Monday, 22 October 2018

Top 250 2005 - Exploring new frontiers

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Agence France Tresor has never been one to shy away from innovative transactions. The year 2005 was a particularly fruitful year for the borrower as it priced the first ever 50-year transaction from a sovereign issuer. By using the syndication route, AFT printed an issue exceeding market expectations on all counts. By Helene Durand.

With funding needs ratcheting up to a whopping €111bn for 2005, France is one of the largest and most active borrowers of the Eurozone government bond market. These needs are driven by two elements – the State budget deficit which amounts to €45bn in 2005 and the redemption of long and medium-term debt coming to maturity which amounts to €66bn. This is slightly lower than the 2004 programme which totalled €122bn.

This programme is executed by the Agence France Tresor (AFT) which is tasked with handling public debt and treasury management. It was created by the Ministry of Economy, Finance and Industry on February 8 2001. For 2005, the AFT has indicated that issuance will be split as follows: 10% inflation-linked, 45% will be in the form of BTANs (two to five-years maturities), and the rest in OATs (from seven to 50-years).

It is in this context that in February 2005 the AFT decided to investigate the possibility of pricing the first ever 50-year OAT, also to be the first ever sovereign to venture that far down the curve. The issuer commissioned a survey which was executed by Barclays Capital, BNP Paribas, Deutsche Bank and HSBC. The co-leads on the survey were CSFB, IXIS and JP Morgan.

At the time, Bertrand de Mazieres, AFT's chief executive said, "We want to check and explore the benefits of a 50-year in relation to the structural developments in the market. We think there is a need to lengthen duration, and it looks like a structural feature. This is why we commissioned a study to reinforce this feeling."

As much as 550 investors – of which 400 were active in the 10-year plus tenors – were polled during the week of February 7 to 11. It quickly became clear that there was strong interest, mainly from the Eurozone area but also the UK, the Netherlands, Germany/Austria, asset managers, banks, insurers and pension funds.

The AFT was keen to ride on the momentum given by the study and started marketing new OAT the week of February 21. It soon became clear that the borrower would not have any problem to cover the full issue size and more, a crucial element for the AFT.

Indeed, Benoit Coeure, deputy chief executive at the AFT said, "We were only prepared to launch a new issue if there was a big enough critical mass of investors prepared to invest in a 50-year OAT. Up until the beginning of 2005, we were not convinced that demand went up to €3bn, but during the survey were surprised by the size and diversity of the interest for the potential offering."

In the end, the leads had amassed a colossal order book with €20bn worth of orders and sized the April 25 2055 OAT at €6bn. This was despite the fact that during the pricing process, the long-end rallied and yields were a little over 4.00%.

Guidance was originally set at 3bp to 7bp over the 30-year OAT. At the time the swap curve between 30 and 50-years was worth 4.3bp. The swap curve between 30s and 50s moved in from 4.3bp to 3.8bp at the time of pricing (on the back of the take-up of the new deal), so at plus 3bp, the new 50-year priced 0.8bp through the differential on the swap curve.

The momentum behind the bookbuild allowed for the price indications to be narrowed. The talk was brought down in stages to 3.7bp, to 3.5bp and 3.4bp before finally pricing at plus 3bp.

Fund managers took 45%, insurers 14% and pension funds 8% while hedge funds bought 18%, and banks 13%. The UK led the way geographically with 23% while the Eurozone took 55% altogether.

The hubbub created by the transaction led a large number of market participants to believe that a plethora of issuers would follow in AFT's footsteps. However, the only followers were the UK and Telecom Italia (See Corporate profile), both of which had a mixed reception.

The recent UK Gilt auction was merely 1.6 times covered while Telecom Italia marked the end of the bull run for corporate spreads. However, the AFT has not discounted the possibility of coming back to the 50-year later this year, should market conditions be conducive.

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