This week's stand-out development was the first issue to fund the EU's EUR100 billion SURE program, a two-tranche Social Bond that gained a record EUR233 billion in demand, with 63% of the issue taken by ESG specialist funds: the offering represents one-third of the prior total outstanding stock of Social debt. Other highlights were Oman raising USD2 billion of seven and 12-year debt and Greece's EUR2 billion tap of its outstanding 2035 bond.

European Union

The European Union obtained record demand of EUR233 billion for a dual-tranche EUR17 billion 10 and 20-year AAA/AA/AAA rated social bond sale, the largest supranational issuance to date, described in its statement as: "the EU's debut transaction under the Support to mitigate Unemployment Risk in an Emergency (SURE) program as well as its inaugural Social bond and first dual-tranche transaction".

578 investors were involved in the EUR10 billion 10-year tranche, priced at -0.238%, three basis points over mid-swaps, versus guidance of a six-basis point spread. This equated to a 36.7 basis point premium to comparable Bunds and 9.2 basis points over France's 0% November OAT. The tranche attracted total bids of EUR145 billion. Fund managers - with 41% - and central banks - with 37% - led the allocations, with the UK, Germany, Benelux and France with 20%, 17%, 16% and 12% respectively leading by geography.

514 investors were involved in the 20-year tranche, priced at 0.131%, 14 basis points over mid-swaps versus initial guidance of a 17-basis point spread. This equated to 52.1 and 3.2 basis points respectively over the comparable Bund and OAT outstanding issues.

46% of the 20-year tranche was purchased by asset managers, followed by bank treasuries with 25% and 13% taken both by central banks and insurance companies and pension funds. Germany, France, the UK and Benelux led demand on a geographic basis with 24%, 19%, 16% and 16% respectively.

63% of the combined deal was allocated to ESG-focused investors. The deal is a breakthrough for the Social Bond segment, described by the EU as worth around EUR50 billion in aggregate before its sale.

Under SURE, the EU will raise at least EUR87.4 billion of social bonds by end-2021 within a total program size of EUR100 billion, ahead of its EUR750 billion Next Generation EU recovery program during 2021-26. A second issue within 2020 is highly likely.

Ahead of the EU's deal, the European Stability Mechanism completed its planned 2020 funding program with a EUR2 billion four-year 0% deal priced at mid-swaps minus eight basis points, two basis points inside guidance.

Emerging markets

Oman announced plans to raise three, seven and 12-year dollar debt despite S&P cutting Oman's ratings by one notch to B+, citing that "Oman's public sector finances …will materially weaken over the next three years, notwithstanding the implementation of measures to reduce fiscal deficits".

On 21 October Oman placed USD2 billion of seven and 12-year debt, gaining a combined USD3.8 billion of demand: it priced the two tranches at 6.75% and 7.375% respectively. It did not launch the planned three-year portion.

Digital telecommunications firm Millicom, whose business spans Latin America, sold USD500 million of 11-year debt at 4.5%, versus initial guidance of low-5% area. Proceeds will permit the redemption of its 6% 2025 issue.

Also on 19 October, Brazilian meat producer BRF tapped its USD500 million 5.75% 2050 issue with an increased USD300 million (up from USD250 million) at a 5.875% yield versus 6% guidance.

Following Turkey's successful sovereign level deal, the country withdrew plans for a debut bond issue by its sovereign wealth fund.

Other debt

Greece successfully tapped its EUR1.875% 2035 issue, its fifth bond sale in 2020. It priced EUR2 billion at 1.152%, mid-swaps plus 125 basis points, ten basis points inside initial guidance, achieving EUR16.75 billion in demand from over 280 accounts. Fund managers took 61%, followed by banks with 17% and hedge funds with 9%: UK and French buyers led demand with 24% and 17% of the allocations respectively.

Italy has today (22 October) attracted over EUR80 billion for a newly launched 2051 syndicated deal, with proceeds linked to the repurchase of four conventional issues maturing between 2021-23 and an inflation linked bond due in 2025.

Kingdom of Denmark raised USD2 billion of two-year bonds at 0.248%, 1 basis point over mid-swaps versus a 5 b.p. initial indicated spread, or 9.85 basis points over the comparable US Treasury. Peak demand reached USD9.2 billion. Proceeds were swapped back to Euros. The deal was dollar denominated to "ensure complete and diversified market access through foreign currency funding" and represented the country's first foreign currency bond since 2014: no further such borrowings currently are planned. Some 115 accounts participated, with central banks and official institutions dominating demand with 74% of allocations.

United Airways returned successfully to the bond markets, raising USD3 billion of 5.875% 2029 collateralized pass through certificates. The deal, which has a 4.1-year average life, is supported by security over a broad pool of assets, including aircraft and spare parts.

Spanish electricity utility Iberdrola sold perpetual deals callable after 5.5 and 8.5 years. It raised a combined EUR3 billion, the largest Spanish corporate hybrid to date according to Iberdrola's statement: the two tranches were priced at 1.874% and 2.25%, with total demand reaching EUR7.5 billion from 263 buyers in 27 countries.

Unipol SAI issued a EUR500 million Restricted Tier 1 capital instrument on 20 October. The perpetual non-call ten-year deal - rated B1/B+ by Moody's and Fitch - attracted demand of over EUR1.5 billion and was priced at 6.375% until first call. 80 percent was placed internationally.

Outlook and implications

The EU's first SURE deal is an exceptional success and represents a very promising start to the EU's large-scale issuance, with funding levels above Germany and France increasing its appeal.

EU securities are attractive to buyers of high-quality sovereign and supranational debt, and to ESG buyers. Some initial highly positive sentiment is likely to ease once the EU becomes a regular large-scale issuer, given the need to fund not only the EUR81 billion or more for SURE, but also its EUR750 billion Next Generation EU program for 2021-26. Two interesting but currently hypothetical questions are whether the EU's issuance reduces the role of German debt securities as the European market's most popular reference, and whether EU issuance could become a permanent feature.

In a Le Monde interview on 19 October, ECB President Cristine Lagarde noted that NGEU " responds to an exceptional situation" but suggested that "we should discuss the possibility of it (permanent EU bond issuance arrangements) remaining in the European toolbox, so that it can be mobilized again in equivalent circumstances". Such proposals would currently meet strong opposition within the EU from stronger-rated countries.

EU debt service sustainability is based on "multiple layers" of protection according to its presentation. For loans - such as the SURE program - the initial backing comes from repayments by the program's beneficiaries, with the EU noting that such payments have always been met to date. In the event of non-payment, debt is backed by the EU budget, with the Commission able to use its cash buffers, change its expenditure program and make calls on member states if needed. The difference between each year's budgetary ceiling and actual outlays gives further protection. Lastly, for the SURE program, member states have given EUR25 billion in guarantees.

Elsewhere, Oman's deal appears a partial success, despite adverse debt sustainability trends, following recent successes by Bahrain, Egypt and Turkey. Oman raised less than previously reportedly targeted, withdrew its three-year tranche, and faces continuing significant challenges to establish a sustainable debt footprint.

Turkey's plans to issue debt for its sovereign wealth fund were unusual - such funds generally are vehicles to invest surplus national resources into longer-term strategic assets. There are no indicators of deterioration in Turkey's wider bond market access, with the country's EMBI+ bond index trading at around 600 basis points over US Treasuries, having improved during October from 650 b.p. on 25 September. Turkey successfully returned to the bond markets on 7 October, raising USD2.5 billion of 6.4% five-year debt, with demand over USD5.8 billion.

Lastly, Greece's highly successful 15-year tap, alongside Iberdrola and Unipol's successful perpetual sales further indicate the strong ongoing demand for long-duration and higher-risk assets.

Posted 23 October 2020 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, S&P Global Market Intelligence