Agence Française de Développement (AFD), the state-owned French development bank, showed its commercial counterparts how it should be done when it issued e300 million of tier 1 eligible deeply subordinated notes.
AFD is only the second French lender to issue tier 1 directly. Before a change in the law in August 2003, French banks could only issue hybrid tier 1 through special purpose vehicles. The first bank to issue directly was Caisse Nationale des Caisses d?Epargne (CNCE), last November.
Tracing its origins to the central bank set up by the Free French government during World War II, AFD provides development aid loans and subsidies in Africa, Asia, the Caribbean, Lebanon and Palestine. It works in 54 countries and in nine French overseas departments and territories. Its foreign structural adjustement lending has grown since 2001.
AFD is a unique issuer. It is an établissement public à caractère industriel et commercial (Epic) which has no share capital and cannot legally become insolvent. But it is also a credit institution under the French monetary and financial code, regulated by the Commission Bancaire and subject to solvency and risk ratios.
Under its major concentration risk ratios, AFD cannot commit more than 25% of its capital to loans to a single credit. According to SG CIB?s credit analysis, over 90% of AFD?s outstanding loans to foreign countries are to Africa, including the bulk of its e2.1 billion of doubtful loans. AFD needed this deal to get more flexibility in lending to such francophone African countries as Morocco and Tunisia.
Although the CNCE deal had gone to Merrill Lynch?s FIG team, SG CIB was called in to give AFD structuring advice and then act as joint lead manager and joint bookrunner. SG CIB has worked on several subordinated debt issues, including tyre maker Michelin?s 30-year bond.
The big conceptual challenge for investors was to work out why AFD was doing this deal. ?Once they understood that, they had to feel comfortable with the structure,? says Eric Cherpion, director of Eurobond syndication at SG CIB. ?Finally, they had to feel confident about the pricing.?
The notes are perpetual. Interest steps up from a fixed to a floating rate at year 10, when AFD has a general option to redeem the notes at par. If AFD doesn?t exercise the call, the coupon increases by 100 basis points.
?This is French government risk with yield enhancement,? says Mark Geller, syndicate desk at joint lead managers Barclays Capital. ?With strong implicit government support and its rarity value, it is a good deal for investors who understand AFD.?
AFD shouldn?t lose its Epic status before the first call date. If it does, though, bondholders want protection. They can vote against a
change in the status of the notes or call the bonds at par or at a higher make-whole level.
Most tier 1 issues incorporate a dividend stopper, but AFD pays no dividend to the state. And AFD?s is the first Paris-listed tier 1 issue. That meant consultation with the Autorité des Marchés Financiers. The AMF had to accept tier 1 features like the loss absorption clause, which includes provisions to reduce the nominal amount of securities if the issuer breaches its minimum solvency ratio.
With feedback from French and non-French investors, the banks took the deal ? limited to e300 million ? to the market with price guidance of 35 to 40bp over mid-swaps. ?Despite tight initial price guidance, the book grew to over e1.2 billion within four hours,? says Geller. With revised guidance of mid-swaps plus 32bp to 35bp, about a quarter of the book dropped away. ?That still left over e9 million at the pricing level of swaps plus 32bp,? says Geller. ?It went outstandingly well. This is the tightest ever tier 1 launch spread.? AFD also benefited from the strong technicals of the European subordinated market, where supply usually tails off in April.
For such an unusual issuer, the initial price guidance wasn?t far out. ?Most tier 1 is from commercial banks,? says Cherpion. ?On subordinated deals, you can make a parallel with Freddie Mac, but Freddie issues lower tier 2. The Landesbanks issue subordinated debt, but the bonds are perpetual and their guarantees are about to disappear, so, again, rating and pricing are not comparable.?
French and UK investors each took 21% of the issue. 17% went to Asia. 35% of the notes went to asset managers, 18% to central banks, 15% each to insurers and other banks, 12% to funds and hedge funds.
?Other French names, including more classic financial institutions, could benefit from the opportunity to issue tier 1 direct,? says Franck Robard, director, hybrid capital group, at SG CIB.