EIB kicks off first major bond sale linked to new euro zone rate

By Yoruk Bahceli

LONDON (Reuters) - The European Investment Bank on Tuesday kicked off the first major bond sale linked to the euro zone's new market interest rate ESTR, a key step in efforts to move away from the scandal-hit interest rate benchmarks.

The deal from the EIB, the European Union's main lending arm and one of the world's biggest multi-lateral banks, will be a floating-rate note based on the euro short-term rate -- ESTR for short -- that goes live on Wednesday.

Compiled by the European Central Bank and seen as the biggest shake-up in the bloc's money market plumbing since the euro's launch in 1999, the ESTR will be published for the first time on Oct. 2, reflecting trading on Oct. 1.

It will replace overnight interbank lending rate EONIA, as the euro zone echoes moves in the U.S. and Britain to move away from Libor and its equivalents that were tainted with rigging scandals.

One of the bankers managing the EIB bond sale told Reuters the deal would set a benchmark for future debt issuers and for the new ESTR-linked debt market.

The deal will "incentivise (issuers) and provide some level of certainty since there will be some active banks trading the bond," he said.

Widespread use of Libor is set to end by December 2021 in Britain and the United States, but the euro zone is taking a more hybrid approach for Euribor, a series of benchmark rates with longer maturities.

The EIB's three-year bond is expected to raise around one billion euros, according to bankers involved with the transaction.

Pricing is expected on Wednesday, when the first quote for the ESTR is published. Initial price thoughts were at 12 basis points area over the ESTR, according to documents seen by Reuters.

Issuers have shown interest in selling bonds linked to the ESTR rate well before it debuted on money markets. In September, German regional state-owned L-Bank sold the first ESTR-linked bond. However, the deal, at 250 million euros, was too small to act as a benchmark.

The EIB bond shows it is pioneering issuance linked to ESTR, much as it led the way on debt sales linked to SONIA, the Bank of England's replacement rate for sterling Libor, with a similar deal in June 2018.

Nearly 30 billion pounds of SONIA-linked issues from supranationals, agencies and banks followed, according to data from Refinitiv IFR, as most issuers switched away from Libor.

A similar flurry is not expected for ESTR deals, as floating-rate note bond sales have not been popular among euro issuers recently given deeply negative interest rates in the region, analysts said.

Floating-rate note issuance in the currency has slumped in 2019, down to almost 30 billion euros from around 80 billion euros for the whole of 2018.

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Negative interest rates make the format less compelling to investors, since coupons on floating-rate debt falls together with the benchmark rates they are tied to.

Floating-rate issuance in sterling on the other hand is near 2018 levels, with most of the gilt yield curve still offering positive yields.

The slower transition in the euro zone compared to the U.S. and Britain is also likely to impact the debt capital markets.

Belgian regulators have approved a reformed rate for Euribor, which covers longer contracts and acts as the benchmark on most euro floating-rate bonds.

"Authorities are much more supportive of Euribor [than Libor]. This is why activity in the SONIA market has been brisker than what we would expect in the euro zone,” said Christoph Reiger, head of rates and credit research at Commerzbank (DE:CBKG).