LONDON, Feb 10 (IFR) - BPCE's €750m seven-year covered was almost twice subscribed on Friday despite a torrid week for France's lenders, when fresh election scandal weighed heavily on domestic bank spreads.
The French sovereign has endured a turbulent ride in recent months as the presidential race gains momentum. The 10-year OAT-Bund spread this week touched 79bp, the highest for more than four years, according to Tradeweb data.
That weakness has started to seep into French bank debt, which suffered significant losses this week. Senior non-preferred paper gapped as much as 15bp wider on Monday, for example, while French covereds have also underperformed other jurisdictions.
" credit has only widened 1bp-2bp although we have seen less liquidity in French names and they have been a bit more difficult to sell," said Christophe Auvity, head of global corporate credit at BNP Paribas Investment Partners.
"Financials however have moved in the same way as OATs, which makes sense given that they are more systemic than corporates."
The outlook for France is wildly different depending on whether the Front National's Marine Le Pen or one of the establishment parties rides to victory in May, and volatility is expected to increase as the final round draws nearer.
"It's difficult for investors to position themselves one way or another over the longer term," said Patrick George, head of markets EMEA at HSBC.
"France's spreads could go to 200bp or they could go to 20bp as the outcome is very digital, and spreads will be driven by political news."
That volatility is taking hold at a time when French banks particularly need access to the debt market, not just to fund their operations but also to print loss-absorbing securities to satisfy new regulations.
French bank euro and US dollar supply increased by almost 85% year-on-year in January, but the pressure to issue remains. BNP Paribas in particular still has some way to go and needs to raise a further €7.3bn of senior non-preferred in 2017, having already raised €2.7bn last month.
BPCE took advantage of better sentiment on Friday morning to open books at swaps plus 8bp area, and revised that to a final 6bp despite some widening in OATs later in the morning. It priced 2.6bp over the OAT curve.
While the 5bp concession was only a touch higher than for other recent covered issues, a banker warned that it will be difficult for the French banks to issue in the coming weeks.
"We've had a one-way market for all French credit and rates, and nothing is really going to change until the election," he said.
Matters could go from bad to worse in the case of a Le Pen victory, which carries the risk of euro break-up and debt redenomination and creates a tail risk for the eurozone overall.
"France leaving the euro would put the viability of the currency union overall into question," said Dominik Winnicki, a credit strategist at Barclays.
"If the pressure on French banks increases further, it should leak into related core jurisdictions, for example, the Netherlands and Belgium."
But the base case for most market participants remains that the ultimate outcome will be benign. Any major sell-off in French risk is likely to be viewed as an opportunity, at least for now, Winnicki said, particularly given the French banks' improved fundamentals.
While markets will be more difficult to navigate, treasurers have learnt their lessons from the 2008 crisis, said Jean Marc Mercier, global co-head of debt capital markets at HSBC.
"Issuers will need to be more agile and maybe do more drive-bys, but markets are open," he said.
"Europe has grown and is much more resilient, although there might be a change on price. Issuers have 52 weeks to fund themselves."
DekaBank, Natixis, Nordea Markets, Santander and Societe Generale were joint leads for BPCE. (Reporting by Alice Gledhill, editing by Helene Durand, Julian Baker)