SSA Market: The long game - Rabobank

Research team at Rabobank notes that one of the Eurozone’s most prominent and youngest SSA issuers has been touted for an even larger role in Europe.

Key Quotes

“The possibility of turning the ESM into a vehicle that would ultimately replace the role of the IMF in future rescue programmes.”

“One of the key considerations as regards the feasibility of such a development is the size and flexibility of the ESM’s current lending capacity. As a purely theoretical exercise we examined the total outstanding amount of IMF debt to Eurozone countries to first see what exposure the IMF continues to have across the region and then assessed whether the ESM has the capacity to absorb this amount.”

“We found that the ESM has both the capacity and flexibility in terms of its funding facilities to absorb the IMF’s existing exposure and would thus face little challenge in taking over the IMF’s role in terms of the size and scope of current funding exposures. We do however anticipate challenges as regards the political impartiality that the issuer may have when dealing with bailout programmes and member states.”

“Last week also saw the release of the EFSF/ESM’s latest quarterly update which revealed that both issuers were ahead of Q1 targets as regards the combined EUR57bn funding needs for 2017. Demand for EFSF and ESM bonds has been strong, with longer dated paper offering attractive new issue premiums. For its part, the ESM started the quarter with a 30-year bond raising EUR3.5 billion. The quarter’s funding target was completed with a 10-year bond placed on 7 March which saw EUR3 billion issued on the back of strong demand enabling EUR1.obn of pre-funding.” 

“The EFSF issued across the curve in Q1 starting with a 6y EUR3.0 bn deal followed by a 26-year bond. A dual-tranche transaction completed the quarter with a 4y and a 39y bond. The February 2056 bond is the EFSF’s longest issuance to date. A total of EUR9.5bn was raised over the quarter which saw EUR500mn prefunded going into Q2. Combined, the EFSF/ESM raised EUR200mn in N-Bonds.”