Bloomberg News

EFSF Says Bond Sale Delayed After Moody’s France Downgrade

November 20, 2012

The European Financial Stability Facility said it delayed a sale of three-year euro benchmark bonds after France was downgraded by Moody’s Investors Service.

The transaction was pulled because the EFSF’s so-called deeds of guarantee require new bond issues to be covered by member states with ratings similar or better than the facility’s own grade, the European Union’s temporary bailout fund said in an e-mailed statement. EFSF’s bonds declined.

Moody’s cut France’s long-term debt rating to Aa1 from its top grade, citing slowing growth for Europe’s second-largest economy. The Luxembourg-based fund, which is rated Aaa by Moody’s and one step lower at AA+ by Standard & Poor’s, was formed in 2010 to provide loans to cash-strapped EU countries.

“EFSF will look to bring its new three-year euro benchmark offering once the issuer is able to satisfy the deeds of guarantee language,” EFSF Chief Financial Officer Christophe Frankel said in the statement. “EFSF is currently unable to proceed until this technical aspect is resolved.”

The three-year securities were initially marketed at a yield range equivalent to the swap rate to two basis points below the benchmark, according to people familiar with the deal. The offering attracted more than 3 billion euros ($3.8 billion) of potential orders, according to the EFSF.

Downgrade Backdrop

The EFSF, backed by the guarantees of euro member states, will be replaced by the European Stability Mechanism that started Oct. 8 and relies on paid-in capital by European governments to fund bailouts. The EFSF will continue with existing programs for Greece, Portugal and Ireland, while aid for the Spanish banking sector will be transferred to the ESM.

“The EFSF must learn to live with the backdrop of intermittent downgrades of its member countries,” said Georg Grodzki, the London-based head of credit research at Legal & General Investment Management Ltd., which manages $622 billion of bonds. “Downgrades or negative outlook changes are likely to remain regular occurrences for Eurozone members for the next couple of years.”

The yield on EFSF’s 1.125 percent bonds due 2017 rose 3.1 basis points to 15.1 basis points more than the benchmark swap rate, data compiled by Bloomberg shows. The spread narrowed to 12.3 basis points on Nov. 19, the smallest gap since the notes were sold on Oct. 15.

Ratings Concern

Moody’s will assess the implications of France’s downgrade for EFSF’s and ESM’s ratings, focussing on whether the support available from the remaining top-rated guarantors and shareholders is “consistent with the EFSF and ESM retaining the highest ratings,” the ratings firm said in a statement.

“People won’t just be worried about this deal today, but that it raises the question what will the ESM’s rating be in a year’s time,” said Gary Jenkins, founder of Swordfish Research Ltd. in Amersham, England. “This could cause a problem because a lot of the sovereign wealth funds only want to invest in Europe where it’s AAA. At a minimum it will put the price of EFSF bonds up.”

JPMorgan Chase & Co, Morgan Stanley and Natixis were managing the bond sale for EFSF.

To contact the reporter on this story: Katie Linsell in London at klinsell@bloomberg.net

To contact the editor responsible for this story: Paul Armstrong at parmstrong10@bloomberg.net


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