A.M. Romani Deputy Head of Funding, Euro Nicola Mercusa ... · A.M. Romani, Deputy Head of Funding,...
Transcript of A.M. Romani Deputy Head of Funding, Euro Nicola Mercusa ... · A.M. Romani, Deputy Head of Funding,...
A.M. Romani, Deputy Head of Funding, EuroNicola Mercusa, Capital Markets Officer
Rome, November 2003
Structure of Presentation
I. EIB: Instrument of European Integration
II. EIB: Funding Needs and Policy
III. EIB and the Euro
IV. EIB: Innovation in ACC and Structured Markets
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EIB Instrument of
European Integration
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Mission
EIBWorld BankBalance of
wealth distribution(EQUITY)
European Internal Market
WTOAllocation of
resources(EFFICIENCY)
European Monetary Union
IMFMacroeconomic
equilibrium(STABILITY)
EuropeEuropeWorldWorldECONOMIC ECONOMIC POLICY POLICY GOALS*GOALS*
• Taxonomy originally proposed by Prof. Musgrave for budgetary policy (see : R.A. Musgrave/ P.B. Musgrave, Public Finance in Theory and Practice, 1984, Chapter 1)
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=> Close Association with EU Goals
• Created by the Treaty of Rome establishing the European Community (1958) as modified by the Treaty of Maastricht on European Union (1992) (Art. 9)
• Art. 158/159 of the Treaty:– « … the Community shall aim at reducing disparities between
the levels of development of the various regions… » and– « … shall also support the achievements of these objectives
by the action it takes through the structural funds…, theEuropean Investment Bank and the other existing financial instruments »
• Statute drawn up as a Protocol anexed to the Treaty (Art. 311)
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=> Joint European Governance
• Board of Governors,composed of Ministers designated by the Member States
• Board of Directors,appointed by the Board of Governors
• Management Committee,appointed by the Board of Governors on a proposal from the Board of Directors
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=> Joint European Sovereign Ownership,today…
Federal Republic of GermanyAAA/Aaa/AAA
French RepublicAAA/Aaa/AAA
Italian RepublicAA/Aa2/AA
Kingdom of SpainAA+/Aaa/AA+
Kingdom of BelgiumAA+/Aa1/AA
Kingdom of the Netherlands AAA/Aaa/AAA
Kingdom of SwedenAA+/Aaa/AA+
United KingdomAAA/Aaa/AAA
17.8%
17.8%
17.8%
17.8%
6.5%
4.9%
4.9%
3.3%
Kingdom of DenmarkAAA/Aaa/AA+
Republic of AustriaAAA/Aaa/AAA
Republic of FinlandAAA/Aaa/AAA
Hellenic RepublicA/A1/A
Portuguese RepublicAA/Aa2/AA
IrelandAAA/Aaa/AAA
2.5%
2.4%
1.3%
0.9%
0.6%
0.1% Grand Duchy of LuxembourgAAA/Aaa/AAA
1.4%
S&P/Moody’s/Fitch
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…and after Enlargement
AAA75.1%
AA23.6%
A1.3%
Germany AAA 16.28%France AAA 16.28%Italy AA 16.28%United Kingdom AAA 16.28%Spain AAA 9.77%Belgium AA 4.51%The Netherlands AAA 4.51%Sweden AAA 2.99%Denmark AAA 2.28%Austria AAA 2.24%Poland A 2.22%Finland AAA 1.29%Greece A 1.22%Portugal AA 0.79%Czech Republic A 0.74%Hungary A 0.69%Ireland AAA 0.57%Slovakia A 0.25%Slovenia AA 0.23%Lithuania Baa1 0.15%Luxembourg AAA 0.11%Cyprus A 0.11%Latvia A 0.10%Estonia A 0.07%Malta A 0.05%
Current situation
After enlargementBaa10.2%
A5.4%AA
21.8%
AAA72.6% (*) In case of split rating, the best
rating has been taken8
ConsolidatedEuropean Sovereign
Issuer
=> « The way to buy Europe » :EIB’s Recognition in the International Capital Markets
EIBFunding needs
and Policy
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Statutory Signposts
• Art. 22:« The Bank shall borrow on the international capitalmarkets the funds necessary for the performance of its tasks»
• Art. 18:« The aggregate amount outstanding at any time of loans and guarantees granted by the Bank shall not exceed 250% of its subscribed capital »
• Art. 19:« Interest rates on loans to be granted by the Bank andcommission on guarantees shall be adjusted to conditionsprevailing on the capital market and shall be calculated insuch a way that the income therefrom shall enable the Bank to meet its obligations…»
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=> Lending, Refinancing and Capital move in Tandem
EUR 150 bn Subscribed capital
EUR 375 bn Lending ceiling
EUR 234 bn Outstanding lending
� Outstanding lending� Lending ceiling up to 250 % of subscribed capital� Subscribed capital
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=> Large Debt Flows
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EIB IBRD IADB ADB IFC EBRDEstimate
for 2003: 42 Mrd
Supranational issuance in 2002
In EUR billion Source: Bondware and EIB for its own data
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=> “Yin and Yang” Funding Policy
CUSTOMIZED FUNDING
(LOWER COST)
BENCHMARK FUNDING
(LARGER VOLUME)
=>Interest and Exchange Rate Hedging
• All funding transactions of the EIB are hedged via swaps and deferred rate setting agreements against exposure to both absolute and relative movements ofinterest rates as well as against exchange rate risks
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=> Currency diversification: 14 currencies in 2002
ZAR
USD
EUR
GBP
NOKDKK
PLN
HUF
CZK JPY
AUD
NZD
TWD
HKD
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EIBand
the Euro
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Euro is EIB’s Core Currency
EUR42%
USD24%
GBP26%
Other8%
Total Outstanding Debt : EUR 185 bnInc. CP, before swaps as of Dec. 31st 2002
EUR 45 bnEUR 48 bn EUR 77 bn
EUR 15 bn
05
1015
2025
3035
4045
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
EUR GBP USD Other Estimate
USD30%
EUR45%
Other10%GBP
15%
2003 Issuance (before swaps as of Aug. 31st 2003)
Annual issuance (before swaps as of Aug. 31st 2003)
Euro: Market Development and Innovation Mix
LATE YOUTH(2002 - 2006)
« SHADOW-LINE »
(’99 – 2001)
EARLY YOUTH(’96 – ’98)
« TEEN »- AGE(’90 – ’95)
INFANCY(Early 70s to late 80s)
TECHNOLOGYPOLICYPRODUCTInnovation
TypeEur-marketdevelopment
Product
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1. EURCO issue
1. EIB ECU issue 1. EIB
ECU jumbo
1. issue with guaranteed conversion ECU/EUR 1:1 1. eurotributaryissue
1. EUR issue
1. EUR 3 bn EARN
1. HUF-Eurotributary
1. EIB ECU short term Notes
1. EUR 5 bn EARN
1. EIB ECU CP
1. EUR global
1. EUR 2 bn EARN
Continuity of issuance
1. EIB EUR Exchange Offer
3.4.5.EUR 5bnEARN
Policy
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1.EUR 5bnEARN
EIB EUR Exchange Offer 1. EUR 2 bn EARN
1. EURCO issue
1. EIB ECU issue 1. EIB ECU
jumbo
1. issue with guaranteed conversion ECU/EUR 1:11. eurotributary issue
1. EUR issue
1. EUR 3 bn EARN
1. HUF-Eurotributary
1.EUR Global
1.EARNs Programme (« primary dealers »)
2.EARNs Programme (« market makers »)
1. EIB ECU short term Notes
1. EIB ECU CP
Market making agreements with banks
3.4.5.EUR 5bnEARN
Technology
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1.EUR 5bnEARN
1. eurotributary issue
Market making agreements with banks
1. EUR 2 bn EARN
1. EURCO issue
1. EIB ECU issue 1. EIB ECU
jumbo
1. issue with guaranteed conversion ECU/EUR 1:11. EUR issue
1. EUR 3 bn EARN
1. HUF-Eurotributary
1.EUR Global
1. EARNs Programme (« primary dealers »)
EARNs Programme (« market makers »)
1.Trading onMTS
1.Exchange offer via InternetAll EARNs on MTS/EuroMTS
All EARNs on Bondvision
1. EIB ECU short term Notes
1. EIB ECU CP
Parallel quotation of EARNs on EuroMTS/MTS Italy
1. EIB EUR Exchange offer
3.4.5.EUR 5bnEARN
EIB and the Euro:Innovation responds to Integration
-crossborder links across European platforms-electronic trading infrastructure for euro outside Europe
-cooperative framework with banks (performance focus)-extension of market making arrangements outside Europe
-new EUR 5 bn benchmarks-longer maturities-eurotributaries in ACC-« pension funds » products-« Basle II » products
LATE YOUTH
(2002 – 2006)
-depositary arrangements-e-bookbuilding, B2B, B2C
- cooperative framework with banks (geographical focus)
-consolidate eurotributaries-add liquidity via increases beyond EUR 5 bn threshold-new benchmarks
« SHADOW-LINE »
(’99 – 2001)
-« global » infrastructure-electronic trading experiments
- market making agreements with banks on individual issues
- new « euro » productsEARLY YOUTH(’96 – ’98)
- hedging instruments-increases to benchmark size-continuity of issuance
TEEN-AGE(’90 – ’95)
- payment and clearing systems
-framework agreements with authorities in individual countries for the establishment of European common standards in:
-issuance procedures-tax treatment-listing-investment eligibility
-issues in basket currencies-in short and long end-in different countries-in growing size-with increasingly common characteristics
INFANCY(Early 70s to late
80s)
PROGRESS BY TECHNICAL
ADVANCEMENT
PROGRESS BY POLICY
FRAMEWORK
PROGRESS BY PRODUCT
Innovation Type
Eur-marketdevelopment
Results: EIB EARN* Eurobenchmark Curve
€ EARN 5.25% 15 Apr 2004 € 6.2 bn
€ EARN 3.875% 15 Apr 2005 € 5 bn
€ EARN 4.875% 15 Apr 2006 € 5 bn
€ EARN 5.75% 15 Feb 2007 € 2.6 bn€ EARN 5% 15 Apr 2008 € 6.1 bn
€ EARN 4% 15 Apr 2009 € 5.5 bn€ EARN 5.625% 15 Oct 2010 € 5 bn
€ EARN 4% 15 Jan 2007 € 5 bn
€ EARN 5.375% 15 Oct 2012 € 5 bn€ 60 billion outstanding11 EuroMTS-benchmarks
€ EARN 3.5% 15 Oct 2005 € 5 bn
€ EARN 3.25% 15 Oct 2008 €5 bn
€ EARN 3.625% 15 Oct 2013 € 5 bn
*Euro Area Reference Notes
As of 28 Nov. 2003
Jan-01
Apr-01
Jul-01
Oct-01
Jan-02
Apr-02
Jul-02
Oct-02
Jan-03
Apr-03
Jul-03
Oct-03
Jan-04
Apr-04
Jul-04
Oct-04
Jan-05
Apr-05
Jul-05
Oct-05
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Apr-06
Jul-06
Oct-06
Jan-07
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Jul-07
UCITS in force
…UK joins EMU?..
FRS 17 in force
Basle II
ACCESSION
UCITS Directive
Dec June
IAS Regulation
Apr
2.Giovannini report on
C&S
ACCESSION PENSION REFORM INTEGRATION OFT/C/S PLATFORMS
BASLE II0% risk weighting
•Benchmarks•2ary market•Legal framework•Eurotributaries
•Long end•UK-euro « link » (e.g. parallel bonds)•Pension fund products (e.g. inflation-linked)
•Links across domestic platforms •«Around the globe» market
•Broaden offer spectrum
Intensify marketing with investors
Looking forward: 4 Innovation Drivers
EIBStructured and ACCMarkets
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Euro: Market Structure Today
• Increasing concentration of financial intermediaries• Emergence of two market segments, dominated by and
large by the same top intermediaries:� benchmarks (transparency, market making)� non-benchmarks (segmentation, delivery)
• Market-driven objectives:
-cooperate with top market makers (adequate new issue size, bookbuilding, fair pricing)-reward performance in secondary trading and/or delivery of non-benchmark transactions
Close coordination of benchmarkand non-benchmark funding
Results: Strong Growth in Structured Issuance
2000 2001 2002 2003 (31.10)No. of transactions: 149 148 219 291
- non-structured 126 94 90 75
- structured 23 54 129 216Volume (EUR bn equiv.): 29.00 32.31 38.01 40.91- non-structured 27.16 31.03 34.61 32.10
- structured 1.85 1.27 3.40 8.80% Total funding:- non-structured 94% 96% 91% 78%
- structured 6% 4% 9% 22%No. currencies: 11 13 14 15
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Strategy joins Flexibility
• Within its global borrowing strategy, the EIB is responsive to investors’ needs by issuing a wide variety of non-benchmark products
• The EIB is fully oriented towards extending the product range available to investors through extreme flexibility for tailor-made products in terms of structures, maturity, size, listing, etc
• EIB’s efforts have recently been recognized by the financial community in the form of Euroweek’s award for the Most Innovative and Receptive borrower
EIB’s Experience in 2003
• Out of the EUR 41 billion equivalent issued so far this year 22%was in the form of structured transations, for a total amount of over EUR 9 billion equivalent (almost tripled wrt 2002)
• Products were issued under the legal framework of EIB’s MTN programmes
• 8 different currencies (EUR, GBP, CZK, JPY, PLN, SKK, TWD, USD)
• In particular, EUR-denominated structured transactions reached the volume of about EUR 3.5 billion, almost tripled with respect to the previous year
Instruments issued in Euro in 2003
Amount Tipology Percentage(EUR)
1,495,000,000 Step-up coupon Notes - Callable 43.21%985,000,000 Fixed / Eurozone Inflation-linked coupo 28.47%500,000,000 Fixed Rate - Callable (nc2) 14.45%240,000,000 Sticky Floating Rate Notes 6.94%100,000,000 Floored Sticky Floater 2.89%
70,000,000 Fixed rate/steeper linked - Callable (3) 2.02%50,000,000 Fixed rate / Currency linked coupons 1.45%20,000,000 Sticky FRN/Fixed - Callable (3) 0.58%
Total amount issued
EUR 3.5 billion
THE EIB IN THE INFLATION-LINKED MARKETTHE EIB IN THE INFLATION-LINKED MARKET
Sources of demand:• Particular interest from investors with IL liabilities, e.g. insurers,
pension funds• Also interest from market participants taking a view on expected
inflation• Pockets of retail interest
EIB approach:• Flexible and responsive• Established reputation in £ IL market• Pioneered structured IL bond issuance in €• EIB hedges inflation risk
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EIB Inflation Linked issuance - overview
EUR GBPEntered in the market in Dec. 02 Entered in the market in Nov. 00
From 2007 to 2015 From 2007 to 2038
EUR 1,085 million GBP 806 million
8 bonds with volumes from EUR 50 to 260 million
8 bonds with volumes from GBP 30 to 250 million
All structures combining fixed followed by inflation linked coupon
"Plain vanilla" and also structured issues
European harmonized inflation index (HICP ex tobacco)
RPI, LPI
So far no back-to-back transactions
Almost GBP 350 million raised for back-to-back
EIB Inflation Linked issuance - overview
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Logic of Inflation Linked (IL) bond issuance for back-to-back loans:• Projects where income is explicitly or implicitly linked to an
inflation rate and will thus benefit from loans linked to the same inflation rate. Relevant sectors typically include utilities, healthcare, transport.
• Extensively used in the growing market for public private partnerships (PPPs) within the European Union
EIB project examples: • Dudley Hospitals, UK (May 2001): first EIB RPI index linked
financing with a specific back-to-back bond issue.• Road safety in Yorkshire, UK. (February 2003)• Blackburn Hospital, UK (July 2003): latest project financed with
a back-to-back IL bond
EIB ISSUANCE IN INFLATION-LINKED PRODUCTSGBP
EIB ISSUANCE IN INFLATION-LINKED PRODUCTSGBP
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EIB ISSUANCE IN INFLATION-LINKED PRODUCTSEUR
EIB ISSUANCE IN INFLATION-LINKED PRODUCTSEUR
EUROZONE INFLATION-LINKED STRUCTURED TRANSACTIONS
Amount Launch Settlement Maturity Dur. Tipology
100,000,000 04-Dec-02 19-Dec-02 19-Dec-07 5.0 Fixed / Eurozone Inflation-linked coupo130,000,000 09-Jan-03 24-Jan-03 24-Jan-10 7.0 Fixed / Eurozone Inflation-linked coupo75,000,000 28-Aug-03 01-Oct-03 01-Oct-10 7.0 Fixed / Eurozone Inflation-linked coupo
150,000,000 23-Jan-03 24-Feb-03 24-Feb-11 8.0 Fixed / Eurozone Inflation-linked coupo170,000,000 18-Feb-03 11-Mar-03 11-Mar-11 8.0 Fixed / Eurozone Inflation-linked coupo100,000,000 18-Feb-03 20-Mar-03 20-Sep-11 8.5 Fixed / Eurozone Inflation-linked coupo260,000,000 29-Jan-03 28-Feb-03 28-Feb-13 10.0 Fixed / Eurozone Inflation-linked coupo100,000,000 03-Mar-03 27-Mar-03 27-Mar-15 12.0 Fixed / Eurozone Inflation-linked coupo
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The future in the inflation linked marketThe future in the inflation linked marketThe future in the inflation linked market
• Continue to support development of the market
• Potential back-to-back transactions
• Potential in € boosted by anticipated changes in regulations in European markets (evolution of pension systems, UCITS directive, IAS, FRS17, etc)
• Constraint: deepening of swap markets to support hedging of larger volumes
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THE EIB IN ACC CAPITAL MARKETS
EIB’s mission:
• Raise funds in domestic and international markets in support of EIB’s role as largest multilateral lender in the region
• Leverage AAA credit standing and integrated funding strategy to achieve lowest borrowing cost and correspondingly attractive lending terms
• Respond to growing preference for funds in local currency
Therefore support development of local currency capital markets, issuing as a complement to sovereigns
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BORROWING STRATEGY IN ACC
1. Build issues to liquid size, establish yield curve where possible- Long term development of benchmark programme - EMU in mind – EIB issued first euro-fungible notes (HUF)
2. Respond to specific needs of investors, including longer maturities and structured issues
3. Create and leverage a sound domestic issuance framework:- Domestic Debt Issuance Programmes (HUF, PLN, CZK):
set the scene for regular issuance in local currency
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ACC BORROWING: Results (I)
• Active in ACC capital markets since 1996• International issuance in CZK, HUF, PLN, SKK• Domestic Debt Issuance Programmes: CZK 30 bn* (1999),
HUF 50 bn (1997) and PLN 3 bn (2001)
• First Euro-tributary bond issued in HUF (Step-down 15.10.2012) • Growing size and sophistication of local investor base
*Increase planned in near future
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ACC BORROWING: Results (II)
Largest non-government issuer in Acceding Countries:€535 million in 2002, strong growth in 2003 to over €1.2bn (ytd)€ m equivalent
0200400600800
100012001400
1999 2000 2001 2002 2003
SKK
PLN
HUF
CZK
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TREASURY POOLS IN LOCAL CURRENCY
• EIB maintains treasury pools of floating rate funds in four ACC currencies:CZK, HUF, PLN, SKK
• This policy improves flexibility and cost effectiveness of borrowing and on-lending in local currency- Allows creation of stock of funds- Facilitates smaller loans and wider range of loan structures
• ACC pools are:- In floating rate format- On-lent at average funding cost (plus intermediation margin)
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The Final Picture
European Financial Integration
EIB Issuance
EUR 45-47 bn equivalent
needed in 2004
EIB
ConsolidatedEuropean Sovereign
Issuer
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