Société Générale was a frequent issuer in the bond market until the conditions in the latter half of 2011 brought the Eurobond market to a standstill. So when investor interest was revived in the opening days of 2012, the French bank was quick to take the opportunity to tap the market, issuing a €1.5bn 10-year covered bond, which attracted investors from across Europe.
French bank Société Générale is normally a frequent issuer in the bond market. But conditions in the latter half of 2011 were far from normal, particularly for French financial institutions. Detered by the impact of the eurozone crisis on French banks’ ability to access the interbank market, and particularly the dollar market, investors shunned the sector and Eurobond activity came to a standstill.
Aggressive action by the European Central Bank and reassuring noises from the Franco-German double act of Nicolas Sarkozy and Angela Merkel eased conditions in the New Year, prompting a spate of new issuance from the French banking community. In acknowledgement of persistent investor wariness, however, many of these issues took the form of covered bonds; because they are backed by a designated pool of assets that remain on the issuer's balance sheet, investors are still entitled to interest and capital repayments in the event of a credit shock.
Ready and waiting
Société Générale was quick to grab the opportunity to issue a €1.25bn, 10-year bond. “As a frequent issuer, our strategy has always been to come to market whenever there is a window of opportunity," says Stéphane Landon, head of group treasury and asset liability management at Société Générale. "In the second half of 2011, opportunities were limited so we were keen to be as active as early as possible in 2012. Fortunately, at the start of the New Year, it was clear the appetite was there and we were ready to take advantage.
“The French authorities brought in a new law recently, which allowed French banks to issue a new type of covered bond backed by home loans. We subsequently created a special vehicle, which has €25bn of home loans in it that we can use as collateral. We accessed the market successfully [in May 2011], so a covered bond made absolute sense for us.”
The key issue in January was price. Even though sentiment had improved, compared to the tail end of 2011, investors were still demanding considerably higher returns than they had six months previously. In May 2011, for example, when Société Générale issued its inaugural covered bond – a €1bn, five-year transaction – the coupon was 3.25%, equivalent to a spread over swaps of just 40 basis points (bps). This time around, the environment was rather different.
“The prices that investors are willing to accept have changed significantly. The appetite is not that different but spreads are much higher,” says Mr Landon.
In the second half of 2011, opportunities were limited so we were keen to be as active as early as possible in 2012. Fortunately, at the start of the New Year, it was clear the appetite was there and we were ready to take advantage
No bank wants to pay more than they absolutely have to, so Société Générale was keen to ensure its deal was structured in a way most likely to appeal to the investor community. The bank was also anxious to pay a similar rate to its peers, including Crédit Agricole, which had come to the market a day earlier with a €1.5bn 10-year issue, priced at 165bps over swaps.
“We wanted to issue a benchmark deal and we wanted to keep the price as tight as possible. We also wanted to ensure we were paying a comparable price to other French banks,” says Mr Landon.
Tight spread, wide appeal
Société Générale has a core group of relationship banks but the bookrunners on its first deal of the year were ABN Amro, BayernLB, Crédit Agricole, Société Générale itself, UBS and UniCredit, all chosen to ensure that the transaction would appeal to a broad cross-section of investors spread across different countries.
The strategy worked. Many bonds issued by French borrowers are sold predominantly to domestic investors. In Société Générale’s case, one-third of the bonds were distributed locally but 55% went to Germany and Austria, 7% went to the Benelux region and the remaining 5% were sold in southern Europe and elsewhere. Almost half the bonds were bought by insurers and pension funds, with a quarter going to other asset managers and 16% to central banks and sovereign or supranational agencies.
The transaction was also completed within half a day. Announced late on the afternoon of January 4, 2012, the books opened at 9:15 Central European Time (CET) on the morning of January 5, 2012. Initial guidance for the price was 170bps to 175bps over swaps but a positive response from investors enabled the bank to price at the tighter end of the range.
“The speed of the fund-raising was reassuring. Within an hour, orders for €1bn of bonds had been received. By 12:30 CET, the books had grown to about €1.5bn so [we] were able to price our deal at 170bps over swaps, offering a 4% coupon, which we knew investors wanted,” says Mr Landon.
Since that first week of January, numerous banks have tapped the covered bond market, prompting concerns about over-supply. But there is little doubt that issuance will continue: banks need to fund themselves and covered bonds provide investors with an extra layer of security. Société Générale itself fully intends to return.
“We have plenty of collateral at our disposal and a large global issuance programme. Clearly we will be back,” says Mr Landon.
