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SSA stampede on post French election rally
April 28, 2017 / 12:05 PM / 7 months ago

SSA stampede on post French election rally

* Public sector issuers capitalise on hot market

* EFSF, Spain print jumbo euro trades

* ADB, Quebec break records

By Matt Painvin

LONDON, April 28 (IFR) - The SSA market sprang into action this week through a series of jumbo transactions as some of the biggest names took advantage of a favourable outcome of the first round of France’s presidential election.

EFSF, Spain and Quebec led the charge in the euro market, raising a combined €15.5bn, while the US dollar market was also resurgent, with EBRD, ADB and the Manitoba printing deals.

Centrist candidate Emmanuel Macron’s emergence as clear front-runner for the second round of France’s election triggered a sharp tightening of credit spreads, prompting opportunistic borrowers to jump into the market after a couple of weeks of dampened primary activity.

The spread between 10-year OATs and Bunds narrowed by 20bp on Monday, although relief was not just confined to French yields, with BTPs also tightening against Germany by a similar amount.

“A big risk has been eliminated for the market,” said Philippe Ithurbide, global head of research, strategy and analysis at Amundi Asset Management, referring to polls showing that Macron will beat far-right leader Marine Le Pen in next month’s second round.

“The tightening of BTPs shows that the whole eurozone was at stake in the first round,” he added.


The first issuer out of the blocks was the European Financial Stability Facility, which is often seen as a proxy for the eurozone, and France in particular.

The rescue fund hit screens on Tuesday with an €8bn dual-tranche offering, split between a new €6bn 10-year note and a €2bn tap of its February 2043s. It was the fund’s biggest transaction in more than three years.

“The outcome of the French election was one of the more positive scenarios for the market and enabled us to go out with a more aggressive trade,” said Siegfried Ruhl, head of funding at EFSF.

The deal attracted over €21.6bn of bids, highlighting the strength of demand for European credits. Asia accounted for 16% of the take-up of the 10-year, while UK and Switzerland-based investors took 27%.

“The demand from outside the euro area is very positive and shows there is a lot of confidence on the investor side regarding the future of the euro area,” said Ruhl.

“The number of orders was at the high end of what we usually have.” For the tap, 30% went to non-euro area investors.

The level of demand was in stark contrast to that of its deals earlier in the year. In February, a €5bn dual-tranche offering got a combined book of just €6.8bn. That deal came amid an uncertain backdrop. A €1.5bn 26-year trade a few weeks before was an even damper squib.

With its latest offering, EFSF has already completed its €13bn funding programme for the second quarter. The fund now has the option to pre-fund some of its needs for the rest of the year.

“We have to sit down and look at our funding plan to decide what we are going to do now that we have fulfilled our quarterly programme,” said Ruhl. “Subject to market conditions, we may bring forward some of our future funding needs in the remaining two months, and will inform markets in due course.”


EFSF’s success opened the door for other issuers and Spain quickly followed on Wednesday with a €5bn 10-year inflation-linked bond.

“The timing was not directly linked to French elections but the overall tone was very strong,” said PJ Bye, head of public sector syndicate at HSBC, and lead on the Spanish deal.

”The market needed and expected a new on-the-run 10-year, the last one being launched in 2014.”

Books closed at over €16.5bn, including €3.35bn of joint lead manager interest.

“The order book was very impressive, both in size and composition, with 163 accounts participating,” said Bye. “The size was the maximum Spain wanted to issue and hit the right balance.”

For the Baa2/BBB+/BBB+/AL rated sovereign, the positive risk environment was reinforced by the strong demand for inflation-linked assets, even with the ECB still concerned by the lack of underlying inflation.

“The prospect of higher inflation is supportive for linkers,” said Bye. “But the activity is not dependent on the ECB reaching its inflation target.”

It was not just the European big guns in the euro market this week. The Province of Quebec printed its largest deal in the currency with a €2.25bn 10-year bond on Wednesday.

One of the consequences of the rally in French credits was to increase the relative value of other issuers.

“The French rally is very positive for SSA, as some names are back over OATs and look more attractive for investors,” said Bye.

Quebec (Aa2/A+/AA-) was one, pricing its deal at mid-swaps plus 14bp, or 7bp over OATs. French investors took 22.5% of the transaction.

Despite the amounts raised this week, bankers say there is a huge imbalance between demand and supply.

“There is not enough supply. This week, net cashflow in the eurozone was negative €25bn - and that is before the PSPP,” said Bye. “The question is: what else can you buy? Secondary paper is rich.” (Reporting by Matt Painvin, editing by Sudip Roy and Philip Wright)

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