February 7, 2017 / 5:10 PM / in 2 years

Volatility trips up AFD in primary market

Feb 7 (IFR) - The market volatility which sent OATs spiralling on Monday claimed a notable victim as Agence Francaise de Developpement pulled a proposed US$1bn three-year deal.

Conditions have become steadily trickier, with French and Italian government bonds selling off as concerns around the political backdrop escalate.

Ten-year OATs hit a yield of 1.14% on Monday, a 6bp rise from Friday’s close, according to Thomson Reuters data, and a near 50bp rise since the beginning of the year.

A rally on Tuesday, with 10-year OATs back to 1.10%, did not provide enough leeway for the issuer to carry through with a trade which market participants had questioned from the moment the mandate hit the screens.

“AFD in US dollars is not always easy to sell, and then there’s the French aspect to the credit: it was ballsy to go out with this,” said one banker away from the deal.

One investor said conditions in the secondary meant that deals from issuers with close ties to the French sovereign were always likely to suffer from a turn towards negative sentiment.

“Anything that’s very linked to the sovereign like a Unedic, Cades - what is happening in France will have an impact on their issuance strategy,” he said.

“This is especially the case for issuers that borrow in foreign currencies and need to tap into an investor base that’s more prudent than the domestic investor base.”

The maelstrom in the secondary proved too much for the issuer to overcome, with AFD pointing the finger of blame squarely at market volatility as it hooked the deal.

“AFD’s euro and US dollar benchmark offerings always aim for being well-distributed and liquid transactions achieved in prevailing market conditions,” the deal’s leads said in a statement.

“Given recent markets volatility over the past sessions, the issuer’s objectives could not be achieved in the current market environment.”

The announcement came after the spread had already been set for a US$1bn no-grow trade at MS+29bp. Initial price thoughts were high 20s yesterday. One lead banker said the attempt to price through the noise appeared achievable, given what other issuers have been able to print in US dollars.

“The broader market backdrop was fairly weak, but obviously there are trades in the market which are working,” said the lead banker.

“We have had a complete range of issuers in dollars, with EIB, BNG and Ontario. The dollar market has been open. During the course of yesterday afternoon, we started to see higher degrees of volatility, especially in France, but by that point we were out.”

The lead said it was too early to say when AFD might look to resurrect the deal.

“These things happen from time to time,” he said. “But when the issuers do come back, investors tend to just go with the flow.”

The issue ratings were AA/AA (S&P/Fitch). Barclays, BNP Paribas, Deutsche Bank and JP Morgan were nominated leads. (Reporting by Robert Hogg.; Editing by Philip Wright and Robert Smith)

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