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The loss of a full set of investment-grade ratings for Colombia
after S&P's downgrade last week was reflected by its EMBI
spread (the average margin of its reference bonds versus US
Treasuries) reaching 263 basis points on 25 May, a 2021 high,
versus a 2021 low of 210 basis points on 8 January and 217 basis
points on 10 May (prior to withdrawing its planned fiscal austerity
program in response to protests). The adjustment is relatively
modest and remained below the 272 basis point margin reached in
late September 2020, or its one-year peak of 307 basis points last
June, suggesting that the loss of investment-grade status had been
widely anticipated, and indicating the relatively strong current
demand for split-rated and stronger sub-investment grade credits.
Nevertheless, further adverse rating changes are widely
forecast.
Abu Dhabi completed a USD2 billion seven-year offering. The
issue priced at 1.676%, 45 basis points over US Treasuries, versus
initial price talk of a 70-75 basis point spread, with peak demand
of USD6.9 billion.
Oman Arab Bank sold a debut perpetual bond. The USD250 million
issue gained USD1.1 billion in demand, pricing at 7.625% to the
initial five-year call versus 8% initial price talk.
Mamoura, the issuing vehicle of Abu Dhabi's state fund Mubadala,
sold a USD1 billion Taiwan-targeted 30-year bond at 3.4%, versus
3.7% guidance, and paid USD500 million for ten years at 2.532%, 95
basis points over mid-swaps and 35 basis points tighter than
guidance. The package attracted USD5.7 billion of demand.
ESG
Pakistan Water and Power Development Authority gained over
USD2.2 billion in demand for its debut Green Bond, the first from
Pakistan. The USD500 million ten-year deal was priced at 7.5%
versus low 8% guidance. Eligible projects include hydro and
wind-powered power schemes.
Multiple European borrowers sold ESG debt on 26 May. Those
issuing included EDF with a social hybrid issue, Dutch electricity
firm Tennet with a three-tranche Green package, UK property
logistics firm Tritax Eurobox with Green debt, and Wendel, a
sub-investment grade French holding company. Additionally, Helaba
sold eight-year Green non-preferred debt, its first such issuance,
and CaixaBank sold Green bonds in sterling, placing GBP500 of 5.5
year bonds (first callable after 4.5 years) at a 1.5% coupon.
EDF's EUR1.25 billion 2.625% perpetual issue is first callable
after seven years. Proceeds may be used for eligible projects
including contracts with SMEs. In its statement, EDF claimed the
deal to be the first benchmark sale of social bonds by a utility
and the first social hybrid bond globally.
Canadian shipping group Seaspan has arranged a USD500 million
private placement of sustainability-linked debt. The package
includes 10, 12, and 15-year liabilities, priced at 3.91%, 4.06%,
and 4.26%. Global Capital reported that over 20 investors
participated.
Other debt
Bank supply remained active. On 24 May, JP Morgan issued a
further USD4.5 billion of four- and seven-year debt, including two
USD2 billion fixed-rate tranches and a USD500 million SOFR-linked
floating rate note. The fixed-rate bonds priced at 0.824% and
2.069%, 50 and 80 basis points over US Treasuries and 20 basis
points inside initial price talk on both tranches. On the same day,
UBS sold USD3 billion of debt: USD1 billion each of fixed and
floating-rate debt and a five-year bond at 1.33%, 19.5 basis points
inside initial guidance of 70-75 basis points over US Treasuries.
Bank of America also issued, placing a USD1.25 billion three-year
FRN.
UBS Group placed a USD750 million perpetual deal - first
callable after five years - at 3.875%. Initial guidance had been
set at 4.25%.
Deutsche Bank raised USD1.5 billion on 25 May, with an 11-year
deal priced at 3.035%.
Westpac also was active, selling fixed and floating rate debt
for five years and a 10-year deal at 2.157%, 60 basis points over
comparable US Treasuries, and 27.5 basis points inside initial
price talk. It gained USD8 billion of demand for the USD2.75
billion package.
They were followed by Morgan Stanley, which sold USD3 billion of
4-year debt (first callable after three years) on 26 May. The issue
priced at 0.79%, 48 basis points over comparable US Treasuries, and
17 basis points inside guidance.
CK Infrastructure, 71.9% owned by CK Hutchison, sold a USD300
million perpetual issue first callable after five years at 4.2%
versus price talk of 4.5%, with demand exceeding USD1.2 billion.
The deal has its coupon fixed for life, an unusual feature in Asia
last used by CK Asset (within the same group) in September
2020.
AstraZeneca arranged a USD7 billion six-part bond sale ranging
from three to 30 years, with coupons extending from 0.3% to 3%.
According to IFR, demand exceeded USD38 billion. Proceeds will help
to fund the USD39 billion purchase of Alexion, a Boston-based US
biotech firm.
On 21 May, Unicredit announced that after posting a EUR2.79
billion loss for 2020, it will not pay a May coupon payment on
EUR2.98 billion of legacy instruments called CASHES (convertible
and subordinated hybrid equity-linked notes), saving some EUR120
million in debt service if it continues non-payment through 2021.
This reverses a February briefing to analysts by CFO Stefano Porro
that the bank had expected to make payments thereon despite its
losses, and despite measures, it took in 2020 permitting it to make
payment on the issue if lossmaking. The bond is a legacy instrument
issued in 2008: payments thereon were suspended previously when the
bank suffered losses.
More constructively, Unicredit showed that its access to senior
debt was unaffected by launching a USD2 billion two-part senior
deal on 26 May, comprising six and 11-year debt callable after five
and ten years respectively. It priced the two tranches at 1.928%
and 3.127%, 120 and 155 basis points over comparable US Treasuries
and 25 basis points inside initial guidance.
Implications and outlook
The lowering of Colombia's bond rating is an adverse development
and highlights the political difficulties that countries in the
region - and elsewhere - are likely to face in attempting to
restore fiscal and external debt sustainability through austerity
policies after the COVID-19 pandemic is controlled.
Popular pushback to higher taxation on lower-income groups in
Colombia is unsurprising, but the outcome risks pushing the
government to increase the burden on the corporate sector, and on
wealthier individuals, but with the consequential risk that this
discourages capital formation and FDI, in turn slowing economic
recovery prospects. Conversely, failure to improve fiscal capture
would increase debt-service burdens and the risks to debt
sustainability. Colombia is one of many countries globally facing
such challenges for post-COVID recovery.
The modest initial market reaction to Colombia's downgrade does
not offer grounds for complacency. The eventual US tapering of
monetary easing measures and an eventual move to rising policy
rates are likely to increase investor selectivity and curtail
appetite for riskier credits as returns improve on completing safer
asset classes. Tougher times lie ahead for weak credits and those
on a declining trajectory.
Over the next 12-18 months, there appears to be a good
probability that US and European rates would continue their recent
upward trend. However, the continued sales of perpetual debt, Abu
Dhabi and Mamoura's successful access to the market, and the strong
response to AstraZeneca's package all indicate that risk appetite
currently remains reasonably sound.
Unicredit's decision is a useful reminder that deeply
subordinated bank instruments are highly risky and subject to
non-payment when banks face capital pressure or other conditions
specified in the issue. The main implication for Unicredit is
reputational damage, which may hinder its ability to issue new AT1
and subordinated debt, although most of its outstanding junior debt
barely reacted to the news. The decision not to pay the current
coupon is a clear adverse development: an interesting indicator
will be whether it decides to pay others due in 2021 to avoid
hurting its market standing (as occurred when Banco Santander
elected not to exercise an initial call on an AT1 bond but reversed
its stance shortly thereafter). Unicredit remains a leading bank in
Italy and its stance appears designed to strengthen its capital
position through the savings made, so damage should prove
temporary. Its successful sale USD2 billion of senior debt so
promptly after the announcement is a clear indicator of market
resilience.
Posted 28 May 2021 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, S&P Global Market Intelligence