(Adds pricing details, background)
By John Geddie
LONDON, March 20 (IFR) - The European Financial Stability Facility (EFSF) surpassed its EUR16.5bn Q1 funding target on Wednesday, with what looks likely to be the issuer’s last tap of an outstanding bond guaranteed by Cyprus.
The euro rescue fund, rated Aa1/AA+/AAA, increased its EUR3bn 3% March 2016 by EUR1bn via a syndicated tap, taking its total funding in the year to date to EUR17bn.
However, with Cyprus on the verge of accepting a bailout programme, the Mediterranean island is expected to soon step out as a guarantor of EFSF’s debt obligations, which would prevent the rescue fund from tapping these bonds in the future.
Approximately EUR3bn of EFSF’s funding has been raised via taps in 2013, with EUR41bn still left to raise for the remainder of the year.
Earlier this week, bankers remained sceptical that EFSF would issue new debt this week given that final bailout terms for Cyprus were not yet approved and the uncertainty this was causing in the market. EFSF had, however, previously flagged this week as a possible issuance window.
When the deal emerged on Wednesday morning, lead banks said investors had nothing to fear from buying a bond part-guaranteed by Cyprus, adding that it would still honour its debt obligations of bonds issued up until it exited as guarantor.
“The credit structure of existing bonds would not change if Cyprus stepped out, therefore that eventuality would not trigger a put option on these new bonds,” said one syndicate official on the deal.
At present, Cyprus is on the hook for up to EUR1.5bn in guarantee commitments of debt issued by the EFSF, worlds away from the EUR211bn committed by Germany.
If Cyprus opts to step out, its share of commitments would be redistributed among EFSF’s other shareholders, as was the case when Greece, Portugal and Ireland entered bailout programmes.
Barclays, Morgan Stanley and UniCredit issued the new bonds at mid-swaps less 5bp, a shade wider than where the outstanding bonds were bid on Tradeweb when final pricing details were released to the market.
The bond was originally issued in late February during volatile market conditions following an inconclusive Italian election, which quelled investor demand.
EFSF was only able to print EUR3bn of the three-year paper, deemed to be a defensive maturity in capital markets, which was seen by some observers as a poor result.
By comparison, earlier in 2013, EFSF had issued handsomely oversubscribed EUR6bn 7yr and EUR5bn 5yr benchmark bonds. (Reporting by John Geddie, editing by Julian Baker)