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Corporate credit risks repricing as French investors pull back
February 10, 2017 / 2:47 PM / 10 months ago

Corporate credit risks repricing as French investors pull back

* French investors becoming cautious

* Le Pen sparks volatility

* French corporates to front-load financing

By Laura Benitez and Helene Durand

LONDON, Feb 10 (IFR) - French investors scaled back their bids for corporate paper this week as mounting concerns over political risk and poor valuations began to weigh.

Participation from French accounts, usually heavyweight buyers of European corporate credit, has more than halved in some of this week’s deals compared to typical levels.

The removal of a significant backstop bid comes at a time when French companies are expected to pursue funding aggressively ahead of the presidential election.

“We have seen lower outright demand and greater price sensitivity creeping into demand dynamics from this investor base across the curve,” said Brendon Moran, global co-head of corporate debt capital markets origination at Societe Generale.

“It’s a fluid situation that will need to be monitored closely for its impact on execution, especially as companies come out of earnings blackout and consider whether to issue.”

France accounted for just 13% of Molnlycke’s €500m eight-year on Monday, compared to 36% of a €500m 10-year the borrower sold in November 2015.

Unilever on Wednesday saw only 10% of its €600m 10-year going to French accounts, having placed a whopping 40% of a €700m 12-year trade there in April last year.

Weakness in French government bonds - which have borne the brunt of the election worries - has left valuations looking stretched, particularly for domestic credits.

Klepierre’s €500m 10-year lost over a third of its book on Thursday, with French investors leading the pullback.

Orders had grown to €1.5bn by midday, but an 18bp revision from the wide end of talk saw investors pull €600m of orders.

The A- rated deal priced at swaps plus 67bp, less than 30bp back from where 10-year OATs were trading earlier in the week.

“French corporate bonds offer no value. If you want to own French risk, you might as well own France,” said Mark Dowding, co-head of IG debt at BlueBay Asset Management.

Much of this week’s volatility was sparked by Marine Le Pen saying she would take France out of the euro if she was elected.

“Whenever a sovereign comes under pressure it takes corporates and financials with it. You tend to reach a point where corporates need to reprice as the sovereign drags wider,” Dowding said.

NO VALUE

The spread between 10-year OATs and Bunds reached 79bp on Wednesday, the highest since November 2012. The margin has since come back in to around 70bp, according to Tradeweb data.

Corporate spreads, conversely, have tightened dramatically since the ECB announced its corporate bond purchase programme in March last year.

“The problem for French credits is that, like many corporates, after the rally we’ve seen in 2016 they look very expensive, especially as they make up a large part of the ECB CSPP universe,” Richard Casey, senior credit portfolio manager at Pioneer.

France-based accounts typically provide strong support in the credit market, buying on average around 20%-25% of IG corporate deals, according to bankers.

“French accounts have definitely been more disciplined and price sensitive, and usually they tend to be the engine room behind the deal” one banker said.

“We’ve seen accounts pull back as soon as pricing is tightened and some just not bother to play at all. So no, we can’t rely on them to push deals through at the moment.” (Additional reporting by Helene Durand; editing by Alex Chambers, Julian Baker)

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