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Sunday, 17 December 2017

Back into the fold

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BNP Paribas caused a stir in 2006 when it was perceived to cock a snook at the French authorities by issuing its covered bond outside the Obligation Fonciere framework. This year its offering came within the framework but the bank insists it will do what is necessary to diversify its funding sources and its offering for clients. Solomon Teague reports.

For BNP Paribas, diversity is king. According to officials at the bank, it is constantly looking at ways to expand the breadth of its debt issuance, in its covered bonds offering and beyond, to diversify its funding sources, its investor base, the products available to existing investors and the currencies in which it issues debt.

This diversity is not reflected in the collateral pools of BNPP’s covered bonds issuance, which are grouped to give pure exposure to one part of the business. This provides a means for professional investors to take on exposure to a specific part of the bank’s business as an alternative to lending to the bank at a senior unsecured level.

BNPP officials argue that investors’ need for diversification requires highly specific products that cater to their specific risk requirements. That view is borne out by the response of investors to BNPP covered bond programmes that have always identified strong performing, low risk businesses.

The collateral underlying the recent €15bn BNP Paribas Public Sector SCF covered bonds launched in June 2009 comprise sovereign bonds with government guarantees from France, the UK, Germany and the US. They were consequently issued centrally from the Paris office, making it possible for the bond to be structured within the Obligation Fonciere (OF) framework. The programme included issuance of both benchmark and private placement bonds.

The deal came at an opportune time for investors, according to Christopher Drennen, head of FIG DCM for France and Benelux at BNP Paribas. Government guaranteed debt is very hot in terms of supply, while investors have shown enormous interest in assets perceived to have very low risk – government guaranteed bonds have a zero per cent risk weighting. The deal is rare, if not unique, in comprising sovereign government guaranteed credit, said Drennen: other comparable offerings have contained a broader mix of municipal and local government debt.

Structuring the public sector covered bond took two years, with much of this spent negotiating the transferability of the government guarantees. Being written on sovereign bonds, the guarantees did not easily transfer to other entities in order to be utilised in the cover pool.

BNP Paribas Public Sector SCF saw responses from 95 investors – the majority of its traditional covered bond investor base, which was gratifying for the bank on the back of a miserable year for the asset class in terms of issuance.

The OF snub

Back in December 2006, BNP Paribas had reopened its covered bonds programme with a €2.5bn five-year deal on home loans directly guaranteed by Credit Logement, the leading French guarantor of home loans. Being structured outside the OF framework, the deal raised eyebrows at the time of issuance. The move was seen by many as a snub to the French covered bond law. But it also enabled BNPP to use assets not eligible under the OF law.

According to Drennen, the OF regime works well when structuring covered bonds where the underlying collateral is originated in the same geographical area, but is less appropriate where the underlying loans are spread over a broader area.

In the December 2006 deal, the home loans were issued by branches all over France, unlike the bonds in the cover pool for the latest public sector deal, which all originated from Paris. Other banks have since followed BNPP in issuing outside the OF format, benefiting from the bank’s 11 months of negotiations with the central bank and the regulator in creating the new structure.

The deal was led by BNP Paribas, HSBC and UniCredit. It went out with initial guidance in the mid-swaps less 1bp area, the structure being perceived as somewhere between the French OF regime and the UK offerings, as represented by an HSBC deal at around that time.

Following a total order book well north of €4bn, it eventually priced at mid-swaps less 2bp, the tighter end of the less 2bp–1bp guidance to which it was revised in the interim.

At the group level, BNP Paribas senior unsecured debt is rated Double A, but its home loans business is rated Triple A. It catered to investors focused on top quality paper and was therefore presented as consistent with the policy of diversification that had long formed the basis of the bank’s issuance policy.

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