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Monday, 23 October 2017

Looking longer term

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Dexia has had a bumper year of borrowing, issuing more than €50bn of debt in the 12 month period. This might seem inimical to the group’s stated aim of achieving active balance sheet deleveraging, but Dexia’s strategy centres not just on how much it issues, but on ensuring it issues the right kind of new debt. Matthew Attwood reports.

Having undertaken to reduce its balance sheet by 35% between 2008 and 2014 as part of its restructuring agreement with the European Commission, Dexia’s focus in the last year has been reorganising its debt profile and restoring liquidity. A key element of that plan is a reduction in its reliance on short-term funding. That market’s closure, in the wake of the Lehman collapse, had led to the injection of €6.4bn by Belgium, France and Luxembourg in 2008.

In 2009 short-term wholesale funding accounted for 29% of the group’s balance sheet. That figure was reduced to 25% in the first quarter of this year, putting it well on the way to its target of 23% by the end of this year. Dexia’s ultimate goal is to get the figure down to 11% by the end of 2014. To achieve that, it needs to term out its short-term debt. With that aim in mind, the average life of funding, excluding deposits, will be extended by one year by December 2014.

Covered bonds are a central part of the group’s funding strategy. These, along with deposits, are defined in Dexia’s annual report for 2009 as “stable funding”, the ratio of which to total funding it intends to increase by 18% between this year and the end of 2014.

Dexia Municipal Agency, the group’s public financing arm, is Dexia’s biggest issuer. It has been a frequent issuer of benchmark Obligation Fonciere transactions, issuing three such deals already this year, totalling €3bn. Highlights last year from Dexia MA include a seven-year Obligation Fonciere deal of €1bn, which received orders of €3bn from neglected duration investors, and its 12-year OF in May, its first since its rescue by the trio of governments and a successful test of the covered bond market’s health. Also active in the covered bond market is Dexia Kommunalbank, the group’s German subsidiary and a regular visitor to the Pfandbrief market. Its most recent visit was a €500m four-year issue and a three-year deal of €1bn which priced at the beginning of March.

A month following September 2008’s intervention by Belgium, France and Luxembourg, those governments granted Dexia a guarantee on a large proportion of its funding, a valuable tool in the group’s campaign to restore liquidity. Its general funding programme has been so successful that the group estimates it will be able to exit the guarantee programme by the end of June 2010. But throughout 2010 and before, when there was very little guaranteed paper from issuers outside of Ireland, Dexia was a core name for investors in guaranteed issuance.

A recent highlight for sterling investors was the issuer’s £500m guaranteed FRN in March, via French subsidiary Dexia Credit Local. That followed a previous visit to the sterling FRN market –of £1.25bn at a three-year tenor – at the beginning of the year, and the issuer’s successful debut in the currency, a £750m long two-year deal, launched in May 2009.

After frequent issuance in guaranteed format throughout 2009, and as 2010 progressed and guaranteed deals became increasingly rare, Dexia pleased the sector’s enthusiasts in February with a competitively priced three-year floater of €2.75bn. Despite its size, it was significantly oversubscribed.

Outside of its core markets, Dexia has also funded with a guarantee in Swiss francs, and in June last year priced its debut dollar-denominated guaranteed issue, a US$2bn two year floater.

Unlike other more troubled issuers, despite its use of a government guarantee Dexia has still accessed funding in the senior unsecured market. In July the group raised €1bn of senior debt at four years, pricing aggressively after receiving more than €2.5bn of orders in less than two hours. It traded much tighter in the secondary market in the ensuing few days, a ringing endorsement of the group as a senior issuer.

“This transaction is a new important milestone, underlining the Dexia Group’s audience in the market and its capacity to raise long-term funding outside the framework of the government guarantee,” said the group at the time. Later in the year, another stand-alone deal, a 2.25-year transaction of €1bn, also priced tightly and proceeded to perform well in secondary trading. Having dispensed with the guarantee, it is likely to return before long.

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