HNW_NRG_C_Bleed_Transp ROUNDTABLE SERIES 2020 – A Year in Review European Debt Capital Markets Sovereigns, Supranationals and Agencies JANUARY 2021 TABLE OF CONTENTS 03 | Foreword 04 | Key Takeaways 05 | Roundtables 06 | Life After LIBOR 14 | UK Gilt Market 26 | MDB Call to Action 40 | European Landscape and EU Response 46 | A Land Down Under 52 | The Importance and Benefits of a Diverse Issuance Program 60 | Consistently Consistent: Now and Next for Europe’s Public Sector Agencies 69 | The Future of ESG 77 | Canadian Maple Market 95 | Canadian Public Sector Issuers 117 | Is There More Turbulence Ahead for Secondary Markets? 125 | Private Placements: Opportunities, New Trends and Challenges 132 | Select RBC-Led Transactions in 2020 134 | Participants 2020 – A YEAR IN REVIEW FOREWORD Welcome to RBC’s 2020 SSA review We have put together a comprehensive collection of roundtable discussions to cover the market themes and unforeseen challenges that, over the past year, the sector had to navigate through. Over those 12 months many issuers had to unexpectedly increase their funding needs due to the pandemic at a time where liquidity was challenged, the outlook was uncertain and with personnel having to also adjust to new working from home arrangements. However, the sector rose to the challenge and did so whilst still driving innovation and transition. We are extremely grateful to the many issuers, investors and market experts who have given up their time to contribute to this review and have offered their insight and experience. Thank you. The SSA business is core to RBC’s global fixed income franchise. It is the sector that continues to lead the market on climate transition and ESG more generally, as well as in the transition from Libor. It is the most global of sectors, and has led the global response to the Covid-19 crisis. Since March last year, the sector has seen unprecedented volumes of issuance, yet demand has led to lower yields, record order books and negative new issue premium. 2020 was also a record year for RBC’s SSA platform: ■ In the USA, we led 44 SSA benchmarks for 25 different issuers; totaling over $95 billion ■ In Canada, we ranked as the top underwriter of Canadian domestic government bonds, having led 305 transactions in 2020; totaling ~C$24 billion, or ~14% of the sector’s ~$176 billion ■ We ranked number 1 in GBP SSA with 23 deals executed in 2020 for 11 different issuers, totaling over £37 billion, including ranking number 1 with the UK DMO ■ In Australia, we underwrote ~40% of all SSA supply ■ We ranked top underwriter in SSA Risk Free Rates globally and have now led 13 inaugural SSA RFR transactions since 2018, including the recent inaugural SONIA index and SOFA index transactions ■ We are a strong supporter of the Green and ESG bond markets and have now underwritten transactions across AUD, CAD, EUR, GBP, NZD, USD, TRY, ZAR currencies ■ Our secondary trading and distribution capabilities continue to provide liquidity even during the most challenging of markets 2021 has started very strongly. Let’s hope it continues that way throughout the year and, as the world looks towards vaccines and a return to normality, the markets remain robust, receptive and supportive of the sector. Keep safe. Sean Taor Head of European DCM RBC Capital Markets 3 | RBC CAPITAL MARKETS KEY TAKEAWAYS 1. Over 2020 we have seen global SSA issuance soar in comparison to 2019, with transactions attracting record low yields and yet record high orderbooks. 2020 was an astonishing and challenging year of record SSA volumes in the midst of the COVID-19 pandemic. Both issuers and investors had to innovate their operations in the face of increased primary supply as Governments, Agencies and Supranationals repeatedly accessed the markets to help bolster their economies against the financial fallout from the crisis. 2. Central banks have become some of the biggest players in the market. Quantitive easing (QE) has been hugely important in providing demand for new issuance, but a world in which central banks are the largest investors is not a balanced one. There’s a danger that issuers become too accustomed to this level of demand and find locating investors challenging when QE ends. And while enormous levels of central bank buying continue, there’s a squeeze in the market that has led to negative new issue concessions and a struggle for investor value. 3. LIBOR is coming to an end and new risk-free-rates are taking over. Market participants are transitioning from Libor to risk free rates at increasing speed. Over 2020 we have seen record volumes of SONIA and SOFA issuance, the move from lag to shift and more recently to index, and continued consent solicitation operations in the sterling market to tackle the legacy issue. As the LIBOR deadline approaches the rules and standards around transition are converging. 4. ESG is fundamental in everything we do. Over 2020 the ESG debt market continued to expand and evolve- with record issuance volumes driven in part by issuers’ needs to tackle COVID-19 as well as a wider drive from issuers and investors towards a more sustainable future. Social and Sustainability bonds have driven that expansion through increased ‘use of proceeds’ and KPI-linked issuance markets. 5. There’s a new way of working and investors and issuers have all had to adapt. As stay-at-home orders proliferated across the globe to protect people from the growing pandemic, investors and issuers, like everyone else, have had to adjust to a new way of living and working. Roadshows have gone virtual, client meetings are online and internal and external communications have become more challenging. While most institutions have adapted admirably, there remains the question of how desirable this new way of working will be in the future. 4 | RBC CAPITAL MARKETS LIFE AFTER LIBOR ROUNDTABLES 5 | RBC CAPITAL MARKETS LIFE AFTER LIBOR > HOME LIFE AFTER LIBOR With the end-of-2021 deadline for the phasing out of LIBOR rates edging ever closer – and with regulators increasingly pushing market participants to transition to new, near-risk-free reference rates (RFRs) in advance of the deadline – great strides continue to be made. 6 | RBC CAPITAL MARKETS LIFE AFTER LIBOR PARTICIPANTS: Sean Taor Xavier Leroy Head of European DCM Senior Funding Officer, New Products RBC Capital Markets and Special Transactions European Investment Bank Isabelle Laurent Katie Kelly Deputy Treasurer & Head of Funding Senior Director of Market Practice & European Bank for Reconstruction and Regulatory Policy Development ICMA Sean Taor: To start with, let’s look at three things – a backwards look at how we’ve got to where we are today, the issues today and then looking to the future. Going back to 2017 when Andrew Bailey came out with the announcement that the FCA wouldn’t compel or persuade banks to quote LIBOR, it was about a year later that the first reformed SONIA transaction was launched- issued by the EIB. Why did it take so long and why did EIB go down that path? Xavier Leroy: We had already tried before to issue a bond linked to SONIA – the first SONIA EIB transaction done with RBC in 2010, but, due to lack of demand, it didn’t work as expected at the time. Internally, we were convinced that something needed to be done to replace LIBOR and its flaws, so we were not surprised at all when Andrew Bailey took that stance. We started to work immediately on it by trying to promote an instrument that would work for the market, and make sure that the market would be ready in order for the transaction to be a success. And it took a long time because the devil is in the detail! We noticed that while the concept of a risk-free rate and SONIA bond is fairly straightforward, when it comes to implementation, there are a lot of hurdles to overcome. It also took quite some time to convince investors, because at first they seemed to be skeptical towards the Bank of England or the FCA. Investors believed that the regulator was saying ‘2021 but, with a bit of luck, it would be 2030, if at all’. At the beginning a lot of investors did not believe that LIBOR would go away but, eventually, they started to be convinced. In addition, the environment was much more favorable than in 2010. Sean Taor: I agree with that and I would also say, from an RBC perspective, that first SONIA deal in 2010 wasn’t a great success. Partly it was because investors didn’t need to buy it, and partly because, even though SONIA’s been around for some time, many were not all able to book or settle a SONIA deal. It then took eight years for the next SONIA deal. The transaction that re-opened the SONIA market came in 2018, the first linked to reformed SONIA. That mandate was announced on a Monday and then priced on the Friday. It is very unusual for EIB, in any currency, to have a whole week between announcement and pricing. Was that to fully explain the full detail of the deal to investors, and to the market? Xavier Leroy: Exactly. We didn’t want to take any chances because the transaction was very high profile. SONIA was all over the news. Therefore, the transaction had to be successful because, otherwise, it could have considerably slowed down the adoption of SONIA by market participants. We wanted the transaction to be a success, not only for the EIB, but for the market as a whole, so that’s why we took it extremely seriously.