Fast money taints France's 30-year bond success

Thu Mar 28, 2013 12:40pm EDT

* Hedge funds and bank traders swamp syndicated bond

* Real money investor demand wanes at low yields

* Opportunists stand to profit from curve flattening

By John Geddie

LONDON, March 28 (IFR) - At first glance, France's almost twice-subscribed 30-year benchmark looks like a standout deal, but the high allocation to fast money investors has raised questions over the true depth of demand at the long-end of the sovereign's curve.

Distribution statistics show that nearly half of the EUR4.5bn bond was allocated to banks (33%) - confirmed by sources as trading desks - and hedge funds (16%), which are typically influenced by short-term trading strategies.

"France knew they could not have got this kind of book with just real money investors, they needed time to make it attractive to other accounts likely to have shorter-term motives," said one syndicate official close to the deal.

When the deal was first mooted in the Agence France Tresor's 2013 borrowing outlook in December 2012, it was anticipated to attract plenty of demand from pension and insurance funds that have a natural need for duration, but had been starved of long-end supply.

The challenge, however, was the low-yield backdrop. France's new bonds priced at an outright yield of 3.263% - slim pickings for a deal that matures on 25 May 2045.

From December, and in anticipation of the new supply, the French curve steepened 14bp between 10 and 30 years, which made the deal somewhat more attractive for real money accounts, but crucially grabbed the attention of opportunistic investors on the look out for the chance to make a quick buck.

Delays to the deal caused by the political headwinds in Europe further accelerated the steepening, with fast money interest in the end far outweighing demand from the real money investors who were initially targeted.

"The steepening got a bit out of hand and suggests they waited a bit too long and ended up paying too much," added another banker.

Many of these opportunistic investors now stand to make handsome profits if France's curve flattens from these inflated highs, said bankers.

BIDING ITS TIME

Lead managers on the deal acknowledged that previous issuance windows for France had been scuppered by political uncertainty in Italy and Cyprus' debt restructuring, but said the issuer was right to bide its time.

"We knew the demand was there but it had proved difficult to find the right window with all the headline risk around," said Torsten Elling, co-head of rates syndicate at Barclays, one of the banks managing the deal.

"It was such an important deal not only for France, but for Europe as a whole, and we needed to get it right."

Leads Barclays, BNP Paribas, Morgan Stanley, RBS and SG CIB gauged the success of the deal by the impressive final book size that came just shy of EUR8bn, and by the fact they managed to print EUR4.5bn from initial expectations of around EUR3bn.

Leads said that the high allocation to bank trading desks was to fill inventory needs for long-dated paper. France has been the only European sovereign to issue new bonds with a maturity of over 15-years this year, and may be the only one for some time with Italy's 30-year plans now looking ominous until it has a stable government in place.

"Of course they will not be holding these bonds to maturity, but they need to service ongoing client demand going forward," said Damien Carde, managing director, head of frequent borrower group DCM at RBS.

Sources said banks would expect to be out of those positions within the next six to twelve months, but if profit can be had in France's curve flattening before, they will likely exit sooner.

The Tresor said bank participation was in line with previous syndications. It has been over three years since France last sold a conventional bond by syndication - a EUR5bn 50-year in March 2010 - and distribution statistics showed bank participation was much lower at 19%, and hedge funds just 4% on that occasion.

You have to go back to 2009 - when France sold its previous 30-year - to find a comparable level of bank participation at 27%, but that was alongside a 67% allocation to real money accounts.

The Tresor's regular auction process, restricted to primary dealers, offers very little insight into end-investor demand.

NATURAL NEED

There are some investors that participated in France's latest deal that are likely to hold the bonds to maturity, however.

One of those is Italian asset manager Generali, which sources said placed an important lead order in the bookbuilding process that gave the deal early impetus.

Filippo Casagrande, head of fixed income at Generali Investment Europe, confirmed Generali had participated in the deal late on Tuesday, adding:

"These bonds allow investors both to implement investment programmes with specific yield targets, and to match ALM driven duration needs, especially for the retirement portfolios," he said.

Insurance and pension funds, like Generali, bought a 20% share of the deal, while other real-money fund managers were allocated the remaining 31%. (Reporting by John Geddie; editing by Julian Baker and Alex Chambers)

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