French agency to make debut in bail-out funding

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A new French agency will make its debut in the international bond markets this week to raise bail-out funding for the country’s banks, marking the latest entrant to a growing investment class.

Banks running the bond sale for the Société de Financement de l’Economie Française (SFEF) are hoping to sell between €3bn and €5bn in three-year bonds this week.

The bonds are of the kind with which investors in Europe and beyond are going to become increasingly familiar – government sponsored debt issued either directly by or on behalf of the battered banking industry.

Sales of such debt have been picking up slowly over the past couple of weeks with both issuers and investors still treading carefully.

The French sale will follow a string of debt issues from UK banks backed by the British government’s Credit Guarantee Scheme, designed to avoid any further collapses since the turmoil sparked by September’s failure of Lehman Brothers.

Governments throughout the world have pledged hundreds of billions towards providing guarantees to banks to help stricken financial institutions raise much needed funding.

European banks have €1,150bn ($1,477bn) of debt due to be repaid between the fourth quarter of 2008 and the end of 2011, according to Standard & Poor’s.

In recent weeks big UK banks such as Lloyds TSB, Barclays, Royal Bank of Scotland and HBOS have all used the UK guarantee scheme. Each would have had to pay £30m to £50m annually for the guarantees on the more than £10bn of bonds already issued.

The bonds have traded well which has provided further support to this new asset class.

Oliver Judd, credit analyst in Aviva Investors’ fixed income team said they have been looking at these new bonds, but at first it was difficult to invest without having seen how they would perform.

He said: “It is establishing a new asset class, although it is not clear what the ongoing liquidity or depth of this market will be. But it is important in the near term in that it provides financing for banks and is a stepping stone to allow them to re-access the market on an unsecured basis in the longer term.”

The success of this new market is important in unlocking the credit crisis, giving banks the ability to raise more and cheaper debt for refinancing, and to grease the wheels of bank lending.

Chris Babington, managing director in debt capital markets at Lloyds TSB, says: “The guarantee has allowed us to issue bonds at an all-in price consistent with an unsecured issue, but opens up a significant additional investor base, allowing us to raise a greater volume of funding.”

SFEF will provide up to €265bn in new loans to France’s banks, to ease lending conditions. The SFEF will use an explicit state guarantee to raise debt of up to five years maturity on the markets and pass it on to banks at a commercial rate plus a 20-basis-point fee for the government backing.

But the real issue for banks and governments will be whether markets will have recovered enough when guarantees run out for banks to refinance these bonds independently.

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