France's uncertain political future is drawing the attention of capital markets investors seeking to put a price on the extra risk posed by the country's bank bond issuers.
Some market participants predict the government's budget bill, due October 6, will not be passed at the first attempt. That, combined with the presidential election early next year is putting pressure on issuers to pre-fund now ahead of any resulting market volatility, even if it requires a pragmatic approach to pricing.
The market already prices French bank credits wider than the rest of core Europe. Looking at some recent tier two issues in euros as a rough guide, BFCM experienced a challenging execution on its first deal of the year in the asset class. Its August 21 deal (Baa1/BBB+/A-) was priced at 140bp over mid-swaps. Ten days earlier, Belgium's KBC Group's deal (Baa1/BBB+/BBB+) came at 112bp. On the same day, Sweden's SEB's deal (A3/A-/A) priced an identical deal at just 100bp over mid-swaps.
The two most recent French bank capital trades both paid sizeable new issue concessions too, if not wildly different from the rest of the market. BFCM's deal and BPCE's 11NC6 tier two in sterling, which was priced this week at 160bp over Gilts, both paid around 10bp of concession according to market participants. Most FIG issuers have been paying new issue premiums in the mid-to-high single digits.
It will be encouraging to French issuers that with their spreads already wider than other parts of the FIG bond market, they are not being asked to pay vast amounts of extra new issue premium on top.
As FIG syndicate bankers have been pointing out, somewhat euphemistically, there are "mixed views on French risk at the moment" but the recent primary market activity shows that deals can be done if the pricing is right. BPCE's sterling trade, which attracted £1.4bn of final orders for a £400m deal, proves it.
That said, not all French banks are equally exposed to what is going on back home. BFCM and BPCE, with heavier domestic operations, are more tightly bound to sovereign and political risk than banks with larger international businesses and should be seen differently by investors.
With only a month until the budget deadline, French issuers still to come to the market will find out fast whether a "sensible" pricing approach holds, or whether investors start asking for more.