Crédit Agricole Public Sector SCF sold a Eu1bn 10 year covered bond inside OATs yesterday (Tuesday) in a precedent-setting move for French covered bonds, according to a lead syndicate official, with a new issue premium and near 2% yield ensuring investor interest.

Crédit Agricole sold the Eu1bn maximum obligations foncières issue at 31bp over mid-swaps on the back of nearly Eu2bn of orders from 110 accounts, via leads ABN Amro, BayernLB, BBVA, Commerzbank, Crédit Agricole and Société Générale.

It was the second benchmark covered bond for the issuer, after a seven year debut in September, and Vincent Hoarau, head of FIs, covered bond and ABS syndicate at Crédit Agricole, said it was remarkable for coming 1bp inside of May 2023 OATs.

That was trading at 32bp over when the leads priced the covered bond, he said, after the French government bond curve had widened some 5bp between the mandate announcement and pricing.

“Pricing inside OATs sets a precedent in the French covered bond segment,” said Hoarau.

Caisse de Refinancement de l’Habitat came closest to achieving such a feat when it priced a Eu1bn 12 year covered bond almost flat to OATs in January, but French issuance has otherwise typically needed to offer a discernible pick-up over government bonds to satisfy domestic investors’ requirements.

Hoarau acknowledged that the spread versus OATs on Crédit Agricole’s deal was not necessarily far off that achieved by CRH in the past, but said that coming inside rather than wide of government bonds, even though only marginally, was significant.

“A lot of investors used to be flexible on pricing as long as it was not inside OATs,” he said, “so there is a difference.”

Market participants away from the deal gave varying assessments of the pricing versus OATs. The sentiment was generally that it was flat to inside, but one said he saw OATs in the 26bp-27bp area, suggesting there was a pick-up involved. He said that assessments can vary depending on which benchmark is being used – z-spreads or i-spreads, for example – and that the matter can become technical, but wondered why French covered bonds would trade through the sovereign.

“The only reason you buy a covered bond through government bonds is for bail-in protection,” he said. “It’s very perplexing.”

The pricing versus OATs of a new 12 year issue for National Australia Bank in the market today (Wednesday) would be interesting, he added, given the importance of French investors for long dated supply.

Another syndicate official away from Crédit Agricole’s deal said that the tight pricing versus OATs could explain a relatively low level of French participation in the deal.

France took 29%, with allocations to foreign investors being Germany and Austria 32%, the UK 11%, the Benelux 9%, southern Europe 8%, Switzerland 4%, Asia 2%, Nordics 1%, and others 4%. Banks took 43%, asset managers 36%, funds 9%, insurance companies 9%, and others 3%.

At 31bp over, the public sector backed deal offered a limited new issue concession, said Hoarau, with the issuer’s September 2019s trading at 18bp over when the leads kicked off deal execution and the curve between seven and 10 years worth some 10bp-12bp.

“The deal also carried a coupon shy of 2% with a re-offer yield of 1.989%,” he said. “The new issue premium and proximity to the 2% yield level were key elements to combine in order to ensure a strong success.”

The mandate was announced on Monday despite it being a public holiday in the UK to give continental European investors time to prepare for the deal, added Hoarau.

“Crédit Agricole is not a frequent issuer in the SCF format and giving a heads-up was decisive ahead of what was going to be a very busy day in primary,” he said.

The leads were also mindful of wanting to collect investor feedback on pricing expectations ahead of competing supply, and knew of some French insurance accounts with yield targets and spread pick-up requirements over the domestic government benchmark.

“A few real money investors stayed away from the deal because the tenor was too long, the coupon too low (1.875%) or because they prefer the mortgage SFH format,” said Hoarau, “but overall the reception was excellent.”

The deal is the tightest outstanding benchmark covered bond for the Crédit Agricole Group, he added. Until yesterday’s deal the tightest re-offer spread on a still outstanding issue had been 35bp over for a Eu1.25bn seven year for Crédit Agricole Home Loan SFH in February.