Safety concerns

IFR Covered Bonds Report 2012
9 min read

French banks started out the year by swamping the long end of the curve but following the news that 3CIF had suspended its bonds, issuance has remained light. Heading into the second half of 2012 the country’s borrowers say a combination of deleveraging and unlimited LTRO cash is giving them breathing room to prepare for 2013.

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French banks have been going through a funding roller-coaster ride in 2012 as volatile sovereign markets have dragged covered bond spreads to historic wides only to tighten again as the ECB arrived with unlimited cash to ease the pressure on European financial institutions.

For the second half of 2012, syndicate officials say the country’s banks are in a comfortable position of almost being fully funded and covered bond spreads are likely to remain stable for the foreseeable future.

Derry Hubbard, head of FIG syndicate at BNP Paribas said: “Issuance levels will remain low for the second half of 2012 compared with the first half of 2012 and last year. This is not necessarily spread driven but it’s more to do with French banks being well funded. If you look at what has happened to the 10-year we sold earlier this year, it priced at 85bp, widened to 90bp and is now at 83bp.”

Laurence Ribot, head of covered bond syndicate at Natixis shared this view: “French banks have less of a need for funding. This is partly to do with deleveraging and partly to do with the fact that they are getting fewer requests for mortgages.”

As a sign of this containment, Caisse de Refinancement de l’Habitat (CRH) sold the first covered bonds since the news of 3CIF broke and bankers believe the tap format and the opportunistic strategy is what will be expected from France’s banks for the second half of 2012.

Strong start

At the beginning of the year, pragmatic French borrowers decided to take advantage of a relatively liquid market to price six 10-year deals raising €9bn in the process, almost a third of the total covered bond tally at the beginning of the year.

“Issuance levels will remain low for the second half of 2012 compared with the first half of 2012 and last year. This is not necessarily spread driven but it’s more to do with French banks being well funded”

The wounds of 2011’s disastrous market encouraged banks to continue funding throughout the first quarter and into the second quarter where a total of about €21bn of covered bonds were predominantly through long-dated deals.

It’s easy to see why French banks went to the long end. With unlimited three-year funding available through twin ECB funding vehicles, the 10-year part of the curve proved to be a hit with French and German insurance companies seeking the magic 4% coupon, which all six deals provided. But the market impact of this flood of issuance was severe, with each new deal coming wider than the previous one.

“Imagine the investors that bought CRH at 160bp and now for CoFF to come 30bp wide of that,” said a syndicate official at a French bank in January. “There is of course a credit differential between all of the French names and €1bn of funding is €1bn the issuer didn’t have before, but I am nervous about the execution of these deals.”

All of the nervousness proved to be unnecessary as in February spreads unexpectedly tightened encouraging the likes of Credit Agricole to take advantage of cash-rich investors. But it was BNP Paribas that waited until March to squeeze every last basis point out of the market and priced the tightest long-dated French bond of the year.

BNP Paribas Home Loan SFH sold a 10-year deal that came almost 100bp inside its peers, vindicating the bank’s decision to wait for the market to improve before launching a deal.

According to Valerie Brunerie, head of funding and securitisation at BNP Paribas, the issuer held off from accessing the market in order to benefit from the full effects of the LTRO that she predicted would take some time to drive spreads tighter.

At the time of writing, the 10-year offering is 7bp tighter in the secondary market, and bankers are hoping that a period of prolonged stability will give market access to those who need it.

Small stain

However, there is a small stain on the French market that might prevent participants from selling bonds in the second half of the year.

The unresolved situation surrounding 3CIF’s bond suspension is hovering over the French market and bankers are anxious for a resolution.

3CIF suspended its covered bonds from trading on May 9 after its auditor refused to sign off on its accounts, but decided to hold off from communicating details of its struggles with the market until Moody’s, Fitch and its auditor could confirm ratings actions and results. But this silence angered many in the market.

Moody’s cut 3CIF’s standalone bank financial strength rating to E/Caa1 from C/A3, ending a communication blackout following the suspension of the issuer’s bonds.

The agency also said the bank was no longer viable without ongoing financial support, adding that 3CIF had only very limited access to private sector financing.

Although bankers were hopeful that a swift solution would be found for the borrower, they now say it is optimistic to think it will be resolved in the next month and all of this uncertainty is bad news for France’s banks.

In general bankers report that investors are not concerned about the quality of French covered bonds or the credit quality – it is more to do with the way 3CIF has been handled.

“We all agree that communication wasn’t optimal, but from the ratings perspective, the agencies assumed there would be government intervention. Without that, I think, France would have been in a much worse situation,” said Jose Sarafana, independent covered bond analyst.

3CIF’s spokeswoman explained that the issuer was to release a statement after the suspension but received a call from both ratings agencies, saying credit committees had been formed. 3CIF, therefore, decided to hold off until there was more certainty.

3CIF is still hopeful that a sale will solve its funding problems but is unable to rule out a nationalisation by the French government.

Covered bonds issued by French banks have widened by as much 60bp at the short-end since the suspension, which traders say is partly a result of concerns regarding French bank exposure to Greek debt.

How any nationalisation may come about remains a key question, as the market seeks a swift solution to what is considered an increasingly serious blemish on the French banking system.

“The situation surrounding CIF gave reason for a pause in the market and issuers were closely monitoring funding market conditions after the news broke. Investors were, however, less concerned and the situation is proving to be very well contained,” said Hubbard.

All covered bonds france: 1/1/2012–2/7/2012
BookrunnersNumber of dealsAmount (US$m)Market Share (%)
2JP Morgan143,739.7011.1
3Societe Generale103,376.4010.1
4Credit Agricole CIB72,422.307.2
7HSBC Holdings51,552.404.6
8BNP Paribas61,540.204.6
10Deutsche Bank41,416.504.2
11Landesbank Baden-Wurttemberg31,290.803.9
12Danske Markets31,046.603.1
17Intesa Sanpaolo1330.51
18Commerzbank AG1324.91
20ABN AMRO Bank1264.80.8
20Bayerische Landesbank Giro1264.80.8
22DZ Bank1254.40.8
23Credit Suisse1207.60.6
24Morgan Stanley191.10.3
Source: Thomson Reuters
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