Previously, the EU had been a modest issuer, with just over €50 billion outstanding, mainly for loans to Ireland and Portugal during the last debt crisis. Now, the EU is set to become the largest supranational bond issuer in Europe to fund its €100 billion instrument for temporary Support to mitigate Unemployment Risks in an Emergency (SURE) and €750 billion Next Generation EU (NGEU) recovery fund. The EU’s use of social and green bonds will significantly impact the volume and liquidity of this asset class. By auctioning debt as well relying on syndicated transactions, the EU is acting more like a sovereign issuer than a supranational and may establish a new European benchmark ‘safe asset’ to rival German Bunds.

SURE

SURE is a temporary scheme to provide €100 billion of loans to Member States to finance labour markets impacted by COVID-19. These loans are specifically aimed at supporting short-time work schemes, self-employed persons and health-related measures. SURE is to be financed exclusively by the issuance of social bonds, managed by the Commission, and backed by a system of guarantees from the EU’s national governments.

In October, a €17 billion inaugural social bond was issued and listed at the Luxembourg Stock Exchange. It is displayed on the Luxembourg Green Exchange, a platform exclusively dedicated to sustainable securities. The bond consists of a €10 billion tranche with a 10-year maturity and a €7 billion tranche with a 20-year maturity. With demand exceeding €233 billion, the bond was 13 times oversubscribed. By the end of December, the Commission had raised a total of €39.5 billion via three transactions under SURE and disbursed this amount to 15 member states, directly passing on to them the favourable funding conditions it obtained. The Commission plans to issue a further €50.8 billion in social bonds, and may consider taps of its outstanding issuances. It is expected that the volume of social bonds available globally will be tripled if and when the full €100 million is issued.

Next Generation EU

NGEU is a recovery fund worth €750 billion agreed in July 2020, targeting areas such as green and digital transitions, unemployment, health security, agriculture and biodiversity. A key barrier to the implementation of NGEU was removed in December when Hungary and Poland dropped their objections to tying payments under the package to rule of law principles. The NGEU regulation was then adopted by the Council, but further sectoral acts must be agreed for NGEU to come into force.

NGEU will also be funded by the Commission borrowing on the capital markets. To ensure that repayments can be made, a temporary increase in the ‘Own Resources’ ceiling of the EU’s budget has been proposed and must be ratified by Member States. The ‘Own Resources’ ceiling is the maximum amount of funds that the EU can request from Member States to cover its financial obligations. 30% of NGEU bonds (in total €800 billion) will be green bonds. The first issuance is expected in mid-2021. The funds borrowed may be used for loans up to €360 billion and for expenditure, or grants, of up to €390 billion. New borrowing activity will stop by the end of 2026 and repayment will be completed by 2058 at the latest. The amount due for repayment in a given year should not exceed €29.25 billion.

Conclusion

The SURE and NGEU issuances will make the EU one of the largest bond issuers in Europe, on a par with the largest sovereigns and surpassing the European Stability Mechanism and European Investment Bank. While unlikely to replace German Bunds as the Eurozone safe sovereign asset in the short term, these new issuances are step towards the creation of a new EU safe asset benchmark. By focussing on social and green bonds, the Commission is sending a clear sign of commitment to sustainable finance and the EU’s aspirations to build a greener and more social Europe.

For more information on this development, contact a member of our Debt Capital Markets & Listing team.

The content of this article is provided for information purposes only and does not constitute legal or other advice.