The most expensive issuers are avoiding euros, with investors shunning the super low yields on offer since the European Central Bank launched its public sector purchase programme earlier this month.
“It’s clearly tough for the very rich issuers in euros to know quite where to come if they want to print large size,” said a head of SSA syndicate. “For cheaper names it’s not such an issue. It’s only when you get close to Bunds that it becomes more difficult.”
As a first time issuer, AFL opted to offer investors a bigger spread over the French government curve than its compatriot agencies — a move that was applauded by SSA bankers off the deal.
“It’s come cheaper than all the other French agencies — AFD and Bpifrance are about 14bp-15bp over OATs, but with an inaugural trade they wanted to offer a bit of value,” said an SSA syndicate official.
“They did a very sensible thing, and were able to move it 3bp. It’s what every new issuer should do. In time they could price a bit closer to OATs.”
Leads HSBC, JP Morgan and Natixis priced the €750m March 2022 bond at 22bp over the interpolated French government curve on Tuesday after receiving healthy interest.
“The book building process was really a surprise,” said Thiébaut Julin, chief financial officer at AFL. “The banks were very confident on Monday then opened books on Tuesday morning, indicating a level of 25bp area.
“The books went to €1.3bn after two hours and our objective was to raise €750m. The orders were very good quality, very diversified in terms of type and geography. We decided to tighten the spread and to price the €750m bond at 22bp versus OATs. The diversification was exceptional. It was beyond what we expected.”
Only one investor out of 70 dropped out after the leads tightened pricing, said Julin.
Factors other than being a debut issuer also affected the pricing considerations, said Julin.
“The natural comparables for pricing were the French public banks, namely AFD and Bpifrance, because they are public institutions with a public mandate and they are banks, so they were a natural benchmark for us,” he said.
“We are a bit different though — we are not owned by the central government but exclusively by local authorities and we are Aa2 rated while they are Aa1 rated. But we decided that it was a good basis to start from and to add a few basis points because of this rating difference, the fact that we are a new institution and that we need to please investors, especially because we’ll be in the market for the next 20 years.”
French investors took around 21% of the paper, with the rest split between investors in Asia, Benelux, Germany and Nordic countries.
AFL is 100% owned by French local authorities and will raise cash for its owners much like Finland’s Municipality Finance. The issuer has maximum €2bn limit on its borrowing programme, but how much it raises will depend on its lending, which has yet to begin. It is also free to raise funds in any currency, with all proceeds swapped back to euros.
“We’ll consider the foreign currency market,” said Julin. “But euros will certainly be the core market for funding most of our needs.”
