October 2, 2019 / 12:57 PM / a month ago

EIB prices first major bond linked to new euro zone rate ESTR

LONDON, Oct 2 (Reuters) - The European Investment Bank priced the first major bond linked to ESTR on Wednesday, the day the first quote was launched for the euro zone’s new benchmark interest rate.

The European Union’s main lending arm raised 1 billion euros through the three-year floating-rate note, according to a document from lead managers seen by Reuters.

The bond was priced at 11 basis points over the ESTR rate, which was quoted for the first time on Wednesday at -0.549%.

Compiled by the European Central Bank, the launch of ESTR is seen as the biggest shake-up in the bloc’s money market plumbing since the euro’s launch in 1999.

ESTR replaces 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.

To account for deeply negative interest rates, the bond’s coupon was fixed at 200 basis points over ESTR. This is a relatively wide margin which provides a buffer and prevents the bond coupon from going negative should rates fall even further.

The EIB is frontrunning the use of ESTR as a benchmark in the debt capital markets after it launched the first deal tied to SONIA, the Bank of England’s replacement rate for Libor, in June 2018.

“The EIB has achieved in setting the standard for the structure of this transaction, similar to what they have done on SONIA and SOFR,” said Benjamin de Forton, head of public sector origination at BNP Paribas, one of the lead managers that ran the deal. (Reporting by Yoruk Bahceli; Editing by Dhara Ranasinghe)

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