10-year EFSF bonds were trading at about 2.60 percent, only 70 basis points over Germany.
Bankers said Chinese and Japanese investors had been big buyers of EFSF bonds earlier in the year on the basis that they were triple A rated with a big premium over Germany, which was seen as a risk-free premium.
However, as worries over the eurozone and its ability to tackle the crisis have deepened, the focus has shifted to the structure of the EFSF, which is still unclear and may mean these bonds could be difficult to sell back to the market.
EU heads of state last week outlined two schemes to leverage up the EFSF, which has a firepower of 440 billion euro.
These are a credit enhancement or insurance scheme, providing additional credit enhancement for new bonds issued by sovereign states, and a special purpose investment vehicle combining public and private capital to extend loans and buy bonds in the primary and secondary markets.
Barclays Capital, Crédit Agricole and JPMorgan are managing the 3 billion euro offering.