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Capital Markets Weekly: China successfully returns to dollar market in Thanksgiving-affected week

27 November 2019 Brian Lawson

Emerging market issuance

China mandated 13 banks on 25 November for USD-denominated issuance, opening books on 26 November and offering three, five, 10 and 20-year tranches. Initial price guidance was reported at 60, 65, 70 and 75 basis points over US Treasuries respectively for the four tranches. Final pricing was set at margins of 35, 40, 50 and 70 basis points, with books exceeding USD20 billion. China sized the deal to raise USD6 billion in total, comprising USD1.5 billion and USD2 billion for the two shorter-dated tranches: it placed USD2 billion for 10-years and USD500 million for the 20-year tranche.

Within China's domestic market, China Development Bank has filed to sell CNY6 billion (USD852 million) of debt. This is of note in that half the sale will comprise two-year floating rate notes linked to the one-year Loan Prime Rate (LPR), a central bank policy rate. The issue is the first issue by a Chinese policy bank linked to LPR. The relatively modest size involved suggests that this is a largely-symbolic step designed to increase the market's usage of LPR as a reference rate, rather than a more fundamental reconfiguration of the market. The other portion of the slated sale will comprise 10-year fixed rate debt.

Uzpromstroybank, a largely state-owned Uzbek bank preparing for privatization, has sold USD300 million of five-year debt which was four times subscribed. The sale followed a European roadshow which met 60 investors in Switzerland, Germany and the UK. On 25 November, it opened books for the deal at initial guidance of 6.5%: despite tightening to 6.375%, books reached a peak of USD1.2 billion for the no-grow deal. Pricing was then tightened to 6%, with a 5.75% coupon. In its statement, the bank noted that its success followed a USD1 billion sovereign sale of five and ten-year debt by Uzbekistan in February this year (at 4.75% and 5.375% respectively). It described its offering as providing a "benchmark for other commercial banks and enterprises" in the country.

Thailand's TMB Bank has issued Additional Tier 1 perpetual debt. According to Global Capital, despite a complex price discovery process in the absence of comparable issues from Thailand, investors elected to "lap up" the offering, which was priced at 4.9% until its initial five-year call.

Also from Thailand, state energy company PTT launched a USD650 million 40-year dollar bond at USD plus 172.5 basis points. The deal was priced to yield 3.903%.

Late last week, National Bank of Kuwait also sold perpetual debt, raising USD750 million of AT1 liabilities at 4.5%. With two weak AA-ratings, the bank is one of the highest-rated in the region.

Emerging market debt accumulation

According to the latest quarterly Global Debt Monitor from the Institute of International Finance (IIF), the stock of foreign currency debt in 30 large emerging market countries has reached a new high of USD4.7 trillion, more than double the level prevailing a decade ago. The report flags that the countries studied face redemptions of USD2 trillion in the period 2022-2022, of which USD800 billion fall due next year. It notes that this build-up implies increasing refinancing risks while "debt service costs will be an increasing constraint on fiscal policy".

Other

France's EDF has arranged a new hybrid issue, a EUR500 million issue with a 3% coupon and offer yield of 3.125%, versus initial price guidance of 3.625%-3.75%. The deal reportedly attracted EUR7.9 billion in peak demand. Proceeds will be used to tender for several outstanding hybrid deals in US dollars and Euros.

Dutch Minister of Finance Wopke Hoeksta has presented a new policy framework for 2020-25. Under the new guidelines, the Dutch State Treasury Agency is charged with extending the average life of the country's liabilities gradually to 8 years from its current 6.4 years. In its statement, DSTA states that "in this way, the current low interest rates will be locked in for a longer period". It notes that this is a continuation of prior policy frameworks, with the average life of 3.5 years in 2012 already having been extended significantly.

Equity

The completion of Alibaba's secondary sale last week (for USD11.2 billion equivalent, at a 2.6% discount to its price in New York) is forecast by Bright Smart Securities to be likely to add 10% to the trading volume of the Hang Seng index. The deal is also widely viewed as encouraging more Chinese entities which were floated on US exchanges also to seek a Hong Kong listing and to sell shares into the regional market. On 26 November, after an improvement in Alibaba's share price in New York, the deal opened at a 6.6% first-day premium.

Our take

China's decision to increase the size of its 2019 offering in the international markets appears designed to serve as a positive message to market participants, rather than reflecting any particular need for extra funding. The deal was healthily oversubscribed despite the larger size, although the long-dated (20-year) tranche appears to have fared relatively less well than the shorter-dated tranches.

Uzpromstroybank's issue is a clear success and an encouraging indicator for further issuance from the Uzbek market, which is undergoing financial reform and liberalization.

TMB's debut AT1 deal from Thailand also was reportedly well received. The move appears pre-emptive, to facilitate further development: as of 31 October the bank reported a Common equity Tier 1 ratio and total capital ratio of 13.95% and 20.25% respectively, comfortably in excess of regulatory requirements (7% for CET1 and 11% overall).

At a more aggregate level, the IIF's latest report is less encouraging, highlighting the steady build-up of emerging market debt stocks and the growing burden of debt service in emerging market borrowers. This serves to reinforce prior analysis by IHS Markit of African debt sustainability, which noted similar trends.

These concerns are greater, in our view, where international EM borrowing has been undertaken to fund existing spending and external deficits rather than to invest in key infrastructure or projects that would improve the borrower's long-term productive capacity. This risks an accumulation of debt and foreign exchange liabilities without increasing the capacity to service such liabilities.

However, given the global background of accommodative monetary policy - and scope for some further easing in key markets such as the EU - we continue expect this to result in only limited and country-specific stresses, such as currently being experienced in Argentina and Lebanon - rather than widespread investor risk reduction of exposures towards the EM asset class overall, at least in the one-year outlook.

Lastly, the Alibaba deal appears to represent a welcome boost to the Hong Kong stock market and serves as a useful precedent to encourage more Chinese firms whose primary listing is in the United States to consider a regional secondary listing. The deal also represents this year's largest equity sale to date - although this should soon be surpassed by Aramco.

Posted 27 November 2019 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, IHS Markit

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