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Capital Markets Weekly: CMBS record sale and sub-1percent corporate perpetual issue highlight yield appetite

21 October 2019 Brian Lawson

This week's highlights include 22 and 31-year debt by Ivory Coast, a sub-1% yielding perpetual issue for Deutsche Bahn, a record post-crisis commercial mortgage backed sale for Blackstone, and multiple Italian sales including a large toll-road project bond.

Emerging markets

The emerging market issuance calendar includes a broad range of credits and maturities:

  • Ivory Coast sold Euro-denominated debt maturing in October 2031 and 2040. It raised EUR850 million due in 2040 at 6.875%, and EUR850 million of 2031 debt at 5.875% with an issue price of 99.015%.
  • Banque Ouest Africaine de Développement (BOAD) is seeking long-dated dollar-denominated issuance.
  • Pearl Petroleum, which operates in the Kurdistan region of Iraq as an energy producer and power generator, has mandated banks for a debut bond issue. It started marketing on 14 October.
  • The Emirate of Sharjah is preparing a 10-year dollar-denominated sukuk deal. In late March it raised a seven-year USD1 billion sukuk, gaining demand of over USD4.3 billion.
  • Bank of China's Macau Branch sold a USD960 million multi-currency green package. This included a SOFR-linked tranche, the first Asian bond to use the new US overnight reference rate.
  • Thai Oil has raised USD565 million of 30-year debt at a 3.5% coupon and issue price of 99.595%.
  • Ukrainian sunflower oil producer Kernel has raised USD300 million of five-year non-call two-year debt: the issue is callable at 103.25% in year three and 101.625% in year four, with a par call option in the final year. The offering initially targeted USD300-350 million at price guidance of 6.75% area, revised after claims over oversubscription to 6.625-6.75%. It was priced at 6.5% with an issue price of 99.475% to yield 6.625%.
  • Russian potash producer Uralkali has priced a USD500 million five year deal with a 4% coupon.

Other debt

Portugal's first auction after its general election was held on 9 October. It sold a EUR750 million tap of its 2.25% 2034 issue, which cleared at 0.49%, with demand of EUR1.855 billion. On 11 September it had tapped the same issue, placing EUR400 million at 0.676%, with demand of EUR919 million. On the same day, its 10-year bond closed at 0.14%, one basis point below the Spanish equivalent. This inversion of the traditional relationship between Spanish and Portuguese yields has remained in place: as of 15 October, Portugal's 10-year bond was trading three basis points tighter.

On 10 October, Ireland gained over EUR11 billion in demand for a EUR2 billion tap of its 2031 Green Bond at 0.229%, with over 130 accounts involved. 43% was placed with asset managers and 24% with banks: the Nordic region and UK, with 24% and 19% respectively led within the order book. The original sale, on the same day in 2018, also raised EUR11 billion in demand - from 170 accounts - clearing at 1.399%.

Italy's Societa di Progretto Brebemi, which operates the toll motorway from Milan to Brescia, has issued one of Europe's largest project finance debt deals. It raised a package of EUR2.1 billion, which included senior secured debt maturing in 2038 and a zero-coupon bond due in 2040, alongside a subordinated ten-year tranche. The issue will refinance debt obtained by the company in 2013, during the project's construction phase.

Italian payment system operator Nexi S.p.A., which was floated earlier this year, has raised EUR825 million of senior unsecured 2024 debt at 1.75%. The company's statement highlights that the proceeds will repay its EUR825 million 4.125% 2023 secured debt. The transaction has multiple benefits: it "results in an unsecured capital structure, extends the tenor of the Group's debt, achieves a coupon that significantly reduces the cost of debt for the Group and sets a new benchmark as the lowest yielding bonds issued by the Group".

Blackstone has sold USD5.6 billion of commercial mortgage backed securities: the deal offered eight distinct classes of risk, including USD2.57 billion of AAA-rated notes. The issue is the largest CMBS deal since the financial crisis according to Global Capital website. The issue was supported by a portfolio of recently-acquired warehouses.

Deutsche Bahn has sold EUR2 billion of perpetual debt, with demand exceeding EUR 8 billion. The deal was in two tranches, callable after 5.5 and ten years: the former was priced at 0.95%, the first sub-1% yielding corporate perpetual deal. The longer tranche priced at 1.6%.

German technology company ZF Friedrichshafen sold a four-tranche package totaling EUR2.7 billion with maturities from four to ten years. The issue completed the refinancing of debt incurred in the acquisition of brake manufacturer Wabco.

Sustainable and green debt

Enel has sold its EUR 2.5 billion three-tranche "sustainable" bond, which attracted over EUR10 billion in demand, showing little investor concern over its structure. It placed EUR1 billion each of June 2024 and June 2027 debt at 0.189% and 0.474% respectively, and EUR500 million of 2034 debt at 1.204%. Each tranche is linked to a specific UN Sustainable Development Goal target with a 25-basis point step up in coupon for failure to meet a sustainable energy goal by end-2021 in the case of the first two tranches, and a climate action goal on carbon dioxide emissions for the longer-dated portion triggered by underperformance at end-2030.

Caisse Francaise de Financement Local (CAFFIL) has presented a new framework for Green covered bonds, which it is marketing to investors. Unusually for such asset-backed instruments, the new program is secured on public sector assets, which Global Capital claims to be unique for Green covered debt.

Implications and outlook

This week's deal flow reinforces our ongoing recent message that renewed policy easing in both European and US markets is impacting the nature and configuration of bond investment patterns:

  • This week's calendar included the first sub 1% yielding perpetual issue, and longer-dated issuance by Ivory Coast, including a 21-year tranche. Thai Oil's 30-year bond is a further positive indicator of revived demand for longer-dated risk instruments.
  • Despite prior concerns about Enel's use of a sustainable rather than the more tightly-defined Green bond structure, its Euro-denominated sale was impressive both for the amount raised and the heavy oversubscription received.
  • Within Europe, perceptions of Italy as an investment destination with an attractive risk/reward balance are increasing, indicated by the range of Italian supply this week. In addition to the issues specifically listed, Italian bank financings also continue to be well received: a UBI Banca EUR500 million 5.5-year deal attracted peak demand of EUR1.4 billion.
  • The Brebemi project bond further reinforces the positive trend relating to Italian risks, but also suggests that the search for yield may be increasing investor willingness to accept risk exposures on individual projects. Such investment has been constrained in the past by investor hesitancy over the ability to monitor and mitigate risks in individual projects, and by problems with some high-profile project-related financings, such as Spain's Castor ill-fated gas deposit project, which enjoyed structural support from the European Investment Bank, and the failure of multiple toll road projects in the same country.
  • The appetite for risk is further confirmed by Blackstone's post-crisis CMBS record deal. While market structures are now considerably less aggressive than pre-2008, USD5.6 billion is an impressive amount to obtain from a single CMBS transaction.

Posted 21 October 2019 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, IHS Markit


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