CRH on the road

IFR Pfandbriefe Covered Bonds 2008
5 min read

CRH is focused on raising its profile in the international investment community following the successful launch of its covered bond in February. With borrowing needs increasing in France, the credit institution says it is planning more roadshows as it mulls more jumbos, writes Han-Nee Tay.

For Caisse de Refinancement de l’Habitat (CRH) president director general Henry Raymond, the principal success of the €2.5bn (US$3.9bn) dual tranche covered bond transaction, launched in February, was in bringing many international accounts onto CRH’s books.

Although CRH is the largest mortgage loan covered bond issuer in France, Raymond said the institution was not well-known enough to international investors, as CRH had not developed a marketing strategy until late 2006. CRH bonds provide safe haven assets for investors in the face of uncertain markets, Raymond stressed, because the institution is governed by a specific legal framework in France.

The government established CRH in 1985 as an institution through which mortgage banks can raise funds. Legislation governs its operations and dictates the kinds of mortgages available as collateral to CRH, ensuring borrowings are backed by high-quality loans. CRH requires an over-collateralisation of 25%, backed by first-rank mortgage loans of not longer than 25 years, each not exceeding €1m. These stringent requirements allowed CRH to pull off its first-ever dual tranche offering in February despite issuing in a climate of extreme investor cautiousness.

“For the market, it was a good deal,” said Raymond. “Notwithstanding the pricing and spreads in the market, it was important for the market to have in their assets sound, very liquid and straightforward bonds. Our bonds provide that.”

In the February transaction, 80% of the €1.5bn three-year covered bonds were placed outside of France and 55% of the €1bn 10-year bonds were sold to overseas investors. The need for CRH to expand and diversify its investor base intensified in recent years as its funding programme grew rapidly, more then doubling in 2006 to €7.2bn from just €3bn the year before, and rising in 2007 to €8.3bn. This forced CRH to rethink its strategy and to wade into the international market for support.

CRH took the decision to deviate from its typical strategy of issuing small taps to fund through benchmark transactions with a full market-making commitment. The February transaction was CRH’s third such benchmark deal, following a €2.5bn offering in September 2007, and another €1.25bn in January this year, which revived the French market for covered bond issuers. Raymond said CRH intends to continue issuing jumbos as long as the market has the appetite for them. He was unable to give an estimate for its funding needs this year as it depends on demand from banks, but suggested it could be bigger than last year’s.

“We’re not sure how much we will borrow, maybe €8bn, maybe €10bn,” Raymond said. “It depends on market demand. If it’s possible for us to issue benchmarks, it would be more straightforward and clearer for investors. But if it’s not possible, we will go on issuing by tap.”

Given that investors are currently reluctant to buy anything with a long tenor, CRH’s ability to place all of its 10-year bonds in February was a massive achievement. It can be partly explained by the fact CRH bonds have sufficient liquidity for investors to easily sell out of their accounts if required. Orders for the 10-year just exceeded €1bn, while those for the three-year surpassed the €1.8bn mark. According to Raymond, the turnover for CRH bonds – rated Aaa by Moody’s and AAA by Fitch – was almost six times its debt in 2007.

Despite the growing number of covered bond issuers in France, Raymond is sanguine about the future. The declining level of deposits in France since the credit crunch has increased the funding requirements of French institutions, while the regulators – and French banks themselves – see the merit of diversifying funding sources. There is plenty of room for CRH alongside a growing number of new issuers, he said.

Its covered bonds have also been given a fillip by their reclassification in the iBoxx annual review. "As CRH had a somewhat different status in the market than other French legal framework based covered bond, the inclusion of CRH covered bonds in iboxx France Covered Legal is likely to support spreads,” explained Bernd Volk, strategist at Deutsche Bank.

The biggest challenge facing the organisation now is not so much the tough markets but the lack of investor familiarity with the CRH name, said Raymond. “We need to road show again, to market our name, because several important foreign accounts are not yet allowed to buy our bonds,” he added. “Some don’t know the specific and very sound legal framework dedicated to us.”