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Sunday, 20 April 2014

Bond investors and derivatives traders: Hollande’s new friends

The bailout of Caisse Centrale du Credit Immobilier de France (3CIF) – France’s answer to the UK’s Northern Rock – has demonstrated yet again that when push comes to shove, even anti-bank socialists like Francois Hollande can’t bring themselves to allow über-capitalist bond investors and derivatives traders to twist in the wind.

IFR Editor-at-large Keith Mullin

IFR Editor-at-large Keith Mullin

While the rescue in the event that no buyer could be found had been telegraphed for months, this latest example of yet another bank being bailed out by a eurozone government is still depressing. The government guarantees cover of up to €20bn. As part of the bailout, CIF is not allowed to make any new loans, which kind of implies it will become a run-off vehicle.

A mitigating factor in this case was that CIF is an important component of France’s social housing policy (extending mortgages to low and middle-income households) and the group has a very French not-public-yet-not-exactly-private Statist orientation. Yet there are also indications that the bailout was largely mounted to protect the group’s swap counterparties.

CIF Euromortgage has always neutralised interest rate and currency risk via the swap market: assets and liabilities are all swapped into three-month Euribor and EONIA cashflows, Barclays analysts estimate that CIF group’s consolidated nominal interest-rate swap outstandings were €82bn at the end of 2011, with an additional €8bn of other derivatives. The government didn’t fancy risking any contagion impact deriving from stress at CIF’s counterparties.

Even so, after the great Franco-Belgian Dexia rescue and the scandalous continuation of Spanish bailout of Bankia, it seems clear that faced with a choice of risking fallout from bank insolvency or continuing the daily struggle to get budget deficits and debt ratios in shape, governments will always go for the former.

What is the point of writing a Crisis Management Directive with all of that bail-in malarkey and resolution righteousness if governments’ first instinct is to rescue first and ask questions later?

Beyond repair

The 3CIF/CIF Euromortgage /CIF Assets/BPI business and financing model had clearly become dysfunctional and beyond repair. Moody’s had upped the ante in May, slashing 3CIF’s standalone bank financial strength rating to E/Caa1 and saying the bank was no longer viable. The agency cut the implied systemic government support by three notches at the end of August – creating a liquidity squeeze – on the back of what it saw as the rising probability of a run-off scenario and associate transition risks for creditors.

HSBC’s efforts to shop the bank around to potential buyers failed: Groupe BPCE/Natixis and Banque Postale ran a mile when confronted with the prospect. In its September 2 statement announcing it had sought a government guarantee, the board admitted that it had “not had more success in attracting proposals from potential buyers than it did the last time it tried to secure the backing of another bank starting in 2005”.

Hang on: 2005? They’ve been failing at this for seven years? You’ve got to wonder why, especially if you flip through the investor slideshow on the bank’s website, dated January 2012. That gives the impression of a bank that’s as rock-solid an institution as you’re ever likely to find. I guess that’s what they call being generous with the truth.

(Incidentally, CIF couldn’t even get its September 2 announcement correct: the English version is dated September 12th! What a blunder.)

Failure to get its 2011 accounts signed off by the auditors in May had caused CIF bonds to tank. In the intervening months, spreads have ratcheted back in. With the government standing behind them, the tightening accelerated. The next CIF Euromortgage covered bond up for redemption (the €1.75bn due October 11) had been causing some consternation. The bonds were trading with a 97 handle a week or so ago; but by Tuesday afternoon they were above par (100.29) with a bid of 131.4bp over mid-swaps.

The next two maturities (€1.025bn due March 25 2013 and €1.26bn due October 12 2013) were quoted respectively at 101.14/101.2bp and 104.15/117.3bp. The group’s most recent public OF (€1bn 4.125s of Jan 2022 issued in May 2011) was at 110.56, equivalent to a spread of 161bp over mid-swaps.

It is a similar story with the senior unsecured bonds. The 6-1/8s due October 16 were bang on par with a bid of 578.50bp over mid-swaps; later maturities were marked with similar spreads but with cash prices straddling 93.5 (4s due Jan 2018) to 97 (3-3/4s due Mar 2014).

I would have loved to have seen how robust CIF’s covered bonds were in the event the government hadn’t rescued the bank. Chances are CIF Euromortgage’s cover pool – Triple A rated RMBS and mortgage notes secured on French mortgages originated by the group, plus some non-domestic Triple A RMBS tranches – plus over-collateralisation would have stood up. But with all the talk around bail-in and the potential for retrospective contractual over-rides, the sanctity of secured bonds is not what it used to be.

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