10/28/2011

French Conduits See Blowout in Spreads

It is becoming a lot more expensive for U.S. lenders to fund their operations via commercial-paper conduits run by big French banks.

Overnight paper issued by the U.S. conduits of BNP Paribas, Calyon, Natixis and Societe Generale is going out the door at 55-60 bp over three-month Libor. Including fees charged by the banks, the total funding cost for a conduit customer is now about 110 bp of the amount raised. By comparison, overnight notes from a top U.S. issuer such as J.P. Morgan are selling at spreads of 10-15 bp, for a total funding cost of about 60 bp.

Around midyear, French banks were paying about the same amount as their counterparts in the States. Spreads gradually widened from there, but didn’t start blowing out dramatically until a few weeks ago.

The sharp rise in spreads among the French conduits reflects weakening demand due to investor fears about exposures to troubled sovereign debt in Europe, in the latest example of how the nations’ banks are feeling the effects of the region’s fiscal crisis. Money-market funds that reliably snapped up the vehicles in the past have stopped buying in recent weeks. Indeed, at this point, BNP, Calyon, Natixis and SocGen are having difficulty selling anything but overnight notes.

“The French conduits are just getting battered,” one market player said.

With European leaders reaching a tentative deal to solve the debt crisis on Oct. 27, French bankers have reason to hope that investors will soon re-embrace their conduits. Were the sovereign-debt uncertainty to continue, their conduits would likely experience a larger exodus of customers — raising the prospect of a steep decline in the amount of paper outstanding.

But the question remains: How much of a hit will the French banks take due to their exposure to Greek bonds? SocGen has disclosed holdings of about €2 billion ($2.8 billion) of Greek debt, while BNP’s exposure is about €4 billion and Calyon parent Credit Agricole’s is about €800 million. Equity analysts point out that Credit Agricole’s and SocGen’s exposures are actually far higher, thanks to ownership stakes each one has in a Greek bank. SocGen acquired a stake in Geniki Bank in 2004, while Credit Agricole owns a majority of Emporiki Bank.

For their part, the banks contend that investors’ sovereign-debt fears are overblown. Most money-market managers remain willing to buy their conduit paper, but are being pressured by their institutional clients to shun it. What’s more, some loyal conduit investors continue to buy longer-dated notes with maturities of up to 30 days.

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