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Capital Markets Weekly: Chile expands ESG issuance

07 May 2021 Brian Lawson

This week's highlights include further ESG issuance by Chile and a financial sector AT1 sustainable bond, within a busy ESG calendar, along with the positive reception on yield-driven grounds for an Australian coal-exporting facility. Greece's latest issue is its first with a zero coupon and achieved its lowest borrowing cost to date.

Emerging markets

Development Bank of Kazakhstan sold 10-year dollar debt, with initial guidance of 3.375%, alongside a domestic currency (tenge) 5-year tranche. It sold USD500 million with a 2.95% coupon, issued at 99.571%. It also placed KZT100 bn (USD232 million) with a 10.95% coupon and issue price of 99.81%.

Panama's Banco General sold USD400 million of perpetual non-call 10-year Additional Tier 1 debt. The deal was priced at 5.25% versus initial price talk of high 5-6% area, after demand reached USD1.1 billion.

Commercial Bank of Qatar gained some USD1.3 billion of demand for its sale of USD700 million of five-year bonds at 2.054%, 30 basis points inside initial guidance of mid-swaps plus 145 basis points.

ESG

A Climate Bonds Initiative Report in late April has noted social and sustainability debt grew dramatically in 2020 on a global basis. 543 issuers issued USD249 billion of social debt, increases of 1107% and 1017% respectively, while sustainability bond sales rose 131% to USD159.8 billion. 634 issuers used Green bonds, up 14%, with total issuance of USD290 billion, up 9%. In aggregate, sales in the three categories (of some USD700 billion in 20202) were almost double the 2019 levels. As a headline item, cumulative Green Bond issuance reached USD1.1 trillion (having obtained the USD1 trillion milestone in early December 2020)

Chile brought this week's sovereign ESG supply. It placed USD2 billion of debt on 4 May, comprising a USD300 million tap of its existing 2.45% 2031 issue at 2.34% and USD1.7 billion of sustainable 20-year debt to fund "eligible social expenditures", priced at 3.302%. The two tranches were priced at margins of 75 and 115 basis points over US Treasuries, respectively 25 and 30 basis points inside initial guidance.

Chile's Treasury noted in a statement that total demand had reached USD6.35 billion. From an ESG perspective, the Treasury flagged the country's ESG credentials as the only Latin American issuer of Green, Social and Sustainable debt. It notes that since 2019, Chile has issued USD16.2 billion of ESG debt, with a total ESG debt stock equivalent to 16.6% of its borrowings, "one of the highest percentages worldwide".

Shinhan Financial Group (from South Korea) sold a USD500 million sustainable Additional Tier 1 bond. The perpetual non-call five-year deal was priced at 2.875% versus initial price talk of 3.4%, with demand exceeding USD2 billion. IFR flags that the coupon is a record, with the previous low for Korean AT1 having been at 3.3%.

Corporate issuance of sustainability-linked debt has been active:

  • Late last week, Brazilian auto components firm Iochpe-Maxion sold USD400 million of seven-year sustainability linked bonds, its international bond debut. The deal was priced at 5.25% yield versus mid-5% guidance with demand of USD1.2 billion. The pricing is tied to KPIs relating to greenhouse gas emissions.
  • Mexican property firm Corporación Inmobiliaria Vesta made its international debut with USD350 million of sustainability-linked debt, pricing the ten-year debt at 3.771%, 220 basis points over US Treasuries and 30 basis points inside guidance.
  • On the same day, Mexican conglomerate Orbia Advance sold USD1.1 billion of five and ten-year sustainability-linked debt, priced at 1.898% and 3.013% respectively.
  • French glass manufacturer Verallia EUR500 million of 1.625% 2028 debt, with total demand of almost EUR2 billion. The issue has key performance indicators of achieving a 15% decline in CO2 emissions by 2025 from the 2019 baseline and a 59% (recycled) glass cullet usage level by that time, up 10 percentage points versus 2019.
  • Also on 6 May, French minerals based specialty solutions firm Imersys sold EUR300 million of ten-year sustainability-linked debt with a 1% coupon, attracting EUR1.3 billion in demand. Imersys has targets of reducing greenhouse gas emissions by 22.9% by 2025 and 36% by 2030 versus a 2018 base with 0.25% and 0.5% penalties applicable for missing the two targets.

Bucking the climate-focused trend, Newcastle Coal Infrastructure Group, which runs the Newcastle coal terminal in the Australian port of that name and connects with Hunter Valley and other coalfields by rail links, marketed a 10-year dollar deal with initial price guidance at UST + 360 basis points. It placed USD450 million at 4.792%, 40 basis points tighter than initial guidance, with demand reportedly exceeding USD2.5 billion for the BBB/BBB- rated offering.

Other Debt

Greece's latest issue has set a record low borrowing cost.

It sold EUR3 billion due February 2026, with a 0% coupon, priced to yield 0.172% 47 basis points over mid-swaps versus initial price talk of 55 basis points. Following 10 and 30-year sales in January and March Greece has now raised EUR9 billion from international bond markets this year.

The country's Debt Office statement notes that the offering is "the Hellenic Republic's first benchmark ever to achieve a 0% coupon, as well as the lowest yield ever achieved". Demand was over EUR20 billion with 140 accounts involved.

The bid for long-duration (higher yielding) assets has been strong this week, first indicated on 3 May by the sale by Norfolk and Southern, a railroad company, of 100-year debt. It placed USD600 million of 2121 bonds with a 4.1% coupon, the first 100-year US corporate sale since 2018.

ENI marketed Euro-denominated perpetual debt, first callable after six and nine years. It raised EUR2 billion split equally between the two tranches, which were priced at 2% and a 2.75% coupon and issue price of 99.607% respectively, according to ENI's statement.

It was followed by Deutsche Bank, which gained EUR5.5 billion of demand for a EUR1.25 billion perpetual non-call seven-year Additional Tier 1 deal. This was priced at 4.625% to first call, versus price talk of a 5.25% area return.

Also on 5 May, JP Morgan raised USD2 billion of perpetual non-call five-year liabilities (structured as preferred stock) priced at 3.65%, an impressive 72.5 basis points inside the initial guidance of 4.375% area.

Additionally, on 6 May, Santander sold USD1 billion of perpetual non-call six-year Tier 1 debt at 4.75%, versus 5% guidance. This was accompanied by EUR750 million of perpetual non-call seven-year AT1 priced at 4.125%, sharply inside the 5% guidance.

Equity

JD Logistics has obtained Hong Kong stock exchange approval for its proposed IPO, a spin-off by JD.com which is forecast in trade media to raise some USD3-4 billion. JD Health was floated in a USD3.9 billion offering in Hing Kong last December while the group parent raised USD4.5 billion from a secondary listing in Hong Kong in June 2020.

According to Nikkei Asia, first quarter new listings in Hong Kong reached a record USD18 billion (nine times the corresponding figure in 2020) while secondary sales reached USD47 billion, four times the 2020 level.

Our take

The aggregate data for ESG issuance is historical but indicative of a positive forward-looking trend.

This week's calendar shows largely positive indicators from an ESG perspective, including issuance of Chile's sustainability sale and Shinhan's bank AT1 deal - with the tightest Korean AT1 coupon to date, along with multiple corporate sustainability-linked sales. Counterbalancing this, the Newcastle issue showed clearly that yield hunger remains a powerful investment driver: the sale by a coal infrastructure facility of relatively generously-priced investment-grade bonds was clearly well received.

Greece's latest deal is yet further confirmation that the ECB's support for European debt markets is outweighing the deterioration in underlying debt fundamentals (from expansion of EU debt stocks given pandemic-related spending), along with its own progress in reestablishing its market standing.

Elsewhere, the latest JD Group share sale in Hong Kong, and the SAR's impressive equity volumes in the first quarter flag important funding trends in consequence of ongoing US moves to delist certain Chinese firms and to impose higher disclosure standards more widely.

Further use of Hong Kong and Shanghai as alternative sources of capital for larger Chinese firms funding appears highly likely, although this has not stopped Chinese firms from accessing US markets as well, indicated by multiple Chinese share sales on US exchanges within 2020/21.

Posted 07 May 2021 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, IHS Markit

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