Investors lose interest in bailout fund

EUROPE’S bailout fund for Ireland and Portugal is losing its appeal as a bond issuer after investors ordered about €4.5 billion of its €3bn of notes compared with demand of nine times that on its first deal a year ago.

That is after the European Financial Stability Facility (EFSF) offered investors a yield spread almost seven times what it paid to sell €5bn of securities last January, according to data which was compiledby Bloomberg.

“The book on the EFSF bond is far from stellar at just €4bn,” said Padhraic Garvey, head of developed-country debt and rates strategy at ING Groep in the Netherlands. “A much bigger cover would have given the thing a better gloss.”

The new bond was the EFSF’s first three-year issue and follows a November 7 sale that was delayed because of eurozone volatility.

Standard & Poor’s said last month that the fund, which will use the proceeds of yesterday’s transaction to help finance the bailouts of Ireland and Portugal, may lose its top credit rating should one of its triple-A rated guarantors be downgraded.

The EFSF said in a statement that the deal attracted orders “close to” €4.5bn. Christof Roche declined to give the exact amount.

The sale of bonds due in February 2015 would have needed orders of two to three times the issue size to be viewed as a success, Mr Garvey said.

Book sizes have been declining since the EFSF’s first bond sale in January 2011 attracted orders of €44.5bn, according to the fund’s website. It said it received over €8bn of bids for its €5bn issue of 2021 notes last June, while the postponed €3bn sale of bonds due 2022 got orders for “in excess of” that amount in November.

The EFSF priced its new notes to yield 40 basis points more than the benchmark swap rate, according to the statement.

That spread compares with the six basis-point margin the fund paid to sell its July 2016 bonds on January 25, 2011.

Those 2.75% July 2016 bonds now have a yield spread of 45 basis points over swaps, down from as much as 102 basis points in November.

The increase in the issue spread “reflects the changing market backdrop, the concerns over the swathe of potentially imminent ratings downgrades within theeurozone which would see the EFSF also lose its own gold-plated rating”, said Richard McGuire of Rabobank International.

“Last January this stuff used to sell like hot cakes. Now it’s certainly more challenging.”