France lands rare linker as inflation soars
France was met with a good reception for a rare inflation-linked transaction on Tuesday, its first 30-year linker syndication in over five years that attracted enough interest to be covered nearly six times over.
“It is nice to see some inflation-linked issuance. This is supposed to be the narrative for this year, that it is the year of inflation," said a DCM banker.
Inflation has become an increasingly pressing topic in recent months as measures of price pressures have climbed at a record-breaking pace. Consumer prices in the European Union rose 0.4% month-on-month in December, a 5% year-on-year jump. The print on January 20 came the day after the UK equivalent showed a 5.4% increase year-on-year and a week after the US posted a 40-year high CPI year-on-year reading of 7%.
France capped the size for its July 2053 OAT€i at €3bn, its smallest syndication since its last linker, a €3bn 0.1% March 2036 OAT€i that priced in July 2020. Two of the three syndications in the interim have been sized at €7bn, the other at €5bn.
“It is a very interesting trade in terms of how things go on for the long-end of the linker market. I don’t think you can have the same expectations on order books that you would for a normal sovereign syndication," said a second banker, adding that the size was materially lower because of the DV01, the measure of a price in relation to rates move, taken into account.
Order books closed in excess of €23.5bn (including €2.95bn JLM interest) and the spread was set at 14bp over the 0.1% July 2047 OAT, tightening 2bp from guidance via BNP Paribas, Citigroup, Credit Agricole, JP Morgan and Societe Generale.
“There are various different ways of looking at fair value. I think the most common is to use the Z-spread IOTA and with that, we saw fair value anywhere in the context from plus 12bp-14bp depending on how you adjust your curve," said the second banker.
“Plus 15bp would have been my best guess for the landing level, so going to 14bp is good. The no-grow aspect should have helped with price tension.”
About 10% of France's total 2022 issuance is planned to be in linker format, and a potential debut green linker is touted.
Survival of the fittest
Despite heightened volatility in the stock market at the start of the week, rates markets have held up relatively well, according to a third banker.
“Rates actually behaved well given the volatility in stocks. If you looked at swap rates they didn’t move too much, only a couple of basis points up and down," he said.
“I think it was notable that today you had KfW, CPP, a high-quality Canadian risk, and the French government in the market. That tells you what sort of market it was, that those were the sort of guys that were able to issue.”
KfW targeted the short end with a long five-year benchmark and CPPIB Capital the more challenging 15-year tenor.
Final books for KfW's €5bn April 2027 note closed in excess of €24.5bn, rising from €16bn when the spread was set at the first update.
“We’re very pleased with the result. For a KfW benchmark the target range was €3bn-€5bn and we wanted to hit the upper end of that target," said the second banker.
"We had that in mind when setting the spread early. It was important to give investors clarity around the spread and to set that early. We have seen a varying degree of spread movements at the start of the year, some have moved not at all and some as much as 3bp so we felt it was important to give that clarity to investors.”
The spread was set at mid-swaps less 19bp, 2bp inside guidance via Commerzbank, Goldman Sachs, HSBC and Societe Generale. At landing there was 1bp new issue concession on offer, according to the second banker.
“The bond was trading five or six cents higher in the grey market as well, which is a respectable performance. It shows it is not offering too much new issue concession, but just the right amount for our aims," he said.
The borrower kicked off its new funding year in spectacular fashion on January 4, amassing its largest ever order book of over €33.5bn for a €5bn 0.125% 10-year benchmark.
“The easiest way to compare the market in recent weeks is to compare apples to apples," said the first banker.
"They priced a 10-year flat to the curve at the start of January and although they have got a very good order book today, they have paid a higher new issue concession for a five-year.”
A fair deal
For CPPIB's €1bn February 2037 note the spread was set at plus 25bp when books opened this morning.
“If you interpolate the 2033s and 2041s you get fair value around 21bp," said the third banker.
"These guys are incredibly focused on their investors and wanted to do a fair deal so set the spread from the outset.”
“They chose the 15-year to fit a gap on their curve. They have a full curve now from 2024s out to 2049.”
Books closed in excess of €1.2bn (including €50m JLM interest).
Barclays, Citigroup, Goldman Sachs, Morgan Stanley and NatWest Markets were leads.
Three no-grow deals are lined up for Wednesday with Finland set to bring a €3bn 20-year note via Bank of America, Danske Bank, Goldman Sachs, JP Morgan and Nordea.
The European Investment Bank has announced IPTs of less 17bp area for a €1bn seven-year climate awareness bond via Credit Agricole, DZ Bank, NatWest Markets and Societe Generale.
The German State of Brandenburg plans a €500m no-grow eight-year transaction with Commerzbank, DekaBank, Goldman Sachs, Helaba and Rabobank as leads.