REFILE-France reinvigorates linker market despite dire inflation outlook
Refiles to amend grammar in quotes
The Republic of France breathed life into the linker market on Wednesday, bringing a rare syndication linked to the domestic index despite an anaemic outlook for growth and inflation.
European sovereigns have focused on printing large benchmarks in recent months as they look to chip away at their increased Covid-19 related funding needs.
However, with its two conventional 20-year and 30-year benchmarks now out of the way, France was keen to bring to fruition what was a longstanding project.
It had indicated in its 2020 financing programme that it would issue a new 10 to 15-year OAT indexed to the French consumer price index (OATi).
"We started having conversations with real money investors last year," said Anthony Requin, AFT's chief executive.
"The domestic linker market responds to a specific demand, in particular from banks that are distributing the Livret A savings books which are very popular in France. Despite what you could consider a low inflation environment, those institutions have long-term commitments to deliver and pass on remuneration that is linked to French inflation. There is therefore a structural demand in terms of asset and liability management."
The transaction was the first time that France was syndicating a deal linked to domestic inflation since 2008.
Bankers away from the deal questioned both the timing and format of the trade.
"I think some people buy it on an asset swaps basis," a syndicate banker away said.
"But to be honest, I don't really know who buys this stuff as end investors. We haven't had any inflation for years. You just have a few sovereigns that do it. To me, it's mainly hedge funds, trading accounts that buy this. Just look at the book, in terms of ratio, you're not seeing anything like the demand you would see for a conventional trade."
Another echoed this view.
"Do we foresee any significant inflation in the future? Probably not," he said.
"It's the kind of product which I've seen not being a big investor focus for quite a while. It's been a while since the linker market was shining very bright."
Still, books closed over €16bn for the €3bn March 2036.
"Compared to 2008, the book is twice the size and if I look at the number of investors, it's also twice the number of investors we had in 2008," said Requin. "We were very focused on serving the demand coming from real money buy and hold accounts and not so much those buying on a switch or relative value basis."
He added that along the structural demand coming from French investors, close to 40% of the demand came from non French accounts.
"Given that AFT had not done a syndication of a domestic linker since 2008, there was a question mark over who the buyers would be but the book we had was a clear confirmation that it wasn't just a Franco-French demand and there was a need to buy from the international community," said Benjamin de Forton, SSA banker at BNP Paribas.
The strong demand gave leads BNP Paribas, Credit Agricole, Citigroup, HSBC and Nomura some leverage for pricing. The bond printed at 18bp over the 0.1% March 2038 OATi, offering around 1bp to 2bp of concession.
Requin said the deal had not emerged earlier as AFT had been waiting for the market to stabilise.
"In March, April, May, the inflation market didn't look good but it has since recovered significantly," he said.
"For transactions, you need to be able to see value from the investor and issuer perspectives. We're off the lows so it made sense for use and for investors, we're not back to pre-crisis levels so they can see some opportunity gains to be made."