(Bloomberg) — The first bond designed to bankroll Europe’s defense spending was sold by a French bank on Thursday, with over €2.8 billion ($3.3 billion) in orders showing strong investor interest in the sector.
BPCE SA priced a €750 million note aligned with Euronext NV’s new methodology for a “European Defence Bond,” according to a person familiar with the matter. The format is similar to green bonds in that the proceeds are ringfenced, except in this case the cash will fund military firms instead of environmentally-friendly projects.
The landmark product illustrates a sea-change in attitudes to financing the industry since Russia’s invasion of Ukraine in 2022. Defense firms are now one of the hottest plays in European markets, as manufacturers seek to fulfill the billions of euros of extra orders pouring in from governments. Even some sustainable funds that once blacklisted the sector are getting in on the act.
“The use-of-proceeds pledge reflects Europe’s gigantic task at hand,” said Maureen Schuller, head of financials sector strategy at ING Groep NV. “I think that going forward we will see more such issues, with banks stepping in to support the financing of Europe’s defence ambitions.”
The five-year note’s spread was set at 85 basis points above mid-swaps, with the demand driving that down from initial price thoughts of 105 basis points to 110 basis points, according to the person familiar. That put the new issue concession, or premium over comparable existing debt, at about 20 basis points, according to Bloomberg calculations.
With war raging close to the European Union’s borders and US President Donald Trump threatening to withdraw support, the bloc’s leaders are racing to develop a military deterrent strong enough to resist Russia. In June, NATO members agreed to increase defense spending to 5% of gross domestic product after Trump repeatedly lambasted his European allies for underspending on security.
Asset managers and banks are competing to profit from the spending rush. That’s sent defense company stocks surging to make up four of the top five performers this year in the benchmark Euro Stoxx 600 index. Even firms that are only tangentially linked to defense are attracting hordes of prospective lenders.
BPCE’s bond is the latest effort to tap into that frenzy. The bank has already increased its financing of the defense industry by two-and-a-half times, and to export financing for French defense products by over seven times, according to an investor presentation.
The strong orders came despite a tumultuous week for French debt due to political uncertainty. The country’s borrowing costs have increased versus peers since Prime Minister Francois Bayrou announced he will call a confidence vote next month. The jitters have also widened French bank bond spreads.
While BPCE said it drew “inspiration” from existing bond-market standards, it is not seeking to qualify its defense debt as “sustainable bond instruments” under widely-used International Capital Market Association guidelines. A June update from ICMA said issuers probably shouldn’t seek to fund defense projects with such labels because ethical investors remain concerned about where weapons will end up.
Instead, BPCE is using a new framework designed by French exchange operator Euronext, called the “European Defence Bond Label.” This was developed with “key stakeholders across the Defence and Security financing ecosystem, including financial institutions, investors, issuers, and other market participants,” according to a July document.
It’s unclear how many investors with sustainable investing mandates participated in the sale. BPCE’s defense bond comes with a commitment that the bank will publish an annual allocation report verified by an external reviewer, similar to green debt reporting standards.
“It means BPCE has a clean shot at funding defense without any criticism. If you have bought it, you can’t really worry about defense funding from it,” said Luke Hickmore, a fixed income portfolio manager at Aberdeen.
–With assistance from Abhinav Ramnarayan, Isolde MacDonogh and ‘Tofe Ayeni.
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