France's First Defence Bond Sparks Strong European Demand
France's European Defence Bond Attracts Strong International Interest
France has made a significant move in the realm of defence financing with its first-ever "European Defence Bond" issuance, which aimed to raise €1 billion for the country's defence companies. The initiative saw an overwhelming response from investors, with the final order book surpassing €3.8 billion—nearly four times the amount on offer.
The bonds, set to mature in five years, received strong support from both domestic and international investors. Notably, 66% of the allocations went to investors outside France, highlighting the growing pan-European interest in the initiative. Among these, 22% came from the Nordic countries, while 20% originated from Southern Europe. Investors from the Benelux area, DACH countries (Germany, Austria, and Switzerland), as well as the UK and Ireland also participated in the bond offering.
This development underscores a shift towards greater collaboration and investment within the European defence sector. Bpifrance CEO Nicolas Dufourcq emphasized that the initiative aims to strengthen strategic autonomy and competitiveness in the industry. He noted that this milestone is crucial for Bpifrance and the broader defence ecosystem across Europe.
"We are committed to supporting innovative companies and enhancing Europe’s defence capabilities, with a particular focus on SMEs and mid-caps that play a crucial role in the sector's value chain," Dufourcq added.
Financing Strategy for the Defence Sector
The funds raised from the bond issuance will be used to finance or refinance loans under Bpifrance’s Def’fi programme. This programme offers tailored financing solutions for small and medium-sized enterprises (SMEs) supplying the defence sector, as well as support for companies within France’s defence industrial and technological base.
The initiative comes at a time when EU member states are seeking to rapidly rearm amid the ongoing threat posed by Russia. As countries look to bolster their military capabilities, the need for innovative financing mechanisms has become increasingly evident.
The Battle Over Joint Debt
The European Commission has proposed a plan to invest up to €800 billion into defence by the end of the decade. However, most of the funding is expected to come from national budgets through the activation of the Stability and Growth Pact's escape clause. To date, the EU executive has allowed 16 countries to deviate from strict fiscal rules to allocate funds for defence.
France, which already exceeds the EU's debt threshold, has been advocating for more innovative financing options, including defence bonds. This push has faced resistance from some "frugal" countries, which oppose joint debt and argue that the post-COVID recovery plan's experience—where repayments increased due to inflation and rising interest rates—demonstrates that joint debt is unsustainable.
In addition to these challenges, the EU has introduced proposals to reduce regulatory burdens for defence companies. These include measures to improve access to finance.
ESG Standards and Their Impact
One of the key issues affecting defence companies is the EU's environmental, social, and governance (ESG) standards. These standards rank companies based on their sustainability efforts, and investors closely monitor them. Under the EU’s taxonomy, which classifies sustainable activities, defence is considered "dirty" or unsustainable.
This classification can make it difficult for defence companies to secure loans or access services such as energy provision or transport. It can also result in penalties for small and medium-sized enterprises (SMEs) working in the sector.
New Financial Instruments for the Defence Sector
The European Defence Bond is just one of the new financial instruments Bpifrance has developed to support the sector. Last month, the organisation launched a new fund open to private investors with a minimum deposit of €500. This fund targets unlisted defence start-ups, SMEs, and mid-cap companies, with a target size of €450 million.
This initiative reflects a broader effort to ensure that the European defence sector remains resilient and competitive, even in the face of economic and regulatory challenges.
