EIB starts sale of first major bond linked to new euro zone rate ESTR

(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, investment banks managing the deal said.

The deal from the EIB, the European Union’s main lending arm and one of the world’s biggest multi-lateral banks, will be based on the euro short-term rate—ESTR for short—in a key step in regulators’ efforts to move away from the scandal-hit LIBOR benchmark.

Compiled by the European Central Bank and viewed as arguably the biggest shake-up in the bloc’s money market plumbing since the euro’s introduction two decades back, the ESTR rate will be formally published for the first time on October 2, reflecting trading on October 1.

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 (for secondary trading) since there will be some active banks trading the bond,” the banker said. 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 rate is published. According to documents seen by Reuters, initial price thoughts were at 12 basis points area over the ESTR rate.

Issuers have shown interest in selling bonds linked to the ESTR rate well before it debuted on money markets and 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 frontrunning 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.
A flurry of issuance linked to SONIA followed after the EIB sold the first bond linked to that rate in June 2018.