Caffil opened its account for 2022 with its first dual-tranche transaction comprising two maturities at the long end of the curve and was able to price the €750m 10 and €500m 20 year tranches flat to inside fair value, even if anticipated insurance demand for the longer piece fell slightly short of expectations.

After a moderate reopening of euro benchmark covered bond issuance last week – comprising five tranches from four issuers for €3.75bn – and with just UniCredit Bank (HVB) live in the market with an 11 year euro benchmark mortgage Pfandbrief, Caisse Française de Financement Local (Caffil) on Monday announced the mandate for €750m no-grow 10 and €500m no-grow 20 year obligations foncières.

“The view we had last week is that it was not the overwhelming huge flows that were expected,” Gonzague Veillas, head of financing and treasury at Caffil parent SFIL, told The CBR. “I can remember some years when there were four or five deals per day, but this year activity was well split over different windows and maturities, and quite well synchronised, I would say.

“So the market appeared quite manageable – all the more in the context of an overall imbalance between supply and redemptions, and especially with the ECB having confirmed its unchanged patterns for investments in covered for the beginning of the year.”

The new issue is the French issuer’s sixth to come in dual-tranche format, but the first on which both tranches are of 10 years and longer, with a combination of five to eight and 10 years and longer tenors typical in the past.

“We thought that this new 10 and 20 year structure was particularly adapted to the market context at the beginning of this year,” said Veillas, “with this strong pick-up in long interest rates in December. We felt this was the occasion to offer a 20 year tranche in order to engage more broadly insurance companies and real money investors keen on locking in these kinds of interesting yields – we offered 0.625% on the 20 year, and it has been years since a 20 year covered bond has offered that kind of coupon.

“So – with reasonable size aspirations, capping the overall transaction at €1.25bn from the start – we thought that a mix of the 10s and 20s could very well match the shape of the market and investor demand, and it would have been a pity to miss the opportunity.”

The transaction also offered Caffil the chance to underline its status as a long term player.

“It is very much in line with our business,” said Veillas, “long term lending to local authorities, and long term export credit loans, too. And not only in the context of loans to local authorities from La Banque Postale, but also to support the development of loan offers from SFIL’s reference shareholder, Caisse des dépôts et consignations, which is also a long dated lender to French local authorities.”

Caffil entered the market on Tuesday, with only Helaba also live with a euro benchmark covered bond transaction, 5.5 and 15 year Pfandbriefe ultimately sized at €2.25bn.

Leads BNP Paribas, Commerzbank, Crédit Agricole, DZ and SG opened books for the obligations foncières with initial guidance of the mid-swaps plus 5bp area for the 10 year tranche and the 10bp area for the 20 year, and ultimately priced the tranches at mid-swaps flat and plus 6bp, respectively, on the back of peak books above €2bn and €1.1bn and final books of over €1.6bn and €900m.

“We had a big response in terms of demand and it was a very nice outcome for the issuer and for the investors that participated,” said Veillas.

However, he said the anticipated demand from insurance companies for particularly the 20 year tranche fell a little short of expectations.

“I had been expecting a more overwhelming participation by them,” said Veillas, “and it is fair to say we did not have all of them in the book.

“There are two camps when it comes to this kind of investor: those who are saying, I have to catch the 25bp pick-up in yields that we had in December quickly; and those who are maybe expecting further developments, maybe on the macroeconomic front, in the course of January, and therefore are waiting a bit before entering these long maturities more broadly.”

The SFIL group has a smaller funding programme for 2022 than 2021’s €8bn, with €3bn-€4bn of Caffil covered bond issuance anticipated, and around €2bn via SFIL.

“So it will be roughly in line with last year for SFIL,” said Olivier Eudes, head of ALM and financial markets at SFIL, “and less for Caffil.

“That does not mean it won’t be a challenging year,” he added, “because we are running with long term maturities, and we have a French election and the ECB’s new policy. So it’s a year in which we have to be careful to execute the whole issuance programme. It’s nevertheless more limited in terms of size. And, thanks to the transaction we priced this week, we are on our way to securing the long duration we need to finance the business.”

The group’s issuance is likely to include both green and social issuance, as in recent years, according to Eudes, while it is also working to expand its eligible assets on the social side. The use-of-proceeds of the group’s green issuance is its local authority lending, but so far, its social issuance has been focused on public hospitals.

“One of the goals we have for this year is to extend as much as possible our issuance capacity on this side, because the market is deep and we have the capacity to issue more,” said Eudes. “This means enlarging the production and qualification of ESG assets, so the strategy is to have a close look at what kind of social activity we may extend to the local authorities besides the green activity.”

Last year the group began offering private placements in social format, but Eudes said the broader market situation meant that MTN issuance was limited in 2021. However, Veillas expects the developing rate environment to stimulate private placement activity.

“When an investor wants to lock in the prevailing yield level, benchmark supply might not be available,” he said, “but issuers like Caffil are open to private placements all the time. So it’s the perfect tool for them to catch their window of investment for long interest rates.

“That’s why we believe very much in the comeback of private placements for covered on long maturities.”