The coronavirus pandemic has created many challenges for individuals, businesses and governments around the world. In Europe, there’s a new vehicle to help finance the economic recovery there—social bonds.
The European Union (EU) came together to deliver a sweeping pandemic aid package in July and has come together again with the issuance of “social bonds” to further fund economic relief. Social bonds are aimed at funding projects that benefit society—in this case, programs for workers displaced by the COVID-19 pandemic.
Social bond proceeds will be directed towards the Support to mitigate Unemployment Risks in an Emergency (SURE) program (a €100 billion program), which provides loans to EU member states to cover costs directly related to the creation or extension of national, short-time work schemes, helping to protect jobs. The EU social bond issuance of 10-year and 20-year instruments (€17 billion issuance in total) saw record demand of €233 billion (US $276 billion), illustrating strong investor interest in these types of instruments.
Both green bonds and social bonds have been exploding in popularity over the past few years. The COVID-19 crisis seems to be drawing even more attention to this space as investors seek environmental, social and governance-driven (ESG) investment solutions. In April alone, US$12.7 billion of social impact bonds were issued around the world, more than the amount raised for all of 2019, putting the year-to-date total to around US$85 billion.1
While there has been bond issuance at the regional level in Europe, these new social bonds represent the first big EU-wide issuance, and of such high-quality—with AAA ratings by several credit rating agencies. We think many investors both inside and outside of Europe will buy these bonds to diversify individual country risk and will consider them as “safe havens” given the high credit rating.
The social bonds also offer attractive yields. The 10-year bond was priced at three basis points above mid-swaps, equivalent to +36.7 basis points over the conventional 0.00% German Bund due August 15, 2030, and the 20-year bond was priced at 14 basis points above mid-swaps, which is equivalent to +52.1 basis points over the 4.75% Bund due July 4, 2040.2
Johannes Hahn, European Commissioner for Budget and Administration, called the issuance the “first step toward entering the major league in global debt capital markets.”3
Will the new EU debt become the benchmark bond for Europe? Maybe—but most benchmark issuers issue bonds on a regular basis, whereas the EU issues bonds in response to programs. The EU is only planning on issuing large amounts of debt over the next four to five years, but if successful, this approach could be considered longer term. After all this issuance, the EU will become the fifth-largest bond market in Europe behind Germany, France, Italy and Spain.