BNP Paribas’ €1.5bn, five-year covered bond has given the market a welcome fillip, but was only made possible thanks to the bank’s five-year strategy of diversifying its funding as broadly as possible.
While no one can be sure that the worst is over, the debt capital markets began the year with a burst of confidence. An important contributor to the mood was BNP Paribas, which reopened the public covered bond market in early January with a €1.5bn, five-year issue.
This was the first covered bond issue since the collapse in September 2008 of Lehman Brothers. It was all the more striking as some commentators had forecast a freeze in this type of issuance until beyond the summer of 2009.
Focusing minds
It helped that BNPP had already been visible in the marketplace during December, when it reopened the unsecured bond market for the shrinking population of non-government-guaranteed banks. That €1.5bn, five-year senior transaction focused investors’ minds on the BNPP name and – given its ‘safe’ reputation – attracted €3.5bn in orders. It was priced at 160 basis points (bps) over mid-swaps.
“The dialogue we had with investors also revealed demand for a covered bond,” says Valérie Brunerie, head of funding in the BNPP Corporate & Investment Banking treasury.
For the past five years, Ms Brunerie says, BNPP has pursued a relentless strategy of funding diversification, in terms of products, currencies, markets and investors. The bank has tapped as many different sources as possible – regardless of its actual funding needs – to prepare the ground for hard times. Last year, hard times finally arrived and, judging by what has happened since, the strategy is paying off.
As the new year came into view and the bank contemplated its financing needs for 2009, it accepted that the market would remain difficult for some months to come. Clearly, a diversity of sources would make fundraising easier. So at the beginning of January, BNPP began more detailed discussions with investors over a possible covered bond deal.
“A lot of people had said that the covered bond market was dead,” says Christopher Drennen, head of France and Benelux DCM FIG origination. “And yes, the market was closed, but not all the time. There were small windows of opportunity when investor interest was aligned with bank liquidity demand.”
Regular communications
On that basis, BNPP had already executed three covered bond transactions since the credit crunch began to bite in August 2007, and had been in regular communication with investors regarding any appetite for more.
Discussions about price began with guidance of 110bps to 120bps over mid-swaps. In happier times, a five-year covered bond would have been priced at a couple of basis points through mid-swaps, and AA-rated senior paper 5bps to 10bps over. There would also have been less attention given to the name of the originator. Ratings being equal, investors used to be more inclined to differentiate between different jurisdictions – German pfandbriefe, Spanish cédulas, French obligations foncières – than between different issuers.
“A highlight of this deal was the increasing investor focus on the originator name,” confirms Derry Hubbard, head of covered bond marketing and execution at BNPP. “There was a shift from a highly standardised dialogue over one type of covered bond versus another, to a more focused view of the actual risks around this covered bond and the quality of the asset pool.”
Property market
As well as thinking more carefully about the quality of the underlying home loans, investors were also taking into account the health of the domestic property market – which, in France’s case, has avoided the speculative bubble conditions of some other European markets.
Investors were also drawn by the five-year maturity. Earlier offerings from government guaranteed banks had congregated in the two- to three-year part of the curve.
Recently it has been common capital market practice to launch and price bond issues on the same day, for fear that the market may turn unexpectedly nasty. BNPP announced this issue the day before the order books were opened, to build even greater investor focus, it says.
The investors must have been reasonably focused, because €1.5bn of orders were logged after the first two hours, rising eventually to €1.9bn. The issue was priced at the tight end, at mid-swaps plus 110bps. Whereas banks have been the biggest buyers of government-guaranteed deals, BNPP was pleased to see 55% of the covered bond deal go to investment managers.
The bank believes that there is now scope to explore funding through new covered bond programmes secured on other types of assets.
“New programmes could allow investors to invest in specific parts of the bank, in specific asset classes,” Mr Drennen explains. “As an example, we have seen demand for a variety of public sector assets. These could provide potential collateral for a new programme in the future.”
