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On 6 September, US holding company Berkshire Hathaway sold a
record-sized Yen deal for a foreign company. Its JPY 430 billion
(USD4.04 billion) six-tranche global yen offering included
maturities of five, seven, 10, 15, 20 and 30 years, at coupons from
0.17% to 1.1%. Total corporate supply on the day reached JPY1.7
trillion (USD16 billion), with SoftBank Group placing JPY500
billion of debt and Mitsui Fudosan and Nippon Steel also issuing.
According to the Financial Times, the single day's supply equated
to 15% of total corporate bond sales in 2018. Dealogic data shows
total Samurai supply (foreign bonds sold under Japanese domestic
documentation) reached USD6.49 billion by end-August, surpassing
the USD4.99 billion record from calendar 1996.
Emerging markets
Mexican state energy firm Pemex announced on 11 September that
it has received a state capital injection of USD5 billion, which it
will use to prepay debt due between 2020-2023. It also announced
plans for a new USD5 billion issue of seven, ten and 30-year debt
to refinance short-term liabilities, and a voluntary bond exchange
program designed to smooth its maturity schedule. According to the
Financial Times, this is likely to target debt maturing in 2022-25
and 2041-48, "to ease the repayment pressure".
It went on to sell an upsized USD7.5 billion package, with total
demand of USD38 billion, the largest ever achieved by Pemex
according to its statement. This included USD3.25 billion for 10
years at 6.85% and USD3 billion for 30 years at 7.7%.
Mexican companies completed three other international
transactions last week. After Grupo Bimbo's success early in the
week, BBVA Bancomer and Industrias Peñoles sold a combined USD1.8
billion of debt, the former in the form of USD750 million dated
subordinated Tier 2 debt of 15-year tenor, first callable after 10
years, priced at 5.875%. The mining and chemicals company raised
USD1.1 billion divided equally between 10 and 30 years, priced at
4.15% and 5.65% respectively. It was followed by Alpek, a
petrochemical firm, which raised USD500 million at 4.285%,
tightening pricing from 287 basis points over US Treasuries to 255
b.p.
On 11 September, Nigerian telephone towers group IHS raised
USD500 million of 7.125% five-year debt and an upsized USD800
million 8% eight year tranche, expanded from USD500 million to
reflect demand.
Jamaica also is in the market, with a USD805 million tap of its
7.875% 2045 issue, with the proceeds slated to redeem expensive
outstanding debt.
India's Power Finance Corporation gained USD4 billion in demand
for a USD750 million two-tranche bond sale, following a similar
USD1 billion operation in June. It priced USD300 million of
five-year bonds with a 3.25% coupon, and USD450 million for 10
years at 3.9% coupon.
Russian steel firm Severstal launched a five-year dollar deal,
with initial price guidance of 3.5% area, and went on to price
USD800 million at 3.15%. This is described by Global Capital
website as the lowest coupon on record for a corporate bond from
the region. It was followed by Chelpipe, which attracted USD1
billion for its USD300 million five-year international debut,
priced 4.5% versus 4.75-5% initial guidance. Ukrainian meat
producer MHP gained USD1.7 billion of demand for a ten-year USD350
million deal: guidance was tightened from 7% to 6.5-6.625%.
Other debt
The US high grade market started the week by continuing the
prior week's high activity levels. 17 new deals were launched on 9
September, alongside five sub-investment grade offerings.
German state agency KFW has raised USD2 billion with a ten-year
green issue, the largest agency Green bond to date, which gained an
impressive USD4.8 billion of demand.
Despite severe Brexit-related uncertainties in the UK, a
syndicated GBP4 billion reopening of the UK's 1.625% 2054 gilt was
strongly received. The issue was priced at 0.5 basis points over
the yield on the UK's 3.75% 2052 issue, the tight end of guidance.
The issue price of 115.557% implied a 1.091% yield to maturity.
Demand reached GBP25.8 billion in 85 orders with 81% from domestic
buyers. The UK's Debt Management Office noted that this latest sale
raises GBP4.6 billion: long-dated gilt sales in the current
financial year have reached GBP20 billion. Overall gilt sales for
fiscal 2019/20 now total GBP61.1 billion versus a target of
GBP117.8 billion.
Our take
Last week's corporate supply, aggregating supply in the US
Dollar, Euro, Yen and other segments, reached a record USD140
billion. The record was noteworthy for having been reached without
including jumbo acquisition-related issuance. US investment grade
companies raised USD72 billion from 45 deals, roughly equaling the
total supply during August in just the four working days after
Labor Day.
The main attraction of Berkshire's Yen sale for domestic
Japanese institutions was its yield: the JPY146.5 billion ten-year
tranche offered a return of +0.44%, versus around -0.25% on
domestic JGBs (domestic government bonds) of comparable maturity,
for a relatively well-known name of high credit standing. Other
well-known US corporates like Apple and Proctor & Gamble also
have benefitted from Japanese institutions looking for improved
returns and diversification without excessive credit risk. The
magnitude of Berkshire's issue may encourage more international
issuance in Yen, with the Nikkei Asian Review suggesting this would
fill a structural gap, with only some 400 Japanese firms - of the
2000 listed on the first section of the Tokyo Stock Exchange -
having issued domestic bond debt. The same source notes that a few
issuers, like SoftBank, dominate large-scale issue supply in the
domestic Yen market.
Despite the investor desire to seek improved returns, Japan's
domestic market is characterized by a high degree of investor
conservatism and risk aversion. This is indicated by the minimal
development of its junk bond market, where the first such issue was
conducted by Aiful in late May. At the time, the Financial Times
highlighted that Japan's Government Pension Investment Fund had
altered its investment criteria in 2018 to permit the purchase of
junk bonds with ratings below BB, but that this has not translated
into new-found actual investment flows.
While credit diversification in Japan is limited - we have seen
no reports of further junk supply - the Yen market shows a similar
trend to Europe in its appetite for extended maturities to gain
improved returns. In June, the Nikkei Asian Review reported that
the average maturity for corporate debt in 2019 exceeded 10 years
for the first time in nearly three decades. Our Japanese economist
Harumi Taguchi notes that increased Samurai bond issuance "should
be very attractive for Japanese financial institutions,
particularly for banks and insurance companies which struggle with
the BoJ's extraordinary monetary policy".
Within Emerging Markets, the Pemex capital injection is risk
positive, and serves as further confirmation of the strategic
position and Mexican state backing for the company. Its strategy is
designed to reduce near-term repayment burdens, extend duration,
and smooth its liability schedule, all risk-positive actions.
Lastly, the UK's impressive long-dated sale shows that UK
institutional buyers - which include pension funds and insurers
with natural appetite for long dated assets - are relatively calm
about the prevailing Brexit-related and electoral uncertainties in
the UK. The volume of demand was a clearly-positive indicator: a
less encouraging indicator is that the UK has not undertaken
significant pre-funding to avoid needing to access markets during
any future Brexit-related market volatility.
Posted 13 September 2019 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, IHS Markit