Issuer: Natexis Banque
Amount: $500 million
Launched: October 16
Lead manager: Tokyo-Mitsubishi International, Dresdner Kleinwort Benson and Merrill Lynch
One clear lesson emerges from the $500 million debut Eurobond for Natexis Banque: the name of the borrower still matters a lot to Euromarket investors.
On fundamentals alone, the deal should have been a blow-out. It was guaranteed by the Republic of France, which gave it triple A ratings and meant it was investors’ first chance since 1995 to pick up French guaranteed debt in dollars. The deal’s three-year maturity made it less volatile than the five- and 10-year paper that predominated in the Eurodollar primary market at the time. What’s more, the launch spread of 14 basis points over treasuries was 5bp wider than the most aggressive bid the borrower received.
Trouble is, many investors didn’t know the name. Natexis Banque was created only in June this year from the merger of two French financial institutions, Crédit National and Banque Française du Commerce Extérieur (BFCE). Although both were veteran Eurobond issuers, some investors demanded a higher premium for the new name. Others at first could not buy the bonds at all. “They had to go and get lines to buy the paper – regardless of the fact that it came with the guarantee of France,” says Denis Kelleher, syndicate manager at Tokyo-Mitsubishi International, which was joint bookrunner for the issue with Dresdner Kleinwort Benson and Merrill Lynch.
Much of the paper was placed at the reoffer spread, according to the bookrunners. But the delay probably made the difference between the deal being a success – as it would have been in normal market conditions – and one that many investors and bankers will want to forget.
On the day of launch, Thursday, October 16, market conditions were less than perfect: spreads in the Eurodollar market had been widening since August. Things were to worsen in the following two weeks with all sovereign and supranational issues suffering.
A five-year deal for the European Investment Bank ballooned from its launch spread of 14bp over treasuries to 37bp over, before trading back to 25bp over at the end of October. Another five-year transaction, for Jexim guaranteed by the Japanese government, moved out from 25bp to 42bp off at one stage.
As investors sold Eurodollar bonds to buy safer assets, such as US treasuries, bid-offer spreads in the Eurobond market widened too. Although the Natexis bonds held firm for a couple of days, the issue widened with the market, bid away from the bookrunners at wider than 30bp on October 27 and October 28 – the two days when world stock markets were at their most volatile. By the end of the month, the Natexis bonds were being bid by the bookrunners at 25bp and offered at 22bp over.
At Natexis Banque, treasury official Jacques Omeyer regards the deal as a success, given market conditions. “It stuck to the launch spread of 14bp over treasuries for a few days until the market really collapsed. Then, it widened more or less in line with other names such as EIB and IADB.”
But critics say that the execution of the deal could have been much better if Natexis had taken a more enlightened approach to the markets. Whereas most borrowers go on roadshows before their maiden issue, or at the very least send some information to the leading investment banks so they can brief investors, in this case there was little warning. Natexis Banque requested bids around lunchtime on October 16 and the deal was launched that afternoon. “We could have sold more bonds at launch if our investors had known the name,” says one banker at a house in continental Europe. “Instead, much of our sales were the following week when spreads were widening.”
So why was there no roadshow? The transaction was used to refinance French export credits, a role that BFCE has undertaken with the government guarantee for years before the merger. “We have never had roadshows for our French-guaranteed paper,” says Omeyer. “I imagine that if I went to the French treasury to ask them to pay for a roadshow to explain why people should buy French-guaranteed paper, they would just laugh at me. What do you imagine the UK treasury would say if you told them to go on a roadshow to explain why investors should buy UK bonds?”
The bookrunners broadly agree that Natexis Banque could be sold solely on the basis of the guarantee, claiming that they placed bonds with a similar range of investors to those who bought BFCE’s guaranteed paper in the past: buyers included Asian central banks and UK funds, as well as investors in Germany, Switzerland and the Benelux countries. Although the deal was targeted at institutions, some bankers report a stronger take-up from retail than for similar deals in the past. “We are seeing quite good demand for short-dated dollar paper,” says a syndicate official at one retail house in Belgium. “And it helped that Crédit National used to be one of the strongest retail names.”
In London, however, rival houses maintain that the deal should have been priced at a wider launch spread than 14bp over treasuries to make up for the lack of name recognition. The tightest bid was 9bp over treasuries while the widest was 18bp, an unusually wide disparity for a new issue. Some banks argue that a floating-rate note would have given Natexis better execution, considering the uncertainty. However, a straight gave cheaper funding for the borrower which swapped the proceeds into floating-rate French francs.
Although there was no roadshow this time, Natexis Banque plans to organize one in the future – most of its funding will be without the state guarantee. It certainly has plenty to explain to investors. It had assets of Ffr303 billion ($51 billion) in June and became the fourth-largest corporate lender in France when the merger was agreed. It is rated single A by S&P and A minus by Moody’s. Moody’s downgraded it at the time of the merger citing “the low level of profitability generated by its commercial banking activities and Moody’s belief that prospects for earnings power to improve in the current business environment are poor”.
However, in early October another French bank, Caisse Centrale des Banques Populaires, took a 23.5% stake in Natexis SA, the holding company of Natexis group, and its stake is likely to increase to 30%, giving it effective control. Moody’s has placed its ratings for both Natexis SA and Natexis Banque on credit watch for an upgrade while S&P changed the outlook from negative to stable.
Omeyer expects Natexis’s next government-guaranteed issue to come in the first half of 1998. Following the merger it is overfunded and is not likely to be borrowing heavily in its own name in the immediate future. It is posting aggressive bids to issue paper off its $2.5 billion Euro-MTN programme, although doing more borrowing from its French domestic medium-term note programme.
