Many French local authorities entered the bond markets over the past two years as bank financing became more expensive. Canny borrowers from this group will have a mind to revisit the market now and those that have not used this source of funding so far should look to join them.
Investors, faced with continued low yields and tighter spreads are looking for new credits and opportunities to buy something that offers some sort of pick-up over government benchmarks.
The spread between French 10 year debt and its German equivalent is now about 50bp compared to about 60bp in early September. Buyers of French public sector bonds are feeling squeezed.
But French regions offer investors a range of pick-ups to the OAT curve with the largest giving up about 20-25bp over their sovereign while the smaller, lower-rated ones offer as much as 60bp.
As is to be expected, demand for these names is high. Département des Bouches-du-Rhône, Département du Puy-de-Dôme and Région Rhône-Alpes launched programmes in recent months and are receiving a slate of enquiries from yield-starved investors.
But this interest cannot be taken for granted. The macroeconomic data emanating from France is not good. French manufacturing activity slowed to its weakest number of orders in six months in November.
Some analysts think France’s economy is a serious threat to Europe’s recovery and some of those think it is a greater risk than Italy or Spain.
That will mean OAT spreads against the Bund could start to push back out — something that French regions' spreads may ape in sympathy. This does not mean appetite for French local authorities will decline dramatically, but conditions will be less favourable and investors less willing to take down paper without a bit of hair on it.
In short, these borrowers risk missing the chance to lock in cheap funding — the very thing that drove them into the bond market in the first place.
City of Lyon has the right idea. After placing a pair of €10m notes using standalone documentation through Nomura on November 21, the issuer decided to launch a €500m EMTN programme in order to more nimbly respond to investor enquiries.
There may be expenses that come with launching an EMTN programme, but the ability to act fast when investors want to lend at low rates must be worth it.
Wise regions will be swift to issue and give the investors the pick-up they crave.