The European Investment Bank has issued its first natively digital bond denominated in British pounds. The EIB raised 50 million with the bond, which has a duration of two years and bears a floating rate of interest.
BNP Paribas, HSBC and RBC Capital Markets are the joint lead managers. The syndicate was advised by Allen & Overy. EIB was advised by Clifford Chance.
Deal team members said they were proud to see that this is a “complete Luxembourg deal”, under Luxembourg’s dematerialised securities act. “I think it’s a perfect illustration of how well recognised Luxembourg law is now by these major players in the DLT sphere,” said Frank Mausen, a capital markets at Allen & Overy.
Luxembourg can now not only issue a bond, but also serves as the home for the platform that is hosting the bond, he noted.
HSBC Orion Platform
The issue uses a combination of private and public blockchains. It is the second digitally native bond under Luxembourg law following the 100 million fixed rate bond issued last November.
It will be registered as a public issuance via HSBC’s Orion Platform. A public blockchain mirror record provides increased transparency on an anonymised basis. The bond will also be listed on the Luxembourg Stock Exchange.
The public/private blockchain system allows for the blockchain records to be held securely on the blockchain, but an Ethereum main net mirror allows the public to see the bond holdings, and make transactions transparent, explained Philippe Noeltner, the lead associate who worked alongside Mausen. “It’s going to have wider ramifications because it sets the scene for future uses of the technology,” he said.
Smart contract
The bond automatically calculates its floating rate of interest via a smart contract tracking the Sonia rates published by the Bank of England.
The system will employ a settlement token, said Noeltner. “You have entities that are going to see their claim that they have against HSBC as their deposit bank being tokenised. And that token is then going to be sent to the issue in order for them to be entitled to this cash,” he explained. “It represents how cash can move on a blockchain.”
It’s a feather in Luxembourg’s cap that HSBC has decided to place its platform in Luxembourg, said Mausen. He related hearing from other banking groups at a recent capital markets forum that they were currently looking at setting up a platform, and that Luxembourg is on their “very short list”.
Three digital EIB bonds to date
Addressing the EIB’s three digital bonds to date, Noeltner said “all these different deals are testing different features in order to set the scene for deals to come that will show how the capital markets can be transformed.”
It is exciting to see that two natively digital securities issuances on DLT infrastructure have now been successfully launched under Luxembourg law in a relatively short space of time,” said Steve Jacoby, partner at Clifford Chance, in a statement.
“Once again the EIB has broken new ground and we are delighted to have been able to leverage our capital markets, regulatory and tech expertise to advise on this complex transaction,” said Alexander Tollast, counsel at Clifford Chance.
“The emergence of digital bonds, and the new market infrastructures in which they are held and settled, gives rise to a number of legal and regulatory challenges,” said Allen & Overy’s Daniel Fletcher, lead partner on the transaction.
The Allen & Overy team also included Salvador Ruiz Bachs, Damian Carolan and Baptise Aubry. The Clifford Chance team advising the EIB consisted of Steve Jacoby, Marc Mehlen, Alexander Tollast, Thomas Guala Molino and Federica Gamen.
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