France has successfully issued its inaugural “European Defence Bond,” raising €1 billion for the country’s defence companies, with the bond being massively oversubscribed. The bonds, which mature in five years, attracted strong support, resulting in a final order book exceeding €3.8 billion. This significant investor interest highlights the growing demand for defence financing solutions in Europe.
The European Defence Bond issuance saw a diverse range of investors participate, with 66% of allocations going to investors outside France. According to Bpifrance, the public sector investment bank, investors from the Nordic countries, Southern Europe, Benelux, DACH countries, as well as the UK and Ireland took part in the issuance.
European Defence Bond: A New Financing Avenue
The European Defence Bond is part of Bpifrance’s efforts to support the defence industry by providing tailored financing solutions. The proceeds from the issuance will be used to finance or refinance loans dedicated to defence sector players under Bpifrance’s Def’fi programme. This programme focuses on supporting small and medium-sized enterprises (SMEs) and mid-cap companies that are crucial to the defence sector’s value chain.
The Def’fi programme is designed to provide financing to defence companies, enabling them to grow and innovate. By supporting these companies, Bpifrance aims to enhance Europe’s defence capabilities and promote strategic autonomy within the defence industry. According to Nicolas Dufourcq, CEO of Bpifrance, the European Defence Bond initiative is a significant milestone for the bank and the entire defence ecosystem in Europe.
Addressing the Challenges of Defence Financing
The European Commission has proposed a plan to invest up to €800 billion in defence by the end of the decade. However, most of the funding is expected to come from member states’ own budgets, following the activation of the national escape clause in the EU’s Stability and Growth Pact. France, which already exceeds the EU’s debt threshold, has been pushing for innovative financing options, including defence bonds. For more information on the EU’s defence financing plans, you can visit the European Commission’s website.
However, some EU member states, known as the “frugal countries,” have expressed concerns about joint debt and the sustainability of such financing options. They argue that the experience of the post-COVID pandemic recovery plan, which saw repayments increase due to inflation and interest rates, demonstrates the risks associated with joint debt. In contrast, France and other proponents of defence bonds believe that such financing solutions are necessary to support the defence industry.
The EU has also proposed measures to improve access to finance for defence companies, including reducing red tape and revising environmental, social, and governance (ESG) standards. Currently, defence is considered “dirty” or unsustainable under the EU’s taxonomy, making it challenging for defence companies to secure loans or services. By addressing these challenges, the EU aims to create a more favourable environment for defence companies to operate.
Bpifrance has been at the forefront of developing new financing products to support the defence sector. In addition to the European Defence Bond, the bank has launched a new fund open to private investors, with a target size of €450 million. This fund will support unlisted defence start-ups, SMEs, and mid-cap companies, providing them with the necessary financing to grow and innovate.
As the EU continues to navigate the complexities of defence financing, the European Defence Bond issuance is a significant step towards creating a more robust and sustainable defence industry. With the demand for defence financing solutions expected to grow, it is likely that we will see more innovative financing products and initiatives in the future. Investors and defence companies alike will be watching closely to see how this develops.
