After a report by Britain’s Sunday Telegraph that the European Financial Stability Facility (EFSF) had to resort to buying its own bonds when investors shunned them, the EFSF denied the report, saying that the issue was a modest size because of unstable market conditions.
The Sunday Telegraph said that after the EFSF announced last week the successful sale of a bond issue, sources revealed that the issue actually met with a shortfall of more than 100 million euros ($137 million), which the paper said the rescue facility covered itself. The bond issue, for 3 billion euros, was in support of Ireland, and according to the paper, only found 2.7 billion euros’ worth of purchasers, leaving the EFSF to pick up the difference. The Telegraph characterized it as a “major failure.”
However, a spokesman for the EFSF denied that there was a problem, saying, according to a Reuters report, “The EFSF did not buy its own bonds and the book was 3 billion euros.” EFSF head Klaus Regling, according to the report, told the Financial Times on Friday that the turmoil in the markets had made it difficult to leverage the fund to the planned 1 trillion euros.
Forbes pointed out that there could be a perfectly logical explanation if, indeed, the EFSF had purchased any of its own bonds: namely, that 12% of the issue was allocated to the co-leads of the issue, which, according to the report, “may or may not be unusual.”
It is “entirely and absolutely usual,” according to the piece, for co-leads to hold a portion of a bond issue on their books as the initial jockeying around during the liquidity period occurs. One subscriber may take less than originally thought; another may want more, and the bonds thus held on the co-leads’ books are used to balance things out. It becomes unusual if, after the liquidity period, the co-leads are stuck with those bonds.
So, “[i]f that 12% remains on the books of the co-leads then yes, it does mean that they just couldn’t sell the bonds.” At that point, who pays for them depends on contract details, and perhaps the lead banks will end up paying for them. If that happens, warns the author, the next issue will find a demand for higher yield from the banks, lest such an eventuality occur again. And that would bode ill for the EFSF.