Compagnie de Financement Foncier is making fast progress in its plans to raise €12bn this year. Its $1bn short-dated issue, aimed at diversifying the investor base, appealed strongly to Asian central banks, Edward Russell-Walling reports.
Asian investors feel increasingly at ease with covered bonds and are developing quite an appetite for the product, as Compagnie de Financement Foncier (CFF) was delighted to discover with its recent $1bn three-year offering.
Central banks and other investors from Asia, including Japan, set a new record for the specialist debt agency by snapping up more than half of the issue.
As French bankers are quick to point out, obligations foncières (OFs), or covered bonds à la Francaise, have been around for more than 150 years. CFF’s parent, Credit Foncier de France, issued its first one in 1852.
In 1999, however, France introduced a new OF law to strengthen and reinvigorate the market. This dictates that the instruments may only be issued off the balance sheets of specialised, dedicated vehicles – sociétés de crédit foncier (SCFs) – which, in turn, may issue only OFs. CFF, which was created in the same year, is the biggest of only four SCFs, accounting for 50% of the market. It has also become the largest French debt issuer after the state.
The CFF assets being refinanced by OFs are essentially residential mortgages and public sector loans acquired from Credit Foncier or Credit Foncier’s parent, Caisse d’Epargne. Since 1999, CFF has issued about €47bn of OFs, of which €41bn was outstanding at the end of 2004.
Three funding routes
The AAA-rated issuer carries out its funding in one of three ways. About half is via Jumbo OFs (€1bn or more), denominated in either euros (under a €50bn European medium-term note programme) or US dollars. Another 10%-20% takes the form of public issues in non-euro currencies, such as Swiss francs, yen, sterling and, most recently, Australian dollars.
“All proceeds must be swapped into euros, since our balance sheet is in euros,” points out Sandrine Guerin, CFF’s deputy chief executive. “So public non-euro issues may vary as a proportion of total funding because they are driven by currency swaps.”
The balance of funding, typically about one third, is through private placements, driven by investor demand. Currency denominations may include US dollars, euros, yen and, occasionally, Hong Kong dollars.
Ambitious plans
Last year, CFF issued debt worth €11.2bn in 90 separate transactions. This year, it plans to raise about €12bn – and it is not dragging its feet. It has already sold securities worth €6bn, including an inaugural A$200m under a newly established Australian medium-term note programme, a ¥50bn five-year deal and a €1.5bn issue maturing in 2017.
Perhaps this year’s most notable deal was the short-dated $1bn issue, launched in late May and priced at 35 basis points over US treasuries. A principal objective here was to diversify the investor base, and short-term dollar paper was chosen as the best way to appeal to Asian accounts. While Asian central banks retain an appetite for dollar assets, many are keen to diversify out of treasuries.
“We did two days marketing before the issue and it was placed in three hours,” says Ms Guerin. The Asian allocation was a source of particular satisfaction, with 15% going to Japan and another 43% to the rest of Asia. Central banks accounted for 40%, in line with CFF’s past experience, and about one third went to investors who were new to the name.
Ms Guerin recently returned from a covered bond conference in Tokyo and says that she was struck by the number of Asian investors in attendance. “They are very interested in this new asset class and are becoming more sophisticated in the way they think about these types of bonds,” she says.
Product awareness
There is a growing awareness of the important differences between individual covered bond issuers, she says. “Before, you had to sell the product. Today, you have to sell the issuer.” Asian investors are also providing more feedback on what they are looking for in covered bond products, she says.
No firm decisions have been taken on the timing or nature of CFF’s next OF issue, though it could be another euro Jumbo, either before or after the August lull. “It all depends on the market and the appetite of investors,” Ms Guerin observes.
She acknowledges that market conditions and the interest rate environment are not making life easy for investors right now. “But the flight to quality, and the fact that so many countries are developing covered bond legislation, testify to the viability of the sector and the growth that is yet to come,” she says.
