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French wobbles hit primary market
February 10, 2017 / 4:07 PM / 10 months ago

French wobbles hit primary market

* 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 for error.

“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 said.

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 ambitious.

“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. SLOWCOACH 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 Markets.

The issuer had sought to get out ahead of Belgium’s dual-trancher, but like AFD found itself caught up in the market maelstrom.

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 the deal.

“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 said.

“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 €1.5bn.”

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)

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