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发帖数: 4638 | 1 大侠给总结一下先
23 October 2011
Draft Terms and Conditions
Maximising the lending capacity of the EFSF
The capacity of the extended EFSF can be enlarged without extending the
guarantees underpinning the EFSF. This optimisation would take due account
of the rules of the Treaty.
Within the terms and conditions of the endorsed framework agreement, the
maximization of EFSF efficiency would support the continued market access of
Euro area Member States under pressure and the proper functioning of the
sovereign debt market. The mechanism will provide immediate and credible
support, always linked to appropriate conditionality and seeking cooperation
with the IMF, while fully preserving the high credit standing of EFSF.
The credit standing of the EFSF is mentioned several times, along with
rating, yet, no discussion of which Member States will have “stepped out”
Several models exist to leverage the capacity of EFSF by several times. A
more precise number on the extent of leverage can only be determined after
contacts with potential investors. Two more specific options - a credit
enhancement approach and the setup of an SPIV (special purpose investment
vehicle) could be further pursued in order to increase the effective
capacity of EFSF in implementing the instruments as described in the EFSF
guidelines.
1. Objective
The effective capacity of the EFSF to assist in managing the funding
requirements of Member States in the Eurozone can be enlarged based on two
approaches:
- The credit enhancement approach (option 1) gives additional credit
enhancement to sovereign bonds issued by Member States, thus removing
concerns about the liquidity position of a Member State.
A “first loss” guarantee doesn’t REMOVE liquidity concerns, it may
alleviate them, but since it is only a portion of the liquidity required, it
does not remove them, furthermore, it only works while the “first loss”
providers are deemed to be liquid.
It is designed to increase demand for new issues of Member States’
sovereign bond programmes and lower the yield thereby supporting the
sustainability of public finances.
- The creation of a Special Purpose Investment Vehicle (option 2) would
combine public and private capital to enlarge the resources available to
EFSF. The SPIV, which could be created centrally or separately centrally or
separately is a very big deal and is glossed over here in a beneficiary
Member States, would aim to create additional liquidity and market capacity
to extend loans, for bank recapitalisation via a Member State and for buying
bonds in the primary and secondary market with the intention of reducing
Member States’ cost of issuance. I think you may need at least two types
of SPV’s as “bank recapitalizations” are very different than “sovereign
debt purchases”, and loans to whom? The loans category is very vague, it
could be loans to banks?
Both options can be delivered within the existing EFSF Framework Agreement.
The governance structure applied to the different EFSF instruments as
described in the guidelines should apply. This is Good
Therefore financing under option 1 and 2 would be linked to an MoU entailing
policy conditionality and appropriate monitoring and surveillance
procedures.
2. Mechanics
Option 1
A Member State issues a sovereign bond with credit enhancement through a
partial protection certificate attached. Both items could be issued as a
combined package, but would be separable and intended to be freely traded
after issuance. Freely traded? Really? I would expect that they will try
and control people from shorting these products. The coupon on the sovereign
bond should be lower than current market yields because of the protection
afforded by the attached certificate, and thereby contribute to the
sustainability of financial flows. This analysis is incorrect, if the
insurance is detachable, it should impact all bonds in the secondary market
for that issuer. That is good in some ways, but it also means that the new
issue will not trade better than the secondary market as a whole and won’t
improve the coupons on new issues relative to the slightly improved overall
secondary market levels. If the insurance is tied to only a specific issue,
then it is fairly restrictred for trading, but the benefit would be more
pronounced in the new issue. In any case, the supply of insurance will be
very small relative to a country’s total outstanding debt until more and
more new issues are done – so no real short term benefit to the overall
market.
The mechanisms to implement this approach should be compatible with the
operational model of EFSF. This could be achieved by EFSF extending a loan
to a Member State in order for the Member State to acquire EFSF bonds which
back the effective guarantee.
The bond would then collateralize the partial protection certificate and
could be held by a Trust or SPV on behalf of the Member State. This is just
crazy. EFSF loans money to a country so it can buy an EFSF bond which it
then puts in trust? Just directly issue insurance against the EFSF. This
seems like a bizarre and unnecessary step and should be removed – it would
also remove negative pledge issues that possibly arise from this bizarre
methodology to create insurance.
In the event of a default (to be defined), the investor could surrender the
partial protection certificate to the Trust/SPV and receive payment in kind
with an EFSF bond. Whoa, I don’t get cash when there is a default I get
EFSF bonds, possibly guaranteed by the country that just defaulted???? This
dramatically reduces the value of the insurance.
Option 2
One or more special purpose investment vehicles (SPIV) would be established;
each dedicated SPIV would have a mandate to facilitate funding of Member
States through loans, and invest in sovereign bonds of a specific country in
the primary and secondary markets. Notice how bank recapitalizations has
disappeared here? We still have loans and bond purchases, but no bank recap
– I assume that is just sloppy, but also tells you how much thought was
put into this document. This vehicle could be funded by different classes
of instrument with distinctive risk/return characteristics. The instruments
could include a senior debt instrument and a participation capital
instrument, both of which would to be freely traded instruments. In addition
there would have to be an EFSF investment which will absorb the first
proportion of losses incurred by the vehicle.
The SPIV structure should be set up so as to attract a broad class of
international public and private investors. For that purpose, the senior
debt instrument could be credit rated and targeted at traditional fixed
income investors. The participation capital instrument could be junior to
the senior debt instrument but rank ahead of the EFSF investment. This might
attract Sovereign Wealth Funds, risk capital investors and potentially some
long-only institutional investors. This tranche will potentially share with
EFSF any upside generated by the investments. This might be interesting,
but will depend on risk/reward and flexibility or lack thereof, etc. In
managed CDO’s, investors focus a lot on managers who have great credit
skills. Say a Pimco or Blackrock. The EFSF is purposely trying to buy
bonds both of these managers are either out of or underweight. They want to
overpay for bonds to push prices higher. There really is limited diversity
as most if not all the countries are extremely highly correlated,
especially in event of default of one. So most of what the EFSF wants to
accomplish would push away traditional investors and scare the rating
agencies. More details need to be seen, it could be interesting, but for
now, it seems the desires of a true private investor and the desires of the
EFSF diverge. But there may be a price where the risk reward is subsidized
enough that private investors want in – thereby increasing costs to the
Member States.
3. Flexibility to deploy both options
The EFSF would benefit from the flexibility to deploy both options, which
are not mutually exclusive:
Option 1 may not be appropriate or feasible in the circumstances of every
Member State, because of negative pledge clauses (see
below) in some Member States’ existing bonds and other financial
instruments. Moreover, because Option 1 focuses on new primary issuance, it
would also only be used for non-programme countries or for programme
countries in an exit/post-programme period (whereas Option 2 could be used
for secondary market operations in relation to programme countries). I have
to admit I get a bit lost here, but I think there bizarre form of the
insurance may be why Finally, a decision on which of Options 1 and 2
represents the most efficient use of EFSF resource can only be assessed
after extensive dialogue with potential investors and rating agencies in any
normal deal, this dialogue would have been ongoing, particularly with the
rating agencies- and the answer may vary from Member State to Member State.
Therefore, retaining the possibility to deploy both approaches would be
beneficial. The plan to plan
4. Timing of implementation
In both options, the technical market preparations can in principle be
achieved quickly following agreement on the terms on which a particular
Member State might benefit from support and once the necessary clearance is
obtained for the EFSF to progress - although option 2 does require a period
of some weeks after finalisation of the structure during which investors and
lenders would be sought for the fund. A funded SPIV may not be so simple,
since ramp-up is usually an issue. It would have to balance having negative
carry while paying outside investors, or use up all the money up front,
thereby reducing the ability to influence markets in the future
5. Issues
Segmentation. The danger of segmenting the relevant sovereign bond market is
reduced as neither option results in any alteration in the nature of Member
States’ sovereign bonds.
Negative pledge clauses. Option 1 has the potential to trigger negative
pledge clauses (i.e. existing commitments from Member States not to grant
security to new creditors, or only if they grant old creditors the same
security as they grant to new
holders) in Member States’ outstanding financial instruments.
There would need to be an extensive due diligence exercise similar to that
being operated for the Greek PSI scheme for any Member State using Option 1,
to establish whether bonds or other obligations have a negative pledge
clause, and if so the extent and implications of it. Option 2 does not raise
this issue. Just issue a regular guarantee and avoid all this negative
pledge stuff
Impact on government debt. There is a material possibility that Option 1
could statistically increase the Member State’s gross debt, as the debt
level would increase due to the loan extended by the EFSF to the Member
State providing credit enhancement.
This issue will have to be assessed by Eurostat. Option 2 may not raise this
issue.
Impact on EFSF rating. The current basis of EFSF’s AAA rating is that no
value is assigned by the agencies to the underlying assets and that the AAA
rating depends entirely on the guarantees provided by the AAA Member States.
The underlying business profile of EFSF is not the driver of the rating.
They say it, but don’t get it. The original AAA came from the fact that
EFSF was never going to have obligations outstanding greater than the amount
of AAA guarantees. Now they plan on taking more risk than is covered by
the AAA members. This runs a real risk of getting something as low as
weakest link, but likely gets something more like a AA- rating. They
understand why they got rating in first place, but don’t seem to connect
the dots to how that has changed. Again, it is not professional at all to
only be re-engaging the rating agencies at this late stage. Expect negative
surprises on the AAA rating
Impact on Member States’ ratings. The rating agencies have already taken
into account the guarantees given by AAA sovereigns in their rating of the
respective Member State. The rating agencies will, however, have regard to a
change in EFSF’s risk profile in their analysis of Member States’ own
ratings.
Were any AAA Member State to suffer a downgrade, this would impact on the
EFSF’s own capacity. I don’t think the EFSF is AAA anymore to begin with,
but yes these guarantees place pressure on all member ratings since nothing
is being done to reduce the probability of default of the borrowers
Leverage. The capacity increase in both options is achieved by combining
public and private resources in order to attain financing for Member States
at sustainable prices. Option 1 achieves this capacity increase by insuring
only a fraction of the actual funding requirements, while option 2 combines
capital from European and non-European public and private investors. The
leverage which can be achieved can only be determined after dialogue with
investors and rating agencies around the new instrument, and in the light of
prevailing investor appetite over time for the sovereign bonds of
particular Member States.
Distribution of returns. According to the EFSF Framework Agreement all
funding and operational costs of EFSF have to be covered by the beneficiary
Member States. A Financial Assistance Facility Agreement will settle all
profits and losses of EFSF engagement for a country. |
