However, under a 2010 Finance Law drafted by the French government, SFEF can be reactivated as an issuing vehicle if a Prime Minister’s decree were to allow it on grounds of exceptional illiquidity. This enables SFEF to keep the guarantee of the French state until December 2010.
SFEF had been expected to issue one more euro deal before shutting up shop, but shareholder banks present at a recent board meeting decided it was
unnecessary.
Improving financial markets have allowed French banks to raise capital independently, Société Générale, for example, raised Eu4.8bn through a rights issue this week; last week BNP Paribas increased its capital by Eu4.3bn, also through a cash call.
"Market conditions are improving and the differential in terms of spread the banks are paying to raise money independently, whether unsecured or in the covered bond market, is becoming more and more attractive compared to what it costs them to go through SFEF to get funds," said Sebastien Bellier, a member of the DCM team at BNP Paribas in London. "In such circumstances, banks obviously prefer to fund independently."
Extraordinary success
SFEF was set up in October 2008 to support the financing of the French economy via secured lending to credit institutions. Since then it has raised Eu48bn, $39bn, Sfr2bn and £750m (Eu77bn/$113bn equivalent) in the international capital markets.
Being the only French agency to carry the explicit guarantee of the state set the credit apart from its peers and helped SFEF to establish itself as one of the most sought-after global agency issuers. Whatever the currency, its deals were regularly oversubscribed, the pricing for the most part fixed at the tight end of guidance and its bonds have been bought by the world’s top investors.
"In just under 12 months, SFEF has issued the equivalent of Eu77bn and attracted demand from 900 investors from all over the world," said Valerie Menoret, SFEF’s head of funding. "I think this is a great achievement and something that we can be proud of. What is important is that the French state wants to keep SFEF as a dormant entity to be reactivated with a decree from the Prime Minister if market conditions deteriorate very significantly but, as of today, that is the end of SFEF as an issuing entity although of course the back office will remain operational."
SFEF has been incredibly successful in its mission said the head of an SSA syndicate desk in London. "They helped the French financial system to get funding in 2009 at cheap levels because the pricing they achieved was tighter than government guaranteed banks and sometimes tighter than EIB and KfW," he said.
"The structure has been extremely well received by investors — SFEF did its job better than many people expected and achieved distribution that some agencies that have been in the market for 10 years have failed to achieve."
Initially, some market participants were sceptical that SFEF would be accepted by SSA investors, particularly the conservative central banks, but their doubts were unfounded. Statistics show that SFEF’s overall euro and dollar issuance has been placed 23% and 33% respectively with central banks and official institutions.
Secondary spreads to tighten
It also managed to crack the historically difficult US investor base, its last dollar deal selling 44% into the Americas.
Menoret believes that SFEF secondary spreads will likely tighten from here.
"On the secondary market, the fact that SFEF is no longer issuing can only be positive. I think investors have recognised that we have always been pragmatic and fair and they have enjoyed good performance of our bonds throughout 2009. The fact that there will be no more supply probably means that there will be further tightening in the secondary market and I doubt that there will be many sellers of the bonds."