LONDON: Investors sent a warning shot to eurozone leaders that they are not out of the woods yet when they shunned the European Financial Stability Facility's latest bond issue, just six weeks after the eurozone's rescue fund priced its largest syndicated deal.
A EUR3bn 10-year ended up being undersubscribed, a far cry from the EUR6bn five-year sold in July that attracted EUR8bn of orders.
Uncertainty over the costs of potential sovereign bail-outs and scale and shape of slated sovereign bond market intervention prompted investors to scale back their exposure on EFSF's latest issue.
"The firewall that the official sector is building is underpinned by the belief that rescue vehicles can go to market and issue in great size," said Sohail Malik, senior portfolio manager for ECM's special situations team, an asset manager with assets under management in excess of USD9bn.
"But, in reality, the only European issuer that can now come to market and get away real bumper-sized issues is Germany," he added.
EFSF's recent successes in the bond markets reflect the comfort that Germany's EUR211bn guarantee engenders, said Malik.
However, the German pool is quickly starting to run out, he said. Investors are now paying closer attention to the fact that with EUR152bn of EFSF issuance since its inception, 72% of the German guarantee has been used up.
France, EFSF's second largest guarantor at EUR158bn, instils less confidence after S&P stripped the country of its Triple A status earlier in 2012, and the other four remaining Triple A guarantors of EFSF's EUR440bn lending capacity - Austria, Finland, Luxembourg and Netherlands - together equate to just EUR70bn of commitments.
"International investors are constantly running these sort of scenarios asking themselves: 'What am I actually buying? What is the EFSF?'" added Malik.
Concerns around the EFSF's structure are, however, not new, nor is the speculation around its increased role in bailout activities. Yet, on a day when the market was in good shape, funding proved scarce.
NOT JUICY ENOUGH
In recent bond issues, the EFSF has been able to entice reticent investors with hefty premiums.
The same tactic was deployed with its latest 10-year issue, to the extent that rival banks scoffed at the double-digit new issue premium on offer when initial price thoughts went out on Tuesday evening at mid-swaps plus mid 50s.
Like the issuer itself, banks were then left dumbfounded when the bond came up short, despite pricing at the wide end of swaps +54/+57bp guidance on Wednesday. "There is nothing we could have done differently.
All the banks proposed the same size, maturity, pricing and timing," said Christophe Frankel, CFO and deputy CEO at the EFSF.
"It was not a question of pricing, some of our most price-sensitive investors were in the book but just not in the size we had hoped," he added.
Frankel brushed off the fund's struggles, stating it was an anomaly caused through a general risk-off tone in the market.
However, just 24 hours after EFSF's issue, Italy sold EUR4bn of 10-year paper at auction with a bid-to-cover ratio of 1.459:1 and pricing 8bp through the offer side of the market as the bidding deadline expired.
Meanwhile, the European corporate bond market saw issuance reach almost EUR7bn equivalent this week, easily absorbed by investors.
Frankel was eager to highlight that more than 90 investors participated in the deal, yet its banks were left to prop up the trade. One market source stated that EFSF's 42-bank syndicate group were given EUR360m, while leads were left to pick up a "sizable chunk" of leftover bonds.
Hours before pricing, broking desks were trying to offload the bond eight ticks (1bp in spread terms) cheaper than the reoffer price, and the deal has since widened out by 7bp, to swaps plus 64bp on Tradeweb at 1236GMT Friday.
In short, if that EUR360m has not been wound down, co-managing banks are now left with paper that is worth some EUR2m less than what they paid for it.
While Frankel remains positive this deal will not leave a lasting impression on investors, he is clearly as eager as investors for eurozone politicians and legislators to get their house in order and ease the pressure on his 'temporary' rescue vehicle.
"In the long term, we envisage some improvement in our spreads because the ESM will come into force and there will be more certainty over EFSF activity and our programmes," he concluded.
indiatimes.com
A EUR3bn 10-year ended up being undersubscribed, a far cry from the EUR6bn five-year sold in July that attracted EUR8bn of orders.
Uncertainty over the costs of potential sovereign bail-outs and scale and shape of slated sovereign bond market intervention prompted investors to scale back their exposure on EFSF's latest issue.
"The firewall that the official sector is building is underpinned by the belief that rescue vehicles can go to market and issue in great size," said Sohail Malik, senior portfolio manager for ECM's special situations team, an asset manager with assets under management in excess of USD9bn.
"But, in reality, the only European issuer that can now come to market and get away real bumper-sized issues is Germany," he added.
EFSF's recent successes in the bond markets reflect the comfort that Germany's EUR211bn guarantee engenders, said Malik.
However, the German pool is quickly starting to run out, he said. Investors are now paying closer attention to the fact that with EUR152bn of EFSF issuance since its inception, 72% of the German guarantee has been used up.
France, EFSF's second largest guarantor at EUR158bn, instils less confidence after S&P stripped the country of its Triple A status earlier in 2012, and the other four remaining Triple A guarantors of EFSF's EUR440bn lending capacity - Austria, Finland, Luxembourg and Netherlands - together equate to just EUR70bn of commitments.
"International investors are constantly running these sort of scenarios asking themselves: 'What am I actually buying? What is the EFSF?'" added Malik.
Concerns around the EFSF's structure are, however, not new, nor is the speculation around its increased role in bailout activities. Yet, on a day when the market was in good shape, funding proved scarce.
NOT JUICY ENOUGH
In recent bond issues, the EFSF has been able to entice reticent investors with hefty premiums.
The same tactic was deployed with its latest 10-year issue, to the extent that rival banks scoffed at the double-digit new issue premium on offer when initial price thoughts went out on Tuesday evening at mid-swaps plus mid 50s.
Like the issuer itself, banks were then left dumbfounded when the bond came up short, despite pricing at the wide end of swaps +54/+57bp guidance on Wednesday. "There is nothing we could have done differently.
All the banks proposed the same size, maturity, pricing and timing," said Christophe Frankel, CFO and deputy CEO at the EFSF.
"It was not a question of pricing, some of our most price-sensitive investors were in the book but just not in the size we had hoped," he added.
Frankel brushed off the fund's struggles, stating it was an anomaly caused through a general risk-off tone in the market.
However, just 24 hours after EFSF's issue, Italy sold EUR4bn of 10-year paper at auction with a bid-to-cover ratio of 1.459:1 and pricing 8bp through the offer side of the market as the bidding deadline expired.
Meanwhile, the European corporate bond market saw issuance reach almost EUR7bn equivalent this week, easily absorbed by investors.
Frankel was eager to highlight that more than 90 investors participated in the deal, yet its banks were left to prop up the trade. One market source stated that EFSF's 42-bank syndicate group were given EUR360m, while leads were left to pick up a "sizable chunk" of leftover bonds.
Hours before pricing, broking desks were trying to offload the bond eight ticks (1bp in spread terms) cheaper than the reoffer price, and the deal has since widened out by 7bp, to swaps plus 64bp on Tradeweb at 1236GMT Friday.
In short, if that EUR360m has not been wound down, co-managing banks are now left with paper that is worth some EUR2m less than what they paid for it.
While Frankel remains positive this deal will not leave a lasting impression on investors, he is clearly as eager as investors for eurozone politicians and legislators to get their house in order and ease the pressure on his 'temporary' rescue vehicle.
"In the long term, we envisage some improvement in our spreads because the ESM will come into force and there will be more certainty over EFSF activity and our programmes," he concluded.
indiatimes.com
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