Bond markets in euro in

In document European Investment Bank annual report 1999 (Page 52-57)

The introduction of the euro was expected to boost the development of European capital markets by reducing fragmentation along national currency lines and deepening the mar- ket both in terms of liquidity and credit spectrum. These expectations seem to have been fulfilled in the first year of the euro. According to Capital Data, euro-denominated international bond issues increased by 40% in 1999, while dollar issues expanded by no more than 12%. The global market share of euro-denominated bonds thus rose from 35% in 1998 to 45% in 1999, exceeding the 43% share for dollar-denominated bonds. This rise in market share would have been even greater had it not been for the offsetting effect stemming from the weakening of the euro. Total bond issues in euro (including domestic issues) have been estimated by the European Commission at around EUR 1.4 trillion in 1999.

The development of a wider euro bond market has predominantly been exploited by borrowers based within the euro area, a natural phenomenon as they do not have to bear exchange rate risks when they issue in their own currency. US borrowers accounted for about one tenth of the total amount raised in euro last year. While borrowers of most emerging market regions continued to borrow predominantly in US dollars, the euro made noticeable inroads as the foreign issuing currency of choice for Eastern European borrowers. Since many of these countries have currencies linked in one way or another to the euro, borrowing in euro is an effective way of reducing the exchange rate risk in their debt management.

The increase in issues in 1999 was unevenly distributed across sectors. A notable shift in the structure of the European bond market can be detected, in the direction of a larger corporate bond market.

Sovereignscontinued to reduce their bond issues as a result of improved government finances, both in the United States and in Europe. The total volume of euro- denominated issues by governments (mostly euro-area governments) amounted to EUR 621bn in 1999, down by around 10% from the year before. Government issues contributed to reinforcing the traditional seasonal pattern of bond issues in 1999, hav- ing front-loaded issues to the first half of the year to establish benchmarks early and to benefit from lower interest rates. The struggle for benchmark status remains par- tially unresolved. While German Bunds appear to have achieved benchmark status at the 10-year maturity, French government bonds have enjoyed the lowest yields at around 5 to 7-year maturities. The attempt to benefit from a larger and more con- centrated bond market in Europe led to an increase in the average issue size in 1999, especially by government issuers.

Quarterly pattern of euro-denominated issuing activity by sector in 1999 400 300 200 100 500 0 Corporates Financials Pfandbriefe and asset-backed securities Governments, agencies, municipals and supranationals

1st

2nd

3rd

Private issuersincreased their share of total euro-denominated issues in 1999, to just over 50%. To some extent, this reflects the reduced presence of sovereigns, but the introduction of the euro has also made it easier for the private sector to tap the international bond market.

Financials, which have traditionally dominated the non-government bond market, ex- perienced continued strong growth in issues in 1999 and with a 20% market share still dominate the non-government sector.

•ThePfandbriefbond market segment was relatively stagnant in 1999, but its slower growth rate partially reflects an already strong position in the private bond market, at 17% of all euro-denominated bond issues. The Pfandbrief market has expanded from its traditional Germanic confines as new legislation facilitated the introduction of these bonds in Spain and France as well.

Corporate borrowingin the bond market has benefited the most from introduction of a common currency. International bond issues by corporates and utilities more than tripled, from EUR 44bn in 1998 to EUR 135bn in 1999, according to Capital Data Bond- ware. Some of this robust expansion is probably related to the high volume of Merger & Acquisition activity, that is itself a result of the closer economic integration brought about by the euro and of the new financing opportunities offered by the much larger financial market in euro.

The structural changes in the bond market in euro can be looked at from a slightly different angle: credit quality. For many years, the bond market in the currencies that have been replaced by the euro was the preserve of government and excellent credit quality borrowers. In its first year the bond market in euro has seen a downward shift of the rating scale of new issues. The share of AAA bond issues has fallen, while the share of other investment grade rating has increased sharply, especially in the lower credit quality classes. Another noticeable development is that the share of bond issues not carrying a formal credit rating from the main rating agencies has dwindled con- siderably in the increasingly anonymous and larger European bond market.

Most of the above developments result from the changing demands of investors. A large fraction of bond issues was usually purchased by retail investors. Throughout the 1990s, investment has tended to concentrate in the hands of professional asset man- agers, who are much less likely to keep their investment for extended investment periods. They tend to be more interested in the continuous liquidity of their invest- ment. The arrival of the euro has reinforced these structural features. The average size of individual bond issues in the euro-denominated bond market doubled in 1999 com- pared with previous years, and the distribution of issue size in euro has converged, in less than a year, to that of the US dollar market.

Sectoral shares of total euro- denominated bond issues in 1999 Corporates 9% Agencies 3% Governments 46% Municipals 1% Supranationals 1% Asset-backed securities 3% Financials 20% Pfandbriefe 17% page51 R E S O U R C E S R A I S E D

j Implementing the EARN programme Benchmark issues launched by the Bank in 1999 totalled 10 billion, in either EARN notes (7 billion) for a minimum of 2 billion or operations for smaller amounts aimed at in- creasing the volume of existing EARN issues. A new 2 billion issue with a maturity of 2006 was launched and existing EARN benchmark issues were re-opened. By end-1999, a com- plete yield curve had been established for the EIB’s benchmarks with seven issues having maturities running from 2003 to 2009, for a total outstanding of 24 billion.

Implementation of the programme has

meant that yields on issues compare favour- ably, both with those obtainable on govern- ment bonds issued by EU Member States participating in EMU apart from those issues regarded as benchmarks (bonds issued by the French or German governments) and with those issued by other European agencies. j Euro debt exchange offer programme Continuing in the same vein as in 1998, the Bank offered holders of its bonds denomi- nated in DEM, FRF, ITL and EUR the possibility of swapping their securities for new EARN issues. This second debt exchange offer pro- gramme, undertaken via an Internet site, served to increase the total amount outstand- ing on the 2005 and 2009 EARNs by 423 mil- lion and 538 million respectively.

Reducing borrowing costs by seeking out market opportunities

In addition to the EARN issuance facility aimed at ensuring euro liquidity in its treas- ury, the Bank also mounted a number of pri- marily structured operations, enabling it to lower the overall cost of raising resources in euro. These operations, totalling a sizeable amount (2.1 billion), were mostly targeted at retail customers looking for potentially higher yields from their investments and pre- pared to take on a degree of risk. Assuming a variety of forms (linked to stock exchange indexes, step-down/one coupon, ...), these is- sues called for increased vigilance on the part of the Bank in assessing the associated risks. Amounts outstanding on EARN

issues as at 31 December 1999

Coupon (%) Maturity Amount

(EUR million) 4.500 15.02.2003 3 160 5.250 15.04.2004 4 619 3.875 15.04.2005 2 000 4.875 15.04.2006 2 000 5.750 15.02.2007 2 578 5.000 15.04.2008 5 082 4.000 15.04.2009 4 538 23 977

Redenominating existing debt

The redenomination process, embarked upon in 1998, was continued in 1999. The amount of debt redenominated into euro by end- 1999 totalled 32 billion or 61% of total out- standing borrowings in EMU currencies (53 billion in all). Euro-tributary issues were rede-

nominated by creating three fungible

tranches with maturities of 15 February, 15 April and 15 July for a total of 10.9 billion. Bonds denominated in DEM and IEP as well as domestic market issues in ITL and FRF to- talling 10.1 billion were also redenominated. Issues denominated in ECU totalling 11 bil- lion were converted into euro.

Major and highly liquid financial markets

Even more than in 1998, issues in GBP and USD accounted for a very considerable share of the resources raised by the Bank: together with the euro, these currencies constituted over 90% of total borrowings before swaps and 97% after swaps.

GBP 4 617 million before and after swaps (EUR 6 974 million)

Borrowings in GBP amounted to 25% of the overall total raised by the Bank, which con- firmed the EIB as a benchmark AAA-rated borrower on the sterling market. As in the past, the Bank’s strategy was geared towards increasing existing fungible issues or creating new tranches for mid-dated (2003 to 2009) and, in particular, long-dated maturities (2021 and 2028) which can be regarded as Gilt substitutes. The Bank’s strategy was also

directed towards diversifying its product offering through structured operations (a borrowing redeemable in variable annual in- stalments in line with developments on the swaps market) or diversifying its investor base with a placement in Japan.

USD 7 098 million before swaps (EUR 6 447 million)

USD 8 571 million after swaps (EUR 7 825 million)

The USD come third in the list of currencies borrowed by the Bank last year on capital markets (23%). Given a volatile and uncertain market on which favourable periods were few and far between, the EIB continued its strategy of establishing benchmark issues the length of the yield curve with maturities of 3, 5 and 10 years, either by issuing new paper or by augmenting existing tranches. This policy resulted in total borrowings outstand- ing on this market rising to USD 5.9 billion, an appreciably larger sum than that for other leading international borrowers.

Alongside benchmark issuance, operations for smaller amounts - basically structured issues - were launched to meet retail demand in Europe and Japan.

Borrowings signed in 1999

(EUR million)

Before swaps Swaps After swaps

Amount % amount Amount %

MEDIUM AND LONG-TERM OPERATIONS

1. Resources raised European Union 18 909 66.7 749 19 658 69.3 EUR 11 646 41.1 776 12 422 43.8 DKK 186 186 0.7 GBP 6 974 24.6 0 6 974 24.6 GRD 289 1.0 − 274 15 0.1 SEK 60 60 0.2 Total Pre-In 7 263 25.6 7 236 25.5 Non-European Union 9 425 33.3 − 727 8 697 30.7 AUD 244 0.9 − 244 CAD 14 0.0 − 14 CHF 622 2.2 0 622 2.2 CZK 85 0.3 0 85 0.3 HKD 514 1.8 − 514 HUF 49 0.2 0 49 0.2 JPY 753 2.7 − 753 NOK 190 0.7 − 190 NZD 45 0.2 − 45 SKK 66 0.2 − 66 TWD 179 0.6 − 179 USD 6 447 22.8 1 378 7 825 27.6 ZAR 217 0.8 − 101 116 0.4 TOTAL 28 334 100.0 22 28 355 100.0

- of which fixed rate 27 046 95.5 − 20 540 6 506 22.9

- of which floating rate 1 288 4.5 20 562 21 850 77.1

2. Euro Debt Exchange Offer Programme

EUR 961 961

In document European Investment Bank annual report 1999 (Page 52-57)