26 International Financing Review February 29 2020EIB first to reshape SOFR sector
Supra prices floater referenced to new index
The EUROPEAN INVESTMENT BANK successfully
CLOSEDûTHEûlRSTûBONDûLINKEDûTOûAûRISK
FREEûRATEû
(RFR) index, pricing an oversubscribed US$1bn
four-year on the new SOFR Index that the New
York Fed begins publishing on Monday.
The Secured Overnight Financing Rate is to
supersede Libor as the US currency’s money
market benchmark by the end of 2021.
A pioneering issuer of RFR bonds in multiple
currencies, the EIB mandated Citigroup, HSBC,
Royal Bank of Canada, Standard Chartered and
Toronto-Dominion for the new issue - its second
JUMBOû3/&2
LINKEDû&2.ûINûAûMONTH
Unlike its previous three-year in January,
however, the US$1bn no-grow four-year
does not reference overnight rates directly.
Rather, it carries the coupon convention:
‘SOFR Index Start and SOFR Index End will
be two days prior to Interest Period’.
“We have always been of the opinion that
the best next development for any RFR
market would be the emergence of an index- that’s clearly a golden source,” said Xavier
,EROY ûSENIORûFUNDINGûOFlCERûATû%)"
Once an index was available to issue
against, “we wanted to do our best to
propose a bond instrument”.
The EIB did not seek to beat the GSEs or
OTHERûMAJORû53ûISSUERSûTOûTHEûPUNCHûWITHû
THEûlRSTû3/&2ûINDEX
LINKER ûHEûINSISTEDûh7Eû
were never in competition.”
h(OPEFULLY û%)"ûHASûTAKENûTHEûlNALûSTEPûANDû
THISûISûWHEREûTHEû3/&2ûMARKETûlNDSû
consensus,” said a lead manager, noting the
multiplicity of SOFR calculation methods (such
as compounding, averaging, shift and lag).
The economic difference between these
are minimal: “A rounding error on the third
decimal,” as Leroy puts it. “But from a
systems point of view they are different.”
Accordingly, the EIB expects all of its future
SOFR linkers to reference the index too. It will
not restructure its three previous deals,
however - since their economic difference
from the index-linked version is so minimal,
they will be allowed to run to maturity.
As its 2020 funding programme is already
WELLûADVANCEDûAFTERûAûVERYûACTIVEûlRSTûTWOû
months of the year, it is unlikely to open
new maturities in the product, however.
Rather, it will seek to add liquidity to its four
existing SOFR FRNs.
MAKING THE SHIFT
The EIB’s move also comes in the wake of the
European Bank for Reconstruction and
Development adopting a shift coupon convention
on its £750m Sonia FRN a week earlier.
This was in anticipation of an index for
the Sterling Overnight Index Average, aswell as to address rounding errors in coupon
calculation.
The Bank of England will begin publishing
a Sonia index and averages from July, it said
on Tuesday. The central bank administers the
rate, which is the Working Group on Sterling
Risk-Free Reference Rates’ preferred rate to
supersede Libor as the UK currency’s money
market benchmark by the end of 2021.
As a prominent issuer of Sonia linkers too,
the EIB is open to issuing against the BoE’s
index when it is introduced this summer.
“Wherever we can bring our contribution,
we do our best to promote [RFRs]. This is
something we have expertise and resources in
and something we really believe in,” Leroy said.OVERSUBSCRIBED
Leads tightened the new issue 1bp in marketing
to SOFR plus 28bp after attracting more than
US$1.7bn of orders. Allowing for the additional
year of maturity and the index’s introduction,
THISûWASûmATûTOûBPûOVERûFAIRûVALUE
“To be able to achieve oversubscription of
US$1.7bn when the broader swing of the market
has put a number of investors on the sidelines
was hugely impressive,” said a lead manager.
h)TûWENTûWELL vûSAIDûONEûSYNDICATEûOFlCIALû
away from the transaction. They attributed this
to the issuer “executing with great care - they
DOûTHEIRûGROUNDWORKûWITHûTHEûMAJORûACCOUNTSv
Despite the deal’s inaugural nature, over
40 investors participated.
“For something dubbed a step forward in the
Ibor transition, that many investors being onside
already was really encouraging,” the lead said.
Distribution was primarily to bank treasuries,
“nicely complemented by central banks and real
money”, the lead said. Sales were global, not only
to North America, he added.
Julian LewisWEEK IN NUMBERS
1.16%
THE YIELD THAT 10-YEAR TREASURIES FELL
TO LAST WEEK, A RECORD LOW, AS FEARS OF
THE SPREAD OF THE CORONAVIRUS GRIPPED
FINANCIAL MARKETS4.875%
THE COUPON THAT ING GROEP PAID ON
ITS REVIVED PERP NON-CALL NOVEMBER
AT1, WHICH WAS AT LEAST 25bp MORE THAN
ON ITS ORIGINAL ATTEMPT. THE US$750m
DEAL WAS PUT BACK ON SCREENS JUST
DAYS AFTER THE US$1bn ORIGINAL WAS
PULLED AFTER THE BANK’S CEO JOINED UBS0
THE NUMBER OF DEALS IN THE US HIGH-
GRADE AND HIGH-YIELD MARKETS LAST
WEEK AS THE GROWING THREAT OF THE
CORONAVIRUS BROUGHT SUPPLY TO AN
ABRUPT HALT1.12%
THE YIELD THAT 10-YEAR BTPs HIT
LAST WEEK, 20bp HIGHER THAN WHERE
THEY WERE ON FEBRUARY 21 AS THE
CORONAVIRUS SPREAD TO ITALY€1.587bn
THE AMOUNT OF CORPORATE BONDS
THE ECB BOUGHT (NET) IN THE WEEK
TO FEBRUARY 21 AS PART OF ITS CSPP
COMPARED WITH €1.997bn THE WEEK EARLIER
In total, it has bought €16.778bn1.151.251.351.451.551.651.751.8502/01/2009/01/2016/01/2023/01/2030/01/2006/02/2013/02/2020/02/2027/02/20%
1.95%0.80.91.01.11.21.31.41.502/01/2009/01/2016/01/2023/01/2030/01/2006/02/2013/02/2020/02/2027/02/20Source: Refinitiv Eikon1.41.92.42.93.43.94.44.95.45.902/07/201802/08/201802/09/201802/10/201802/11/201802/12/201802/01/201902/02/201902/03/201902/04/201902/05/201902/06/201902/07/201902/08/201902/09/201902/10/201902/11/201902/12/201902/01/202002/02/2020%A NEW DAWN
SOFR6 IFR Bonds 2322 p 25 - 43 .indd 26 28 / 02 / 2020 19 : 15 : 30