* AFD pulls transaction amid French government bond sell-off
* Long-dated EFSF struggles
* Caution ahead for issuers
By Robert Hogg
Feb 10 (IFR) - The European Financial Stability Facility
scraped over the line in its toughest bond deal in years this
week, while Agence Francaise de Developpement had to pull a US
dollar trade after it failed to get enough demand as volatility
in French OATs buffeted primary markets.
Public sector issuers have had a clear run at the market
since the start of 2017, with the traditional wave of supply
being met with ample investor demand.
However, after a strong January, the headlines around the
French presidential election campaign have whipped up investors'
concerns over political risk, and issuers, particularly those
close to the sovereign, are having to face up to a new reality.
"The market was always going to need a period where it
priced in political risk and this is what we’re seeing
happening," said Mark Dowding, co-head of investment-grade debt
at BlueBay Asset Management.
"The French presidency is by no mean a foregone conclusion.
A Le Pen victory could push spreads 200bp wider. It's
unlikely that we'll have clarity until March and we will operate
in a climate of uncertainty in the next six weeks."
French development agency AFD (AA/AA, both stable) was a
conspicuous victim of the volatility, with the issuer forced to
pull a US$1bn three-year offering through Barclays, BNP
Paribas, Deutsche Bank and JP Morgan.
"Issuers linked to the sovereign like AFD and [fellow French
government agency] Cades may be impacted by tensions on OATs,"
said Axel Botte, a strategist at Natixis Asset Management.
"These issuers will have to be more opportunistic and spread
volatility will influence their funding policy. Those selling
debt to foreign investors in US dollar markets will be impacted
most as these will tend to be more prudent."
LITTLE ROOM FOR ERROR
While volatility in the French government debt market was partly
to blame for AFD's troubles, a banker away from the deal said
that the execution strategy this time round had left little room
"I think they started a bit tight, offering around 5bp of
new-issue premium, then France sold off and erased all the
new-issue premium so the deal was coming flat to the curve," he
A banker at one of the leads said AFD's attempt to leave its
natural buyer base in euros and chase US dollars had proved too
"The difference between the euro and US dollar markets is
significant," he said. "The majority of French agencies are
marketed versus France in the euro market, which shelters deals
from the spread move."
AFD dipped into the market on Friday to sell a €250m tap of
its 0.375% April 2024s at 15bp over OATs. The add-on took the
total outstanding size to €1.1bn.
According to one banker away from the dollar deal, AFD was
rumoured to have only garnered US$180m of orders, although one
lead banker said that figure was incorrect. Neither he nor
another lead banker would comment on the size of the order book.
AFD pulled the plug when it became clear the trade would not
have been in the best interests of the accounts buying the deal,
one of the leads said.
Another warning sign that issuers will have to take more care
came from the EFSF (Aa1/AA/AA, all stable) which struggled to
sell a €1.5bn 26-year through Citigroup, Commerzbank and NatWest
The issuer had sought to get out ahead of Belgium's
dual-trancher, but like AFD found itself caught up in the market
Leads blamed negative political headlines for a sluggish
flow of orders into the books, but bankers not involved in the
deal criticised the strategy.
"EFSF was a bit of a damp squib," said a banker away from
"They got two things wrong: the maturity and the price.
Coming two weeks after doing 3.5 yards for a 30-year, and to
price at 30bp over mid-swaps, was punchy."
A second banker away from the deal said he thought the EFSF
was "shell-shocked" by the transaction. However, Siegfried Ruhl,
the EFSF's head of funding, said the issuer had raised €5bn
within two weeks at the long end.
"We had seen that there was some demand left, which was the
trigger for us to go out with another long-term transaction," he
"We adjusted to the smaller demand this time round, and that
was enough for us to reach the minimum size for a new line of
He added that the choice of maturity was based on further
demand from investors and recommendations from banks via an RFP.
The order book was in excess of €1.8bn (including €225m in
bids from the joint lead managers).
(Reporting by Robert Hogg; additional reporting by Helene
Durand; editing by Matthew Davies)