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Tuesday, 12 December 2017

Straight to the top table

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Societe de Financement de l'Economie Francaise has been propelled to the upper echelons of the SSA borrower league table since its inception late last year, due to its ongoing capital market presence. This shows no sign of fading. Put simply, its role is to support the French banking industry through the disbursement of the money it raises to those banks which require assistance from the state. Mike Winfield reports.

When France took the decision to create a specific body to support its banking sector, Societe de Financement de l'Economie Francaise was the result. Unlike the course taken by most other sovereigns to support their domestic banks, France reacted soon after the need arose by creating a single unitary issuer through which it conducts its support for eligible institutions. Created in November 2008, its objective is to support the French economy by ensuring the banks are able to continue lending to businesses and individuals. This structure has the benefit of providing a single entity for rating purposes, for which investors only need secure credit approval once. This contrasts with the model in the UK, among others, where individual banks issue in their own name with the guarantee of the sovereign, meaning investors must secure credit approval on a case-by-case basis.

SFEF is a private company, 66% of which is held by seven large French banks (BNP Paribas, Credit Agricole, Societe Generale, Groupe Caisse d'Epargne, Credit Mutuel, Groupe Banque Populaire and HSBC France) and 34% by the French state. The borrowing vehicle remains under the state's supervision to refinance the medium-term activities of French credit institutions. In return, the banks are required to use SFEF and must pay a fair cost for the advantage of the guarantee that they can obtain (in line with normal market conditions).

Its mission is to inject the proceeds of its fundraising into the French banking system to allow for the normal functioning of the economy, with a focus on helping corporates, households and local authorities. In addition, the French State Shareholding Corporation can make up to €40bn available to strengthen the capital ratios of credit institutions to restore confidence in their financial strength. The government is also committed to injecting capital directly into credit institutions if necessary.

The reality has been a succession of trades from the Triple A rated issuer in the two to five-year US dollar and euro-denominated sectors. By mid-May SFEF had raised €40bn and US$25.5bn, or around €59bn in total since its inception – having successfully extended its original issuance programme in euros to the US dollar market. By comparison, KfW had at the same point completed €40.3bn of its expected €75bn financing requirement for 2009, or around 54% of its total, while the EIB had secured 70% of its €70bn annual needs.

The appearance of SFEF as a new Triple A rated issuer, combined with the emergence of sovereign guaranteed bank supply, has created a market in which the competition for funds has become increasingly intense. During the first quarter, ongoing risk aversion skewed supply to the shorter part of the credit curve: SFEF itself only currently issues debt of up to five-year's maximum maturity. But its issues have an impressive record for maintaining their spread, particularly earlier this year when spreads of many SSA issuers were tending to widen.

The reception afforded SFEF's first public deal illustrates the appeal of this financing structure. The €5bn 3.5% November 2011 issue priced at mid-swaps plus 5bp, after attracting a final book size of over €12bn.

All of SFEF's issues have priced towards the tighter end of the guidance set. All have been well oversubscribed, underscoring the popularity of the issuer, although, in common with other SSA issuers, new issue spreads in the first three months of the year came under some pressure relative to mid-swaps: SFEF's five-year euro deal sold at the beginning of April priced at 37bp over mid-swaps.

In US dollars its first appearance was a US$6bn three-year deal at 40bp over swaps, before raising US$5.5bn in two-years at plus 45bp, then US$4bn threes at plus 50bp. In late April SFEF completed its US dollar curve as market sentiment improved for slightly longer dated supply, raising US$7bn with a 3.375% April 2014 issue which attracted demand of over US$13bn. This deal remains the largest single-tranche 144a/Reg S issue in the US dollar market and, helped by the headline launch spread of mid-swaps plus 95bp, saw a significant 48% placed with US investors.

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