France's CFF Prices $2B U.S. Dollar-Denominated Covered Bond

In a long-anticipated move, France's Compagnie de Financement Foncier (CFF) priced its first-ever U.S. dollar-denominated (USD) covered bond Thursday (April 15).

This is also the first USD covered bond (CB) ever issued under French law and the first USD CB from any European financial institution since 2007.

CFF's launch follows in the wake of two recent USD CB issues by Canadian banks — a $1.5 billion deal from Royal Bank of Canada (RBC) on April 7 and a $2 billion issue from Canadian Imperial Bank of Commerce (CIBC) on Jan. 27. 

About 62% of CFF's three-year, $2 billion covered bond went to investors in the U.S., according to a source familiar with the deal. This compares to 84% for CIBC's issue.

Pricing was 40 basis points over mid-swaps — reportedly about the same as initial guidance.  The CFF issue was well received, with a $3 billion order book.

Like the RBC and CIBC offerings, the CFF issue was marketed to big U.S. institutional investors in the private placement market under SEC Rule 144A, which provides an exemption to requirements that would otherwise apply. Unlike those Canadian deals, the CFF covered bonds will be issued pursuant to a legislative framework (in this case, under French law) rather than on a purely "structured" basis.

Meanwhile, there is still no new covered bond from a U.S. bank on the horizon.  Although Bank of America and now-defunct Washington Mutual (WaMu) successfully sold large mortgage-backed structured covered bond issues in 2006 and 2007 (WaMu's program is now sponsored by JP Morgan), momentum ground to a halt with the global economic crisis.   Some proponents of covered bonds as a supplementary funding source in the U.S. are now pinning their hopes on a bill pending in Congress that would establish a comprehensive legal framework — although the legislation's future is uncertain.

Fitch Ratings has described CFF as "a special-purpose credit institution licensed by the French banking authorities to issue OFs [obligations foncières], the French form of legislative covered bonds."

A possible USD covered bond from CFF has been anticipated in some circles since at least July 2009, when it became known that CFF had applied for the SEC exemption that would allow it to sell a covered bond to U.S. institutional investors.  Jerry Marlatt, Senior Of Counsel at Morrison & Foerster, commented on that in October of last year in an interview with Investment Dealers Digest: 

"We see a curious development where French banks and other foreign banks are actively looking at issuing dollar-denominated covered bonds in the U.S. market while U.S. banks are not because of the regulatory environment."

News of a U.S. covered bond roadshow by CFF surfaced in January of this year, although the company declined to comment publicly at that time.

Plans for covered bonds by other European issuers may also be in the works.  In mid-January, Germany's Commerzbank publicly announced its intention to launch a U.S. dollar-denominated Pfandbrief (German legislative covered bond) in this calendar year — although the timing is now reportedly more in question.

In their previous history, European banks have issued only a handful of U.S. dollar-denominated covered bonds — and none since 2007:

• In November 2006 — following Washington Mutual's success in launching the first U.S. covered bond program — Germany's Hypothekenbank in Essen reportedly managed to sell about 55% of a Pfandbrief (German legislative covered bond) issue, backed by public-sector obligations, to the U.S. institutional investment community. 

• Later the same month, the UK's HBOS launched a $2 billion issue that Euroweek called "the first purely residential [European] mortgage backed covered bond dollar benchmark targeted at the U.S." — of which 76% reportedly was sold here. 

• The last such European USD CB issuance until the CFF deal was reportedly a $1 billion issue from a Spanish bank — Banco Bilbao Vizcaya Argentaria SA (BBVA) — in July 2007.

Covered bonds are dual-recourse debt obligations that give an investor recourse for payment both (1) directly against the issuer and (2) to a pool of assets — the cover pool — that secures or "covers" the bond if the issuer becomes insolvent.  Still little known in the U.S., they are widely used in Europe for real estate and public sector financing.