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    European Commission Takes Over Social Bonds Market

    Stockholm (NordSIP) – On Tuesday, October 20th, the European Union launched its inaugural €17 billion dual-tranche social bond due in 2030 and 2040. The bond was issued under the Support to mitigate Unemployment Risk in an Emergency (SURE) programme, created to mobilise significant financial means to fight the negative economic and social consequences of the coronavirus outbreak on their territory.

    “With this operation, the European Commission has made a first step towards entering the major league in global debt capital markets. It is the highest amount ever borrowed in the history of the EU. 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. The successful launch is a vote of confidence in the European Union as issuer and borrower” said Johannes Hahn (Pictured), European Commissioner for Budget and Administration.

    The first tranche, with a 2030 maturity, was worth € pays a 0% coupon and was priced at a 102.4 premium to yield -0.238%. The re-offer spread was 3 basis points (bps) above mid-swaps, which is equivalent to +36.7bps over the conventional 0.00% Bund due on August 15th, 2030, and 9.2bps above the 0.00% OAT due November 25th, 2030. The 20-year bond pays a 0.1 coupon and was priced at a 99.4 discount to yield 0.131%. The re-offer spread was 14bps above mid-swaps, which is equivalent to 52.1bps over the 4.75% Bund due July 4th, 2040, and +3.2bps above the 0.25% OAT due 25-May-2040. The final new issue premiums have been estimated a 1bp and 2bps for the 10-year and 20-year tranches respectively, both values extremely limited given the amounts printed. The Joint Lead Managers were Barclays, BNP Paribas, Deutsche Bank, Nomura and UniCredit.

    Demand was extremely strong with order books closing with bids in excess of €233 billion, which according to the European Commission is “the largest ever collected in the history of Sovereign, Supranational and Agencies debt capital markets and the size of €17bn, the highest issued amount in EUR from a Supranational institution ever.”

    Geographically, demand for the 10-year social bond was relatively well distributed among investors domesticated in Germany (17%), France (12%), the UK (20%) and the Benelux (15%). The Nordics(8%), Southern Europe (7%)and other miscellaneous European countries (5%) were the next largest group, followed by Asian (9%), American (5%) and Middle Eastern & African (MEA) (3%) investors. Sectorally, fund managers were dominant, purchasing 41% of the bonds, followed by central banks (37%), bank treasuries (15%),  insurance companies and pension funds (6%) and banks (1%).

    Geographically, demand for the 20-year social bond was more concentrated within the EU’s dominant economies. Investors in Germany (24%), France (19%), the UK (16%) and the Benelux (18%) purchased the vast majority of the bonds. The Nordics(6%), Southern Europe (10%)and other miscellaneous European countries (5%) were the next largest group. Non-European investors were significantly less represented than in the shorter maturity. Asian (1%), American (1%) and Middle Eastern & African (MEA) (2%) investors only purchased 4% of the securities. Sectorally, fund managers were dominant, purchasing 41% of the bonds, followed by central banks (37%), bank treasuries (15%),  insurance companies and pension funds (6%) and banks (1%).

    “This deal becomes the largest Social transaction ever printed and approximately 63% of the two tranches have been allocated to ESG investors. This deal also significantly contributed to increase the size of the Social bond market, seen at around €50bn pre EU transaction. 578 investors participated to the 10-year tranche and 514 investors in the 20-year tranche.”

    Image courtesy of European Commission

    Filipe Albuquerque
    Filipe is an economist with 8 years of experience in macroeconomic and financial analysis for the Economist Intelligence Unit, the UN World Institute for Development Economic Research, the Stockholm School of Economics and the School of Oriental and African Studies. Filipe holds a MSc in European Political Economy from the LSE and a MSc in Economics from the University of London, where he currently is a PhD candidate.

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