In May this year Dexia announced it would accelerate deleveraging by selling most of the guaranteed assets in its financial products portfolio at a loss of 3.6bn. This, in addition to 377m of impairment on writedowns of Greek debt as part of the IIF Greece assistance programme, meant that the groups net loss for Q2 2011 was 4.03bn.
Though the figure does not make pretty reading, the group completed its 18bn long term funding for the year by the end of July, with more than half coming through covered bonds. "We have important loading of assets at the end of the year, so we are ready to issue very early in the year and thats a recurrent situation for Dexia," says Cecile Van De Moosdyk, head of long term funding at Dexia. "If we were to issue more this year, it would constitute pre-funding for 2012, but we would only go back to market if it is in better shape."
The groups two benchmark issuing entities, Dexia Municipal Agency (DexMA) and Dexia Kommunalbank, did not hesitate in coming to market during busy windows in the first half of the year, the first of which was in January. Dexia Kommunalbank came to market with a 1bn five year Pfandbrief, which was priced at 35bp over mid-swaps, and a week later DexMA printed a 1bn 10 year deal at 100bp over mid-swaps on January 18.
A smaller window opened in May and both entities again took advantage with benchmark deals. DexMAs 1bn five year Obligations Foncières secured a twice covered book and was priced at 91bp over mid-swaps, prompting some syndicate officials to praise the transaction.
But DexMAs spread levels remain extremely wide by French standards, and reassurances from the bank that it is heading back to profitability through its restructuring have not yet led to cheaper funding. "To put a link between clarification of our balance sheet and the spreads we have to pay on covered bonds is not easy because the market is moving totally independently of Dexia," says Van De Moosdyk. "At this moment, were more reliant on the situation in markets than the situation of Dexia itself."
By August 24, after weeks of market volatility and pressure on French banks, asset swap spreads on all outstanding DexMA bonds except for the two shortest dated notes were indicated at more than 100bp over, according to UniCredit research. Much worse was to come after the market re-opened on August 25. New issue premiums put pressure on bid-offer levels of outstanding bonds, and spreads on all DexMA bonds widened by a further 50bp-75bp.
DexMA leads the way back
With 63bn of outstanding covered bonds, DexMA is the groups largest source of covered bond funding. In the first half of 2011 it issued 6bn worth, including the two benchmarks. The remainder came through 1.5bn of private placements and 2.5bn of taps.
Another 6bn of the 18bn in long term funding raised this year came through alternative secured funding with other financial institutions. "This is a way of entering more bilateral transactions, which are sort of long term repos with other banks," says Van De Moosdyk. "For this we use assets on our balance sheets of different entities that are not eligible in our covered bond vehicle."
As well as providing another source of long term funding, the alternative secured funding route is a way for Dexia to diversify into other currencies, predominantly US dollars, sterling and Australian dollars, Van De Moosdyk says. Dexia could achieve currency diversification through non-euro denominated covered bonds as well, and the bank is looking at those markets for issuance, particularly in the US where Dexia set up an MTN programme last year.
But currency concerns are not the issuers prime motivation to issue outside euros. "From a long term funding strategy its more important as a way of opening the issuance programme to new investor bases," says Van De Moosdyk.
If investors are keen to find out what collateral is on offer, DexMAs exposure to peripheral Europe, including 10% Italian assets in the pool, might stoke some concerns. But the public sector loans in the cover pools are 98% local, as opposed to sovereign state, and this difference is crucial because local sector assets do not carry the same exposure risk, says Van De Moosdyk.
The prominence of local sector loans means the sovereign debt crisis wont change DexMAs approach to managing the cover pool. "The local sector has much lower depth in proportion to total balance sheet, and the cost of debt for local municipalities is very small in proportion to operating expenses," she says.
Eventually the proportion of loans to French and Belgian authorities, Van De Moosdyk adds, will increase as Dexia will not refinance Spanish and Italian assets once its entities in those countries are sold over the next few years as mandated by the European Commission following the 6bn emerging bail-out granted by the French, Belgian and Luxembourg governments in September 2008.
Although analysts in the covered bond market have bemoaned the tendency of some investors not to do their own analysis of fundamentals, Dexia has found during investor meetings that the buy-side is increasingly well informed and in fact wants more technical explanations from issuers than previously. "Investors have changed the way they analyse and want to know precisely what theyre buying," Van De Moosdyk says. "We explain how DexMA works, the law behind the bond, how they are protected by over-collateralisation and rules on liquidity control."