Last updated: October 7, 2013 4:48 pm

Europe’s bail-out fund set for €5bn issue

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Europe’s bail-out fund is preparing its maiden bond sale this week after choosing the bank managers for an eagerly anticipated five-year debt deal that could raise as much as €5bn.

The €500bn European Stability Mechanism named HSBC, JPMorgan and Société Générale as the joint lead managers of its inaugural bond, which will be launched “in the near future, subject to market conditions”.

People familiar with the matter said the deal was likely to be priced and issued on Tuesday.

Strategists, bankers and investors have been keenly looking forward to the ESM’s maiden bond issuance since it was established last year as a permanent successor to the European Financial Stability Facility, which bailed out Greece, Ireland and Portugal.

“This is arguably a key moment for the European bond market this year,” said Peter Goves, a strategist at Citi.

“It will become a new and permanent feature of Europe’s bond landscape…We’re all waiting to see where it prices compared with its peers.”

Bankers on the deal indicated that the ESM’s five-year bond was likely to be priced near the European five-year midswaps rate, which would mean a yield of about 1.28 per cent.

“The first indications are strong,” one banker said.

This would put the ESM’s borrowing costs roughly between the European Investment Bank and its predecessor, the EFSF.

The EIB is one of the main pillars of Europe’s so-called SSA bond market of sovereigns, supranationals and agencies.

But the ESM has several big advantages over its precursor that have led investors and analysts to expect it to enjoy lower borrowing costs than the EFSF.

The new bail-out fund will be permanent; enjoy explicit, legally enshrined “seniority” in creditor rankings and it has paid-in capital from its member countries.

The ESM, which in July took over responsibility for providing financial assistance to stricken eurozone countries, is supposed to raise €9bn from bond markets by the end of this year and another €17bn in 2014.

The maiden bond sale is a five-year deal to ensure it is attractive to the broadest possible investor base, whether European banks, US asset managers or Asian central banks.

So far, the ESM has provided €41.3bn to recapitalise Spanish banks and €9bn towards Cyprus’s bail-out programme, leaving most of the fund’s firepower uncommitted.

However, the EFSF will continue to be a fixture of Europe’s bond market for years to come, as it will have to continue to finance its €192bn of commitments to Portugal, Ireland and Greece.

The EFSF has indicated a provisional funding programme for next year of €34bn.

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