On 7 May 2021, Euronext, the leading pan-European market infrastructure, issued its largest ever corporate bond to support its acquisition of the Borsa Italiana Group.
Euronext chose to issue through VP Securities, providing what Stéphane Boujnah, Chief Executive Officer and Chairman of the Managing Board of Euronext described as “the proof of concept of the Euronext federal model.” In this article, the parties involved in this ground-breaking transaction talk about their experience working with a cross-border issuance model, and whether or not we will see a permanent shift in market practice.
Setting minds at ease
Issuing a bond of €1.8 billion in 3 tranches required the collaboration of a number of banks, lead managers and lawyers. And while there was a general willingness to try a different approach, there were quite a few concerns as well. “Eurobond market participants have a standardised way of doing things,” explains Raffaele De Vitis, Managing Director at Crédit Agricole CIB, one of the joint global coordinators for the bond offering. “They rely on proven methods of issuing, and are rather conservative when it comes to standard procedures. Consequently, making every parties comfortable with the new process is an important prerequisite. This was particularly relevant in this case because of the strategic importance of the bond.”
Even from Euronext’s perspective, the decision was not taken lightly, as Giorgio Modica, CFO of Euronext, explains. “We are not a recurring issuer. It is not business as usual for us to raise this type of capital and this transaction is by far the largest we have ever done. So, the first thing I said was, ‘Yes, but we need to make sure that it flies.’ I will need to be in a position where I could tell others why I believe.”
Ensuring European Central Bank eligibility
Giorgio Modica’s first concern was ensuring European Central Bank (ECB) eligibility. “We wanted to make sure that issuing our bond through VP Securities would not prevent the ECB from participating via its CSPP,” he says. Fortunately, this concern was quickly put to rest. “One of the first things we focused on was making sure that the bonds were eligible for the ECB,” relates Cenzi Gargaro, Partner of Counsel at White & Case LLP. “For the bond to be eligible, Euronext needed to issue it through a recognised CSD. Fortunately, VP Securities had the necessary recognition, and the right links with Clearstream and Euroclear. So, we could tick that box.” In fact, all three tranches were ECB eligible.
The question of dematerialisation
Then, from the legal perspective, there was the issue of dematerialisation. “Initially, I was a bit concerned, because as far as I knew, a dematerialised structure had never been used for a bond of this size,” Dan Lauder, Counsel at Allen & Overy, states. “English law, traditionally, has to have a physical document of title. The market is used to this structure over the years. We wouldn’t consider anything else because this is the norm. So, my first thought was that this would require a lot of thought and work. We would need to be sensitive to how investors will see it.”
Cenzi Gargaro was very familiar with dematerialisation from French law, yet there was still some hesitancy. “Bonds have been dematerialized in France since the 80s. So, it is a fairly tried and tested approach. However, one of the most dangerous things you can do as a lawyer is to make assumptions. Different jurisdictions have different rules regarding dematerialization vs global notes. This is why you don’t just say, ‘Dematerialized – no problem.’”
What helped put their minds at ease regarding this issue? Dan Lauder highlights two key factors. “We could visualise the parallel with the French structure. Once you can do that in one legal system, then it becomes a possibility in another legal system, because the clearing systems are not that different. Second, I knew that it had happened under English law, where banks had used a dematerialised structure for debt programmes for small level transactions.”
Once they had laid the legal groundwork, the team found that the documentation process was easier with the dematerialised bond. “The issuing and paying agency process and the relationships were much lighter than the actual heavy English documents, which are stuffed with references to physical bonds,” Dan Lauder says. From Giorgio Modica’s perspective, going with a dematerialised bond had an added benefit of complying with Central Securities Depositories Regulation (CSDR), which states that all issuances have to be dematerialised from 2023. “Not having a global note is future-proof,” he says. “And using Danish law means a cheaper execution for us.”
Will investors be wary of the Danish ISIN?
Another major concern involved investor reach. “The main concern around this way of issuing and settling, centred around the possibility of reaching all the international investors we wanted to reach,” Raffaele De Vitis says. “We were concerned about whether investors would raise questions or objections during the book building process about issuing under a Danish ISIN. It is not very common and no central European entity had done this before.” This concern too proved to be unfounded. During the book building process, the lead managers did not receive a single question about or objection to the Danish ISIN. And the bond’s performance met, and in many cases, exceeded expectations.
Bond performance exceeds expectations
The final order book reached an amount of c. €5 billion and was more than 2.7 times oversubscribed. The issuance attracted a wide range of international investors from France, Germany, Austria, the UK, Ireland and the Benelux, as well as a healthy representation of Nordic investors in the shorter (5-year) tranche. “We were able to price the 20-year tranche, which is the most challenging, with the tightest spread ever,” says Giorgio Modica. “We were able to get the best pricing ever. The spreads at issuance were very aligned with the ones in the secondary market, which means we were able to price at fair value, both on the 10-year and 20-year bond.”
Raffaele De Vitis was also pleased with the bond’s performance, “It’s a very solid result. When we were assessing the value of the bond, all tranches priced at or inside their fair value, which is a strong statement to the healthy demand that underpinned the bond.”
VP infrastructure ensures a smooth process
Looking back on the entire process, Raffaele De Vitis highlights VP’s infrastructure as one of the key factors to success. “Once everyone was comfortable with the process and had made the necessary changes to the documentation, the process itself was at least as easy as issuing through the normal route. The plan worked in much the same way as the classic ICSD issuance, and the bridge that VP has to the ICSDs made it easier. The fact that VP has a solid infrastructure and a tested way of working with its partners also made it easier. In fact, the [entire] process was quite pleasant.”
Dan Lauder also looks back at a successful process, where the banks, their legal counsel and the issuer all worked together to challenge the status quo. “I found it on the whole to be a very fascinating experience from a legal point of view. And, in some ways, very enjoyable. When you’re involved in something quite innovative like this, it does add something to the experience. And in the end, all of my concerns proved to be unfounded.”
Will we see a shift in market practice?
Cenzi Gargaro is not entirely convinced. “I don’t think it is going to be an automatic gamechanger. Not because issuers are unwilling to change, but simply because they won’t think about it or there will be no pressing need for it.” However, he also points out that such shifts in market practice have occurred before. “For example, France moved from issuing covered bonds under UK and US law to French law at the start of the 2000s under a new statutory regime. This move necessarily meant switching to dematerialised notes using the French clearing system. This served as a catalyst and, since that time, virtually every French corporate issues its ordinary bonds under French law in dematerialised form. So, history teaches us that change can happen; it just requires the necessary impetus. However, the question is whether a domestic development can attract a more international following, which may depend on other factors.”
One such impetus could be the widespread adoption of dematerialisation. “I’ve always liked the idea of dematerialisation,” says Dan Lauder. “And I do think that the days of the physical bond are limited. You can still use English law, in theory, without the physical bond. This approach is doable and it’s a good structure – so it does present a good alternative.”
Raffaele De Vitis believes it is a matter of helping market participants get used to a new way of doing things. “I think as investors, underwriters, issuers and lawyers become more accustomed to these tools, you’ll see more issuances in this way. Market participants are creatures of habits. You need people to be comfortable with the way things work, and after they are, then they might be willing to change. If you can really show that it is cheaper and it works, then you can make a case for it.”
The proof is in the issuance
When Giorgio Modica needed to convince himself, he started by building a document with a list of concerns, and for each point, he counterbalanced it with facts. “The facts told us that it could be done, and now we can say that it is a success, so our assessment was correct.” In an industry where market participants hesitate to be first movers, Giorgio Modica believes Euronext’s experience can help other issuers see that there are alternatives to the established market practice. “The fact that this issuance was successful is proof that it can be done. I hope that the Euronext’s example can be replicated by other institutions and that other CFOs can make the same decision that I did.”
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