French agencies, whether new to the bond markets or established for many years, have had an impressive run in the markets this year, with RFF, La Poste and above all ERAP setting important benchmarks. Meanwhile, issuers of obligations foncières have been winning fans.
A year ago 2003 looked like it was going to be a quiet year in the French agency market. But that was before France Télécom almost buckled under the weight of its huge debts and had to be bailed out by its majority owner: the French state.
As part of the government's rescue package, it needed Eu9bn to take up its share of a planned Eu15bn rights issue for the national champion. Unsurprisingly, the prospect of state aid for a company that had been quite happy to take part in the telecoms M&A spree and heady 3G licence bidding was not one that the European Commission was ever going to look at generously. The result, in typical French style, was the creation of what is effectively an SPV of the state.
To be wholly accurate, the government did not create its France Télécom funding vehicle, but remodelled an existing one: Entreprise de recherches et d'activités pétrolières. Founded in 1965 to manage the state's industrial holdings, the entity had previously taken on stakes in industries such as oil, mining and nuclear power. But at the end of last year, with its official name changed to ERAP, the vehicle was charged with being the conduit through which the state would raise around Eu9bn - and do it quickly.
Because of the need for speed, the French government simultaneously awarded ERAP a rare explicit guarantee - something which even Cades had not enjoyed. The result was that when the borrower launched its debut issue at the end of March, after extensive premarketing and with demand for top quality product high, investors flocked to the credit.
ERAP to the
Lead managers BNP Paribas, Deutsche Bank, HSBC and UBS Warburg were able to increase the transaction from the minimum Eu3bn to Eu4bn after building a Eu6.2bn order book. Given that the deal was launched one week into the Iraq conflict, ERAP was particularly pleased with its success.
"It is a reflection of the fantastic credit quality of ERAP that we have succeeded in putting together such a big order book and getting such a sizeable transaction in these conditions," Anne Duthilleul, chairman and CEO of ERAP, told EuroWeek at the time.
Pricing the transaction was also tricky. After going out with initial price talk of 6bp-8bp over OATs, guidance was revised to 8bp-10bp over, with a re-offer of 8bp finally set. The process was smoother when ERAP completed its funding needs in late April with a Eu5.4bn deal split into three and seven year tranches, and led by ABN Amro, Barclays Capital, Deutsche Bank, JP Morgan and SG.
"It was an exceptional achievement to raise an additional Eu5.4bn so soon after the inaugural deal just a month ago," said a syndicate official representing the bookrunners. "Very few borrowers could raise in excess of Eu9bn of funding within a month and achieve such competitive pricing."
But although ERAP had achieved levels in line with where Kreditanstalt für Wiederaufbau (KfW) was trading relative to its explicit guarantor, Germany, some bankers believe that the speed with which the money was raised meant that ERAP did not optimise its funding costs.
"All in all it went well, but they paid a bit too much given the explicit state guarantee," says one. "To be fair, borrowing some Eu9bn in such a short time has a price, which explains the basis point or two that I believe they paid up, but I am sure that it could have been managed better."
The banker has no complaints about the execution of the transactions. Rather, he says that ERAP should have been allowed more time and flexibility to take a more opportunistic approach to the market, along with the staff and infrastructure necessary to do so.
"They only have a small team at ERAP, in contrast to how Cades was set up and run," he says. "Cades has shown the merits of such self-contained debt management operations and has been run in a very efficient and cost effective way. Had ERAP been able to use a wider range of instruments through its MTN programme, it could definitely have lowered its cost of funding."
The market will shortly be watching to see how well another explicitly guaranteed French borrower accesses the market, when Unédic, the central organisation of the French unemployment benefit payment scheme, approaches the market for the first time in almost a decade. As this report was going to press, Unédic was preparing to launch a Eu4bn minimum five year issue via BNP Paribas, CDC IXIS, Dresdner Kleinwort Wasserstein and SG.
One of the many instruments that Cades has taken advantage of to optimise its funding costs has been inflation-linked bonds. Taking the lead from Agence France Trésor's (AFT) successful creation of its OATis linked to French inflation and then OATeis linked to euro zone inflation, the social security debt repayment agency created its own Cadesi issues.
In February, Réseau Ferré de France (RFF) joined AFT, Cades and also Caisse Nationale des Autoroutes (CNA) in the inflation-linked market with the launch of the first non-government bond linked to euro zone inflation. Led by Barclays Capital, BNP Paribas, CDC IXIS and Natexis Banques Populaires, the Eu800m offered investors a welcome 20 year point on the inflation-linked yield curve.
Pricing the transaction was a challenge, but the leads were able to find sufficient demand for the paper. Although the smaller size, wider bid/offer spreads and lower liquidity of the transaction put off some investors who participate in the OATi and OATei curves, a market-making agreement and RFF's statement that it might add more liquidity through increases mitigated these factors. Those investors still waiting for more liquid supply in this part of the curve will be pleased to know that AFT itself is considering issuing an inflation-linked 15 year deal.
Demand for RFF's issue was boosted by a combination of factors. "At the beginning of 2002 real interest rates were quite high and breakeven inflation quite low, so you had tremendous demand for inflation-linked product," says Zeina Bignier, head of sovereign, supranational and public debt group origination at SG CIB. "And there were also the accounting changes last year that made it easier for investors to buy inflation-linked product."
These changes to legislation should also, in the long run, make it easier for France to implement the changes to its pension system that the government is attempting to make. "The pension reform taking place in France at the moment means that in the coming years there will be special funds dedicated to pensions and the most appropriate product will be inflation-linked bonds," says Bignier.
Given that demand for the product is not matched by supply, RFF's decision to tap the market clearly made sense. But while such opportunities might also be attractive for other French agencies with assets linked to inflation - as have Cades, CNA and RFF - getting permission to issue the product is not an easy task.
"There are several other agencies for whom inflation-linked issuance is appropriate," says one banker, "but they have first to convince their ministries of the merits of the product. For the likes of SNCF, RATP and La Poste, it would make sense, but it is by no means easy for them to get the go ahead."
Indeed the banker says that the fact that some agencies have been able to issue inflation-linked bonds highlights their pro-active approach to debt management. "They had to put in a lot of work to get their ministries comfortable with the inflation-linked concept," he says, "and that show that there is a lot of dynamism in the funding teams at these borrowers and that they have a lot of ideas."
RFF chose euro zone inflation rather than French for its issue to attract more international accounts and thereby expand its investor base. And although French agencies continue to benefit from a strong domestic bid, they have in the past couple of years, partly through stepping up their marketing efforts, attracted an increasing international following.
When La Poste, for example, issued a Eu580m 20 year transaction in June via ABN Amro, Barclays Capital and Natexis Banques Populaires, it sold around 60% of the issue outside France. Insurance companies and pension funds looking for both long dated assets and yield took some 70% of the paper.
This was despite pricing of 7bp over mid-swaps, which some bankers considered aggressive. However, the ability of EPICs to maintain their tight trading levels against Euribor has only enhanced their attractiveness in the eyes of investors.
"The spreads against Euribor of implicitly guaranteed issuers have been fairly stable over the past couple of years despite the fact that swap spreads have tightened a lot," says Denis Prouteau, head of sovereign, supranational, agency and local authority origination at CDC IXIS. "While explicitly guaranteed borrowers such as ERAP have underperformed against swaps this year, in line with government bonds, agencies have so far remained at between 2bp and 7bp and have in some cases even tightened."
Also generating an increasing amount of international demand have been France's obligations foncières issuers, mainly by taking a more market-friendly approach. "In the past obligations foncières used to come at quite aggressive levels, but that is not the case any more," says Jean-Luc Lamarque, head of syndicate at Crédit Agricole Indosuez. "All the issues that have come to the market in the past 12 months have definitely come at the right level."
Demand for CIF Euromortgage, Compagnie de Financement Foncier (CFF) and Dexia Municipal Agency paper has been further boosted by investors' desire to diversify out of core European government bonds. "The French issuers have benefited from the growing caution towards the Bund," says Ted Lord, director, covered bond products at Barclays Capital in Frankfurt. "As investors increasingly question the ability of Germany to maintain its triple-A rating over the long term, obligations foncières, with stable triple-A ratings, a strong legal framework and good over-collateralisations, are a more attractive way to invest."
Lord says that this has been especially clear on deals that he has worked on for CFF and CIF Euromortgage this year. On a Eu1bn 15 year CFF deal in early May, for example, Barclays placed 87% of its paper outside France, with 51% going to German investors.
"These two issuers realised early in the game that the non-French investor demand for obligations foncières was rapidly rising," says Lord. "They changed their issuing approach more towards the international market standard and have benefited.
"Their marketing efforts in Asia, Europe, and the Americas have greatly increased the international demand for their paper. They are very focused on investor-demand-led issues which are appreciated by the market."
Dexia MA, meanwhile, has been active tapping various currencies to optimise its funding costs. "They are an excellent credit and very well known, and they have taken advantage of that to raise aggressive funding in a wide range of currencies," says one banker.
Activity in the obligations foncières market could become even more interesting if, as many market participants are speculating, the merged Crédit Agricole/Crédit Lyonnais establishes a société de crédit foncier vehicle to issue the product. Bankers say that the institution will have the critical mass in mortgages to make such an operation worthwhile.
However, although senior management at the institutions have discussed the possibility, they may well have enough on their hands making the merger work before they have time to turn their full attention to the obligations foncières market.