Bloomberg News

EFSF Bond-Yield Boost Fails to Halt Demand Slide Amid Crisis

January 06, 2012

(Adds strategist’s comment in third paragraph. For more on the euro crisis click on EXT4.)

Jan. 5 (Bloomberg) -- Europe’s bailout fund is losing its appeal as a bond issuer after investors ordered about 4.5 billion euros ($5.8 billion) of its 3 billion euros of notes compared with demand of nine times on its first deal a year ago.

That’s after the European Financial Stability Facility offered investors a yield spread almost seven times what it paid to sell 5 billion euros of securities last January, according to data compiled by Bloomberg.

“The book on the EFSF bond is far from stellar at just 4 billion,” said Padhraic Garvey, global head of developed- country debt and rates strategy at ING Groep NV in Amsterdam, said before the deal closed. “A much bigger cover would have given the thing a better gloss.”

The new bond was the EFSF’s first three-year issue and follows a Nov. 7 sale that was delayed because of volatility caused by the euro region’s deepening sovereign crisis. Standard & Poor’s said last month that the fund, which will use the proceeds of today’s transaction to help finance the bailouts of Ireland and Portugal, may lose its top credit rating should one of its AAA rated guarantors be downgraded.

The EFSF in Luxembourg said in a statement that the deal attracted orders “close to” 4.5 billion euros. Christof Roche declined to give the exact amount.

Success Target

The sale of bonds due February 2015 would have needed orders of two to three times the issue size to be viewed as a success, Garvey said. It had received 4 billion euros of orders as of 9:30 a.m. in London, 30 minutes before the books were due to close, according to a banker involved in the transaction.

Book sizes have been declining since the EFSF’s first bond sale in January 2011 attracted orders of 44.5 billion euros, according to the fund’s website. It said it received more than 8 billion euros of bids for its 5 billion-euro issue of 2021 notes last June, while the postponed 3 billion-euro sale of bonds due 2022 got orders for “in excess of” that amount in November.

The EFSF, which owes its top credit ratings to guarantees from nations including France and Germany, priced its new notes to yield 40 basis points more than the benchmark swap rate, according to the fund’s statement. Credit Suisse Group AG, Deutsche Bank AG and Societe Generale SA managed the fundraising.

That spread compares with the six basis-point margin the fund paid to sell its July 2016 bonds on Jan. 25, 2011, according to data compiled by Bloomberg. Those 2.75 percent July 2016 bonds now have a yield spread of 45 basis points over swaps, down from as much as 102 basis points in November, according to Bloomberg Bond Trader prices.

The increase in the issue spread “reflects the changing market backdrop, the concerns over the swathe of potentially imminent ratings downgrades within the euro zone which would see the EFSF also lose its own gold-plated rating,” said Richard McGuire, a senior fixed-income strategist at Rabobank International in London. “Last January this stuff used to sell like hot cakes. Now it’s certainly more challenging.”

--With assistance from Namitha Jagadeesh in London. Editors: Paul Armstrong, Michael Shanahan

To contact the reporters on this story: Ben Martin in London at bmartin38@bloomberg.net; John Glover in London at johnglover@bloomberg.net

To contact the editor responsible for this story: Paul Armstrong at Parmstrong10@bloomberg.net


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