BNP Paribas SA, Societe Generale SA, Credit Agricole SA and Groupe BPCE, France’s biggest banks, are struggling to fund about 37 billion euros ($48 billion) of debt payments due in the first quarter.
As their access to U.S. dollar short-term funds dries, and faced with soaring costs in the bond market, French lenders are raising money by selling their debt through structured products and issuing bonds backed by mortgages on properties in Paris and regions including Cote-d’Azur, the French Riviera playground of the rich. They may also tap the three-year European Central Bank facility, which opened today.
“It’s gotten harder and harder to get refinancing on the markets, and as time goes by rating agencies are taking negative actions, pushing up already high funding costs,” said Jacques- Pascal Porta, who helps manage 500 million euros at Ofi Gestion Privee in Paris and owns BNP Paribas shares.
French banks’ credit ratings were cut this month by Moody’s Investors Service, which cited funding constraints and a worsening European debt crisis. Their ability to raise money is limited by their public and private debt holdings in the five countries at the heart of Europe’s crisis — Greece, Portugal, Ireland, Spain and Italy — which as of June were the world’s biggest at $681 billion. Also, with France’s AAA rating at risk, the state may find it hard to aid them like it did when Lehman Brothers Holdings Inc.’s collapse sparked a crisis in 2008.
European banks overall will have about 300 billion euros of redemptions in senior debt and covered bonds in the first three months, the most in the past two years and the highest quarterly amount in 2012, according to Barclays Capital estimates.
BNP Paribas, France’s largest bank, has 15.7 billion euros coming due between January and March, or about half of its annual redemptions, while Societe Generale, the second-largest, has 6.6 billion euros, according to data compiled by Bloomberg.
The region’s crisis dried up the banks’ access to short- term U.S dollar funding, with the eight largest prime U.S.
money-market mutual funds cutting holdings of French bank debt by 68 percent in November. They have reduced the debt holdings by $76.8 billion in the past 12 months.
French banks’ woes have also moved to longer-term debt. BNP Paribas and Societe Generale, which got more than 30 percent of their 2011 medium- and long-term refinancing through senior debt sales, said they haven’t tapped the market since the summer.
BNP Paribas, which completed its 35 billion-euro medium-and long-term funding plan in July, sold 8 billion euros in debt by the end of October through private placements, distribution in networks and home-loan covered bonds. It has achieved about a third of its 2012 medium- and long-term funding program.
Societe Generale has shrunk its 2012 long-term refinancing plans by about 50 percent to up to 15 billion euros, and said its needs are “fully achievable.” The Paris-based bank, with 21.8 billion euros of redemptions next year, its highest annual amount, said it has a “regular repayment schedule, with more than 65 percent of the outstanding maturing beyond 2013.”
French banks, like other lenders across the euro region, might be able to tap the ECB’s funding window.
The ECB, while balking at broadening its sovereign bond- buying program, today begins offering unlimited funding against collateral for as long as three years in President Mario Draghi’s effort to get cash flowing in the financial system.
The decision gives “some comfort” to European banks, allowing them to keep lending and avoid a credit crunch, Societe Generale Chief Executive Officer Frederic Oudea, who also heads the French Banking Federation, said in a Dec. 16 interview on BFM radio. Banks may also use the window to meet funding needs.
“There is no reason not to tap it because it’s a way to secure one’s 2012 financing program,” Oudea said.
The Frankfurt-based ECB awarded 489 billion euros in 1,134- day loans, more than economists’ median estimate of 293 billion euros in a Bloomberg News survey. The ECB said 523 banks asked for the funds, to be lent at the average of its benchmark rate, currently 1 percent, over the period of the loans.
The ECB loans come with an expectation from European governments that banks will buy sovereign bonds, which they may be reluctant to do. As a consequence, for now “the question is when banks will be able to issue term debt again,” said Jean- Marc Moriani, founder of advisory firm JM Conseil and a former head of Natixis SA’s investment-banking unit.
Senior bond markets for European banks have been almost shut since investors were forced to write down Greek sovereign debt in July. European Union leaders raised the level of Greek debt writedowns for bondholders to 50 percent in October.
Spreads on euro-denominated bank bonds have widened to 424 basis points, from 235 basis points on Dec. 31, 2010, Bank of America Merrill Lynch’s EUR Corporates, Banking Index shows. As the cost of raising money in the bond market soars, banks will cut sales by 60 percent in Europe next year, Societe Generale predicted last month in a European credit research note entitled “Rotten to the Core.” Banks will sell 50 billion euros of senior notes, down from a euro-area low of 121 billion euros so far this year, the note said.
French banks have sold at least 14 billion euros of debt to cover next year’s needs, or 20 percent of their 2012 long-term funding programs, which on average they’re reducing by 40 percent, according to estimates from Guillaume Tiberghien, a London-based analyst at Exane BNP Paribas.
“When debt expires, it doesn’t mean that they need to issue immediately,” Tiberghien said in a phone interview. “Right now, long-debt markets aren’t really open, but when things reopen, it will be first covered bonds.”
Covered bonds, or securities backed by mortgages or public- sector loans as well as the borrower’s guarantee, will be the only type of debt whose sales may not fall in Europe, Societe Generale analysts estimated. There may be 185 billion euros of such debt sold in 2012 compared with 183 billion euros by November, they estimated.
“It’s a safe product, given the French banks’ origination quality in residential real estate,” Moriani said. “One will see how much they can still issue.”
BNP Paribas, Societe Generale, Credit Agricole and BPCE have AAA-rated covered-bond sales units that use home loans to back debt. Societe Generale got 19 percent of its funds from covered bonds in 2011; for BNP Paribas, it was 18 percent.
Private placements accounted for 29 percent of BNP Paribas’s funding needs, while placements through networks made up 17 percent. Societe Generale got the biggest chunk of its funding, or 42 percent, from structured private placements.
Meanwhile, banks and the French government have dismissed any talk of possible state support for lenders.
“The extreme solution would be that the state put in place refinancing guarantees like it did after Lehman,” said Ofi Gestion’s Porta. “But this time that would have a perverse effect, with rating agencies ready to cut sovereign grades.”
France provided about 20 billion euros to boost capital at its largest banks after Lehman’s September 2008 bankruptcy. President Nicolas Sarkozy also set up a 320 billion-euro contingency fund to guarantee bank debt.
Now, with France’s top-notch credit rating at risk, the government may find its hands tied. France’s credit outlook was cut by Fitch Ratings on Dec. 16 on the “heightened risk of contingent liabilities” from the escalating euro-region crisis.
Standard & Poor’s and Moody’s are reviewing France’s ratings. French banks’ external debt is about 104 percent of the country’s gross domestic product, with 60 percent being short- term, “implying sizable external refinancing needs for the French banking sector in 2012,” S&P estimated Dec. 5.
S&P on Dec. 7 placed ratings of BNP Paribas, Societe Generale, Credit Agricole and BPCE on watch for a possible downgrade. Moody’s cut its ratings on BNP Paribas, Societe Generale and Credit Agricole on Dec. 9.
“Liquidity and funding conditions have deteriorated significantly,” Moody’s said in its statement. The likelihood that they “will face further funding pressures has risen in line with the worsening European debt crisis.”