SSA Market: The long game - Rabobank

Research Team at Rabobank notes that last week the EFSF raised EUR5bn in a dual tranche deal, issuing two new bonds with 4y and 39y maturities while the 2% Feb 2056 was issued at MS+60bps and forms a crucial part of the EFSF’s/ESM’s recently announced plans for Greece. 

Key Quotes

“Last week we received further clarification as regards the bond exchange that will be conducted with Greek banks and additional details concerning the ESM swap arrangements. Below are some of the key details.”

“In order to recapitalise the Greek banking system the EFSF/ ESM provided floating rate notes (FRNs), rather than cash, to the banks worth EUR42.7bn. The Greek state is responsible for paying the coupon due on the FRN’s to the EFSF/ESM. Under the new plan, in a simultaneous process the EFSF/ ESM will convert the FRNs to 30yr fixed rate bonds and buy them back from the banks. They will only conduct the buybacks when they have the cash available to do so. The banks will never actually hold the long dated bonds and so will not be exposed to the interest rate risk associated with holding them.”

“When the EFSF/ ESM is raising the funds to conduct these buybacks, there is an incentive for the issuance tenor to be long. This is because the Greek state is paying the interest on these bonds and the issuance of debt at the prevailing low yield levels will help to reduce the country’s interest bill in the long-term/ minimise interest rate re-setting risk.”

“Our understanding is that the uptick in the EFSF’s funding plan (from EUR27bn-40bn) was to facilitate the repurchase of new 30yr fixed rate bonds from the Greek banks. In an ideal world this issuance would have a maturity close to 30yrs but it is our understanding that the EFSF/ ESM will not look to do this at all costs.”