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Capital Markets Weekly: Underpinned by central bank quantitative easing, bond markets indicate recovering risk appetite
There are three key developments to flag this week:
- Expanded and successful debt issuance in multiple segments, indicating further improvement in risk appetite, with markets underpinned by sizeable and broad-reaching quantitative easing measures globally.
- Underlying debt sustainability indicators are worsening substantially given the sharp decline in fiscal revenues and increased government spending in response to the COVID-19 pandemic. According to Vitor Gaspar, director of the Fiscal Affairs department of the IMF, the IMF is now projecting a 13-percentage point increase in the global debt to GDP ratio, "substantially more than in 2009 at the peak of the global financial crisis". This is projected to expand 17 percentage points in advanced economies, 9 percent in emerging markets but only 4.5% of GDP in low-income developing countries, highlighting their lower response capacity.
- The G20 meeting did approve debt relief for IDA countries as previously jointly requested by the IMF and World Bank, also calling for private-sector bondholders to offer similar relief, with the IMF taking additional steps to expand its provision of liquidity and concessional finance.
Sub-investment grade debt
On 13 April, the US high yield market revived with over USD2 billion in new debt sales.
Burlington Stores, Inc. raised USD300 million of 6.25% five-year debt and a USD700 million convertible issue with a 2.25% coupon and 32% premium: other borrowers included Cinemark, a cinema operator, Sabre (which operates travel-related technology), TransDign (an aerospace firm) and Ferrellgas, a propane manufacturer.
The first three deals were all on a secured basis, with Cinemark and Sabre offering coupons of 8.75% and 9.25% respectively.
The average spread on high yield bonds has fallen to 8.2 percentage points over US Treasuries versus its 23 March high of 11.4 percent, while the average secondary leveraged loan price has improved over the same period by ten percentage points to over 86% of nominal value. The renewal of junk issuance followed the Federal Reserve's move last week to include Exchange Traded Funds that buy sub-investment grade debt within the list of eligible assets for quantitative easing purchases.
As an adverse indicator for high-yield sector default risks, JC Penney missed payment of a bond coupon on 15 April. It has some USD3.7 billion of outstanding bonds.
Santander México, 92% owned by Banco Santander, successfully reopened the Latin American debt market on 14 April. It sold USD1.75 billion of five-year debt at 5.375%, versus initial guidance of 6%, after gaining an impressive USD6 billion in demand.
Malaysian state oil company Petronas has sold a USD6 billion package, its first issuance since selling USD5 billion in March 2015. On 15 April it placed USD2.25 billion of 10-year bonds at 3.65%, USD2.75 billion of 30-year debt at 4.55%, and USD1 billion for 40 years at 4.8%. In a statement the company noted that demand reached USD37 billion, "one of the largest order books for an Asian issuer ever".
Saudi Arabia has followed Qatar and UAE in issuing multi-tranche sovereign debt. On 15 April it sold USD2.5 billion of 5.5-year debt, USD1.5 billion for 10.5 years and USD3 billion for 40 years: the tranches were priced at 260 and 270 basis points for the two shorter portions and 4.55% for the long-dated bond. Demand reportedly reached USD54 billion.
To fund its COVID-19 response, World Bank brought the largest agency bond to date, a USD8 billion five-year sustainable development bond (SDB) sold on 15 April at 0.704%, for which it gained USD12.4 billion in demand. In a statement, it described this as "extremely strong demand" and its "largest orderbook": demand was obtained from 190 accounts, led by central banks and bank treasuries.
It is also funding in Euros and sterling which will similarly be used to fund health and wellbeing projects. The sterling bond was for GBP1.5 billion: the three-year offering gained GBP1.8 billion in demand from 60 investors and was priced at 0.544%.
Prior to this issuance, World Bank described itself as the "largest single provider of financing" for projects that "deliver social impact worldwide", noting an ongoing commitment to over 100 new projects annually with aggregate value of over USD22 billion.
Greece launched a seven-year benchmark sale on 15 April, with initial price guidance of mid-swaps plus 230 basis points. The issue reflects the country's increased fiscal outlays to address COVID-19: measures taken in an initial phase to April cost around EUR7 billion. It gained EUR6 billion of demand for the EUR2 billion offering, which priced at a 220-basis point margin, but demand fell well short of levels enjoyed in prior sales, such as the EUR14 billion of interest for its 15-year syndicated offering in January 2020.
Implications and Outlook
The diverse calendar indicates a revival in bond-market risk appetite, showing the effectiveness of very sizeable global quantitative easing initiatives in helping to stabilize global debt demand.
In particular, the Federal Reserve's decision to extend its purchases to funds that buy junk bond debt appears to have contributed rapidly to an improvement in sentiment in that sector, driving a significant tightening in spreads from their late March peak.
Santander México's bond sale was a clear success and a positive indicator for some revival of issuance from the region. It comes as a positive sign after two difficult months, in which regional access to market and banking finance fell sharply.
Even if market access improves for Latin American and other emerging market borrowers, funding pressures also will grow. A World Bank forecast suggests the Latin American region faces a 4.6% decline in GDP during 2020, with its Vice President for the region, Humberto López, calling for further state intervention to "guarantee that financial markets and (key) employers can weather the storm", while seeking state support for financial institutions and companies of crucial importance to employment.
IHS Markit views the G20 debt relief initiative as risk-positive in that it should alleviate default risks in the world's poorest countries. After initial signs of pushback, we note its statement refers to all official lenders, which would include China, which had previously suggested a preference to assist bilaterally in debt restructuring initiatives. The statement also encourages private-sector lenders to undertake parallel measures, but we continue to view this as harder to arrange.
It is also risk positive that the IMF is working towards an increase in SDR quotas and plans to expand its liquidity provision and concessional funding, all of which should help debt sustainability in recipient countries.
As a further positive indicator in this regard, Asian Development Bank also has expanded its response package to COVID-19 from the USD6.5 billion announced on 18 March to USD20 billion. Its latest estimate projects regional growth to decline from 5.2% to 2.2% in 2020.
World Bank's record-sized issue - which also gained its largest order book to date - is a further positive indicator of the strong official response to the COVID-19 crisis.
Less positively, the IMF forecasts highlight the severity of the pandemic's longer-term impact on global debt sustainability. Near-term, markets appear well-supported by central bank intervention, but countries with higher debt-to-GDP ratios are likely to face eventual market scrutiny and pressure for fiscal consolidation to preserve debt sustainability. While Italy, Spain and Greece all have achieved successful new funding recently, longer-term challenges lie ahead.
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- Regional manufacturing indexes begin long road back in May
- Capital Markets Weekly: Three emerging market defaults likely without triggering wider flight from asset class
- Weekly Pricing Pulse: The rebound begins to look more convincing
- Measuring country risk from the bottom up results in opportunities
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