Investors Show Strong Appetite for European Union’s First Social Bond

EU’s record-breaking issue “an important addition” to fast-growing market.

The European Union has experienced high levels of demand for its first tranche of social bonds, aimed at supporting the bloc’s recovery from economic effects of the Covid-19 pandemic.

Issued yesterday, the bonds were almost fourteen times oversubscribed, attracting bids of €233 billion for just €17 billion securities. According to Reuters, €10 billion of 10-year AAA-rated social bonds attracted €145 billion of demand. The 20-year tranche was 12 times oversubscribed, attracting €88 billion. The 10-year bond offers a negative yield, whilst the 20-year bond has a positive yield.

Strong demand was underpinned by expectations that the European Central Bank would be active in the secondary market, having historically underinvested in supranational debt. Both tranches continued to see strong demand in the first day of secondary trading on Wednesday, with yields on the 10- and 20-year bonds dropping 10-12 basis points.

The proceeds will support the EU’s SURE (Support to mitigate Unemployment Risks in an Emergency) scheme, which will fund measures by member states to preserve income for employees at firms experiencing negative impacts from Covid-19, as well as self-employed workers.

The EU plans to sell €30 billion this year to fund SURE, hoping to raise €100 billion from investors by the end of 2021. Collectively, it represents the world’s largest social bond programme, effectively tripling the outstanding social bond universe.

But the SURE issuance is part of a much larger funding programme. The EU is hoping to raise €700 billion for its full pandemic recovery fund. This would increase the size of the bloc’s debt 15 times above current low levels (approx. €52 billion), but would still put it behind major Euro-zone sovereign issuers such as France, Italy, Spain and Germany.

The SURE bond proceeds will contribute to two social impact areas under the UN’s Sustainable Development Goals: employment generation and programmes designed to prevent and/or alleviate unemployment; and good health and wellbeing through increased access to universal health coverage.

The bonds are aligned with the Social Bond Principles of the International Capital Markets Association, and include requirements for beneficiary member states to report every six months. Under the Social Bond Framework drawn up by the European Commission, member states must report on the how funds are spent as well as the social impact.

Christian Kopf, Head of Fixed Income at Union Investment, said the deal marked the EU’s arrival as a large-scale investment grade issuer. “We view the social bonds issued by the EU as an interesting opportunity for sustainability-minded investors.  The new issues have a Triple-A rating from all major rating agencies and will likely offer a yield pick-up over securities issued by the European Stability Mechanism or the European Investment Bank, as well as a higher yield than government bonds issued by member states with comparable ratings,” he added. “The EU’s social bonds are therefore an important addition to the market for sustainable bonds, which has so far been dominated by green bonds.”

According to Refinitiv, issuance of social bonds rose to US$85 billion in the year to end-September, versus US$10.6 billion in the same period in 2019. Much of the increase has taken place since April, with the Covid-19 pandemic stimulating issuance of bonds targeting societal issues. Public-sector agencies and financial institutions have issued social bonds aimed at funding projects to tackle unemployment, for example, and to provide loans to the healthcare sector and low-income families.

“The decision to issue the EU SURE bonds as social bonds will be a game-changer for the global social bonds market. At the same time, it is a clear demonstration of the EU’s long-term commitment to sustainable financing,” said Johannes Hahn, Commissioner for Budget and Administration.

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