Emboldened EFSF eyes more flexible funding plan

* Investors swamp EFSF 7-yr bond despite ratings wobble

* Rescue fund takes nimble approach towards funding wall

* Banks complain about potential costs of new business

By Christopher Whittall and John Geddie

LONDON, Jan 18 (IFR) - The European Financial Stability Facility looks set to adopt a more flexible debt issuance strategy going forward as it faces its largest ever funding programme this year.

The EFSF, rated Aa1/AA+/AAA, raised market eyebrows in December when it announced a sharp increase in its scheduled long-term bond issuance for 2013 from EUR45bn to EUR58bn.

A blow-out EUR6bn seven-year syndicated deal this week showed that the emergency fund has no trouble in raising money via traditional avenues.

Nonetheless, the EFSF has indicated it may add more strings to its bow by becoming more receptive to reverse enquiries, while bankers believe its upsized funding needs make it more likely to return to debt auctions, as it did for the first time last year.

"For the time being, our strategy is mainly based on benchmarks and taps. We will monitor the reaction of the market to see if we need to react to reverse enquiries for taps, but we definitely need to be flexible," Christophe Frankel, CFO and deputy CEO of the EFSF, told IFR.

"It is too soon to say whether we will use more auctions. What I can say is we have to remain flexible and adapt to what the market wants."

The evolution is hardly surprising: the EFSF completed its first reverse enquiry-inspired deal last April with a EUR1bn tap of its 3.875% March 2032 bond.

Perhaps more significant is this week's confirmation of the EFSF's stature among investors. The fund's EUR6bn syndicated seven-year bond was its first visit to the market since its downgrade to Aa1 by Moody's last year and attracted a bumper EUR8.3bn in orders. The transaction represented the largest seven-year SSA deal the euro bond market has ever seen.

"They're in the very top tier of liquidity providers in the market," said one of the bankers on that deal. "They'll do whatever they need to get funding done this year - the size of this deal shows they have a very strong customer base."

At present, the EFSF tends towards syndicated benchmark deals, which require it go through a time-consuming process of collecting formal proposals from its banking group. However, there is far greater flexibility and a shorter decision process around taps that can be done via syndication or auction.

SQUEEZING THE BANKS

Having more options should enable it to raise billions of euros at the lowest possible price. Not everyone wins, though.

Banks have previously complained about the increasing pressure to execute balance sheet-intensive trades and extend committed credit lines to the rescue fund.

The market group already had to maintain a 2.5% share across all the EFSF's auctions and T-bills, a rule that has also been extended to the European Stability Mechanism, which took over the EFSF's bills programme this year.

"They now have all these strings to their bow to try to get the best funding they can, but it means they are squeezing the banks as hard as they can on all fronts," said the head of SSA syndicate at one of the EFSF's participating banks.

"They've asked all banks to step up with loan lines, step up on expensive auctions, and now have the capacity to request more arbitrage business via taps, which can, at times, be unprofitable for banks."

When the EFSF took the unprecedented step of tapping a benchmark bond via auction in May last year, it sparked uproar from SSA bankers bitter about losing the fees they would have received from a syndicated deal.

However, even the preferred syndicated business can prove costly. This sense was heightened in the wake of the EFSF's 10-year benchmark deal last year, where books were undersubscribed and leads were left long underperforming bonds.

Other bankers highlight that almost a quarter of the EFSF's market group received less than two benchmark (non-tap) mandates last year - the minimum necessary to make ends meet.

Not that grumbles from its syndicate banks are likely to deter the EFSF from diversifying its options to complete its hefty 2013 programme.

"The EFSF is keen to be properly reactive: if there's a pocket of liquidity, they'll accommodate it," said another head of SSA syndicate.

"Their funding is sizeable and potentially a challenge. But if they come at the right price they can get big trades done." (Reporting by Christopher Whittall and John Geddie; Editing by Philip Wright and Julian Baker)