UPDATE 2-Dexia announces first ever covered bond exchange

Wed Sep 8, 2010 9:33am EDT

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* Exchange aims to help Dexia's refinancing plans * Other banks may use exchanges to cut refinancing risk (Adds more detail)

By Jane Merriman

LONDON, Sept 8 (Reuters) - Dexia Municipal Agency, part of the Franco-Belgian financial group, announced plans on Wednesday to exchange seven covered bonds worth 14.5 billion euros ($18.41 billion) to lengthen its debt maturities and reduce refinancing risk.

The exchange is the first of its kind involving a covered bond and could pave the way for other similar transactions from European banks facing a big hump of bond maturities in the next couple of years.

Dexia's exchange, which is voluntary, does not bring in fresh cash, but gives the company more breathing space in terms of refinancing outstanding debts.

"The purpose of the offer is to increase the duration of Dexia MA's liabilities and take advantage of attractive market conditions," Dexia said in a statement.

The firm said the exchange was also designed to improve secondary market liquidity in Dexia covered bonds.

Dexia aims to exchange the seven bonds with maturities ranging from November 2010 to March 2014 for three new covered bonds with maturities of five, eight and 10 years. Each new series of bonds will have a maximum size of 3 billion euros.

REFINANCING RISK

Covered bonds are backed by pools of mortgages or public sector loans that remain on the issuing bank's balance sheet. Investors have a claim on these assets in any default.

The exchange will help Dexia complete its 2010 funding programme, one of the lead banks on the deal said.

It will allow the firm to carry out a refinancing that would otherwise not be possible except through several fundraisings of the primary bond markets, it said.

Bond exchanges have been widely used by companies and governments to manage debt maturities.

Banks have also done buy-backs and exchanges of hybrid bonds, but exchanges of covered bonds are a new direction. Banks could find it useful as a way to push out debt maturities beyond 2011, 2012, when there will be a lot of banks with bonds to refinance.

"This tool has been used in the corporate sector and sovereign sector in the past, now lots of people in the financial sector are looking at it," said Richard Kemmish, head of covered bond origination at Credit Suisse.

"Issuers are concerned about upcoming refinancing in 2011. You could see exchanges of senior unsecured bonds for covered bonds and government guaranteed issues for covered bonds. Lots are looking at it - so watch this space."

Dexia's bond investors have until Sept. 15 to accept its exchange offer.

The banks managing the deal are Credit Suisse, Deutsche Bank and HSBC. (Reporting by Jane Merriman; Editing by Sharon Lindores) ($1=.7875 Euro)

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