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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