The European Commission on Tuesday drew record orders in excess of €233bn from more than 500 investors for the inaugural bonds issued under SURE, the EU’s programme for safeguarding jobs during the coronavirus crisis. IPE contacted European pension investors to find out about their involvement – or otherwise – in the landmark transaction.
A natural place to start was the Netherlands and its top tier pension investors, with PGGM and APG revealing substantial purchases.
PGGM bought €212m worth of the SURE bonds on behalf of its client PFZW, the €233bn healthcare scheme, while its peer APG got its hands on €170m of the bonds, €145.5m of which was bought for its main client ABP, the largest pension fund in the Netherlands.
Cardano participated in the transaction on behalf of seven smaller Dutch pension funds. It subscribed for more than €100m and was allocated €35m by the banks in charge of the deal.
“The interest rate on the bonds was higher than the current yield on French government bonds, even though they have a higher credit rating at AAA compared with AA for French bonds,” noted Marco Teunissen, portfolio manager at the fiduciary manager.
However, in France the mandatory supplementary pension fund for civil servants, ERAFP, did not get involved in the deal as the yield was too low for its regulatory constraints.
Issuer: European Union, with the European Commission executing the deal on its behalf
What: €17bn dual tranche social bond, the largest ever Euro-denominated bond from a supranational issuer
- €10bn 0% due in October 2030, priced at 3 basis points over mid-swaps, equivalent to 36.7bps over the conventional 0.00% Bund due 15 August 2030 and 9.2bps points above the 0.00% OAT (French government bond) due 25 November 2030
- €7bn 0.1% due in October 2040, priced at 14bps over mid-swaps, equivalent to 52.1bps over the 4.75% Bund due 4 July 2040 and 3.2bps above the 0.25% OAT due 25 May 2040
Orders: More than €233bn, “the largest ever collected in the history of sovereign, supranational and agencies debt capital markets”. €145bn of orders for the 10-year tranche and over €88bn for the 20-year tranche. 578 investors participated in the 10-year tranche, 514 in the 20-year
Ratings: Triple-A from DBRS, Fitch, Moody’s, S&P, and SCOPE, “benefitting from the unconditional support of all EU member states”
Joint lead managers: Barclays, BNP Paribas, Deutsche Bank, Nomura and UniCredit
Source: EC/Joint lead managers
Back in the Netherlands, the mandates of Cardano’s nine other pension fund clients do not permit investments in supranational bonds such as the SURE issuance, and some other Dutch pension funds decided not to participate in the SURE bond sale.
Metal schemes PME and PMT both said they “did not see a reason to reposition our bond portfolio at this moment.” However, a PME spokesperson added that the fund expected to participate in future EU bond sales “as the EU will become one of the largest AAA-rated issuers”.
Cardano’s Teunissen said the spread on future SURE bonds would probably be lower than that on yesterday’s: “The first issue had to be successful because it was the first one, so it had to be priced attractively. And the market will become more liquid once more SURE bonds are issued so the liquidity premium will also be lower going forward.”
In Denmark, DKK293bn (€39bn) labour-market pensions group Sampension saw reason to place orders for the SURE bonds, with Lars Peter Lilleøre, its head of fixed income, describing the deal as “historic”.
He said Sampension tended to consider issuance from “E-names” – the European Financial Stabilisation Mechanism, the European Investment Bank and others – relative to both swap markets and European government bonds, especially OATs.
“Given the expected magnitude of EU issuance this year and next, we do expect a rather full curve and with decent deep liquidity across the points,” he added, although noting that that the stated expected maturity of the SURE programme – 15 years on average – may prohibit a full curve in the sense that the two year and five year points may not be used to a very large degree.
“We will see,” he said.
Earlier this month, the European Commission announced it would issue the EU SURE bonds as social bonds, and that it had therefore adopted an independently evaluated Social Bond Framework, which is meant to provide investors with confidence that the funds mobilised will serve a social objective.
For at least some pension funds, the social aspect only added to the attraction.
Sandor Steverink, head of treasuries at APG Asset Management, said the investment in the SURE bonds was an opportunity for APG to show its “strong commitment to support Europe’s sustainable recovery as well as affected workers and their families”.
“And at the same time, it offers a good risk return perspective for our clients’ end beneficiaries.”
Johannes Hahn, European Commissioner for budget and administration, said: “The strong investor interest and the favourable conditions under which the bond was placed are further proof of the new-found interest in EU bonds.
“The ‘social bond’ character of the issuance has helped to attract investors who wish to help EU Member States in supporting employment through these difficult times.”
“This is a whole new game with in my opinion potentially different benefits”
Luc Vanbriel, CIO of KBC Pension Fund
Not all European pension funds are set up to invest directly and thus comment on individual deals. KBC Pension Fund in Belgium, for example, invests via mutual funds, so CIO Luc Vanbriel said he followed the SURE bond sale but at a distance.
He commented more from a macro-economic perspective.
“The idea is to borrow the money in financial markets against the EU budget, so de facto it’s a joint liability of all member states,” he said. ”On the other side of the equation, the proceeds will be disbursed according to a set of policy priorities. This is a whole new game with in my opinion potentially different benefits.”
Vanbriel said he viewed the issuance programme as “a major step forward in completing the euro-zone construction and in the development of a permanent facility to borrow money and create a risk-free euro curve”, with another benefit being enhanced public and private sector shock-absorbing capabilities.