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Money markets us bill supply may support repo rates rbc


* Rise in US repo rates may compress short-term swap spreads * High yield in 3-month bill sale rises on the week * ECB injection could worsen shortage of Spanish bonds in repo By Chris Reese and Emelia Sithole-Matarise NEW YORK/LONDON, July 13 The interest rate on U.S. repurchase agreements is likely to be supported in coming weeks as the supply of Treasury bills rises, which could in turn compress shorter-dated interest rate swap spreads, according to a strategist at RBC Capital Markets. A recent narrowing of shorter-dated swap spreads may be related to changing expectations for repo rates, said Michael Cloherty, head of U.S. interest rates strategy at RBC in New York. "In the upcoming weeks, a rise in bill supply is likely to keep repo elevated," Cloherty said, noting that "repo rates are highly dependent on bill supply, and bill supply is highly seasonal. "August tends to be one of the months where issuance is high, and we will see an above-average rise in bill supply this month," Cloherty said. The rate on repos secured by Treasuries dipped to 0.22 percent o n M onday from 0.25 percent o n F riday. Repo rates have generally been trending higher since touching a recent low of 0.03 percent over a year ago. Meanwhile, the spread on two-year interest rate swaps over Treasuries narrowed to 19.75 basis points o n Mo nday from 20.5 basis points on Fr iday. The two-year swap spread has generally been narrowing since hitting a recent wide of 54.5 in November, 2011. The U.S. Treasury on Monday auctioned $32 billion of 3-month bills at a high rate of 0.11 percent, up slightly from a high rate of 0.1 percent in a similar auction last week and matching the high rate in an auction two weeks ago. An auction of $28 billion of 6-month bills on Monday brought a high rate of 0.145 percent, up from a high rate of 0.135 percent in a similar auction last week and matching the high rate from an auction two weeks ago. Meanwhile, in Europe, a fresh injection of long-term ECB loans into the banking system could worsen a shortage of Spanish government bonds in the repo market, further squeezing a source of short-term funds for Spain's banks. Traders said a distortion of prices in the Spanish repo market that followed a 1 trillion euro flood of three-year European Central Bank loans in December and February could be exacerbated if the bank repeated the operation. Spanish government bonds have been in short supply in the repo market, where banks commonly use them as collateral to raise funds, since domestic banks parked them at the ECB in return for cash -- particularly the three-year loans. This prompted investors who need the bonds because of their own short positions to pay a premium for the paper. In a normal repo operation, the party needing the cash would pay the premium, but in the distorted Spanish market, it is the other way around. "In Spain there are a lot of short positions in the market ... and we're seeing the repo levels around -3 or -4 percent," a repo market trader said. A negative number means the borrower is effectively being paid to take the lender's cash. "As soon as the repo market gets to be like that, it stops functioning effectively and that has a knock-on effect in the cash market because you can't provide liquidity to clients," the trader said. ECB President Mario Draghi said earlier this month the ECB would discuss loosening its collateral rules further in September and could repeat other measures such as its long-term cheap loans, known as LTROs. "Perversely if another LTRO came in and there was a big take-up by Spanish banks and they put Spanish bonds in, the repo market could get worse," another trader said. "This is contributing to the decline of the cash market because you need the repo to oil the wheels in the cash market." Banks can repay the ECB's initial three-year loans after 12 months. But as the three-year-old sovereign debt crisis rumbles on with Spain now on the front line, analysts expect reliance by peripheral banks on the central bank to remain high. Spanish banks' reliance on ECB loans has increased in recent months, as it has for Italian banks. But unlike Spain, the Italian repo market is still functioning normally, supported by the deeper liquidity in the country's debt market.

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Rlpc investors want pricing premium for ceva sante buyout loan


Feb 24 As veterinary pharmaceuticals firm Ceva Sante Animale prepares to launch an 850 million euro ($1.17 billion) covenant-lite financing, investors are demanding that pricing reflects both the aggressive nature of the structure and the growing unease regarding French credits. Credit Agricole, Goldman Sachs, Natixis and Nomura agreed to underwrite the covenant-lite loan, which will be mainly denominated in euros and will include a dollar carve-out. The European market has previously shunned loans that do not have traditional maintenance covenants that protect investors."If Ceva's syndication is going to struggle, it will be on the grounds of its geographical location and its structure, because people have seen how structural issues make a massive difference in France. The deal is very punchy and it feels like the wrong jurisdiction to do covenant-lite. Theoretically there should be a pricing premium for it," a leveraged finance banker said. Investors have been increasingly wary of investing in France recently; the market is suffering as a result of wider macroeconomic conditions and is also a difficult region if companies default on their debt and enter restructuring, as the process has been seen as lengthy and more borrower-friendly. The Ceva loan has aggressive total leverage levels of 7.0 times EBITDA. Senior leverage is expected to be 5.25-5.5 times.

In addition, the loan will not have a 'double luxco' structure, which allows senior lenders to enforce security without going through French courts to avoid a potentially lengthy restructuring if the company defaults. The exclusion of double luxco on Ceva led some banks to walk away from the deal. With a pricing premium, institutional investors are more likely to invest in Ceva, which is a strong credit and a well-known borrower in Europe's leveraged loan market. It could also benefit from being one of a very few buyout financings in the European market. In a technical market, in which demand far outweighs supply, cash-rich investors are desperate to put cash to work, even if the terms are more aggressive than they would want.

"It is not great and the structure is not what we want to see, particularly when there has been such underperformance on portfolio deals in France. Now would be the time to reinforce your protection, but there are no deals out there, so it plays into the borrowers' hands," a loan investor said. Ceva is the ninth-largest animal health group globally and a sale of a minority stake in the company has attracted interest from several private equity firms, which are expected to submit bids in late February that could value the total company at 1.5 billion euros. Management will have a majority stake in the company and is taking a very active role in the sale and financing process.

DEAL TERMS The financing includes a 700 million euro term loan B; a 50 million euro revolver; and a 100 million euro capital expenditure facility. A Payment In Kind (PIK) loan of around 200 million euro is also included, which has been preplaced with a mezzanine fund of Ardian (formerly Axa Private Equity). The deal is due to launch for syndication at the end of March with bank meetings taking place in London and New York, when pricing will emerge. With operations in the US, the inclusion of a dollar tranche is unsurprising and opportunistic. A banker said there is always the threat that the dollar component of the deal could be increased if European investors push too far for a hefty pricing premium and effectively price the deal out of the market. ($1 = 0.7275 euros)