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Capital Markets Weekly: Continued Latin American supply and perpetual AT1 sales further confirm healthy risk-appetite

08 May 2020 Brian Lawson

Emerging markets

Bahrain gained over USD11 billion in demand for a USD2 billion two-part offering comprising a 4.5-year sukuk issue and 10-year conventional funding. Pricing was tightened to 6.25% and 7.375% versus initial guidance of 6.625-6.75% and 8% area respectively.

Qatari issuers also were active:

Qatar National Bank sold a USD1 billion five-year dollar deal. After gaining USD3.75 billion in demand it was priced at a 225-basis point margin, versus guidance of 260 basis points over US Treasuries. The bank, 50% owned by Qatar Investment Authority is the largest both in Qatar and the MENA region.

Qatar Insurance sold USD300 million of 6.25% perpetual Tier 2 subordinated debt, first callable after 5.5 years. Group President Khalifa Abdulla Turki Al Subaey Group President described investor interest as "outstanding".

Chile has dominated Latin American supply this week. At sovereign level, on 5 May it sold USD1.458 billion of January 2031 debt and tapped its Euro-denominated 1.625% 2025 issue with EUR500 million. The dollar tranche attracted USD8.2 billion in demand from 250 accounts: it was priced at 2.454%, 180 basis points over US treasuries, versus guidance of 225 b.p. . The Euro-denominated tap was priced at 1.165%, 150 basis points over mid-swaps versus 195 b.p. guidance, with demand of EUR3.5 billion from 190 purchasers. The proceeds will fund COVID-19 related fiscal measures.

Previously, Empresa de Transporte de Pasajeros Metro, Santiago's metro system operator, sold USD1.5 billion of ten and 30-year debt. The two tranches were priced at 3.65% and 4.7% respectively, with total demand of over USD7 billion from 370 accounts, particularly from US, Swiss, Hong Kong and UK based buyers. Proceeds primarily will repay existing debt.

Mexico-based pan-American telecommunications firm América Móvil sold USD1 billion of 10-year debt at 2.892%, 225 basis points over US treasury bonds. Peak demand reached USD3.75 billion, permitting tightening of 30 basis points versus initial guidance. The company recently repurchased EUR1.32 billion of convertible debt. The offering achieved the firm's lowest 10-year borrowing cost to date.

On 1 May, Argentina's EMBI+ spread tightened by 12.6%, opening at 3400 basis points over US Treasuries versus an average spread of 4050 basis points the prior day: it closed at 3493b.p. The spread decline caused market confusion, as individual bonds were weaker on the day. Argentine media such as Ámbito Financiero have clarified that the movement was technical. Argentina's 2021 Global bond - one of its highest-yielding securities - was removed from the index.

On 5 May, however, markets did rally - with Argentina's 2022 issue reportedly surging 18.3% in value - after the Argentine government agreed to receive counterproposals from a major group of bondholders.

Corporate debt

The aerospace and airlines sectors were prominent:

Boeing brought a USD25 billion seven-part offering on 30 April, reportedly attracting USD70 billion in demand. The deal is this year's largest US corporate offering. Before launch, Boeing had been reported as seeking USD10-15 billion.

The offering included tranches ranging from three to 40 years, with the longest tranche priced at 4.625 percent over comparable US Treasury bonds, versus initial price talk of 5.5 percent. The company recently drew a USD13.8 billion bank facility to improve liquidity. Although Boeing retains an investment grade rating, pricing levels reflected recent concern that reduced aircraft demand and prior problems with the 737 MAX airliner, would push the firm towards sub-investment grade ratings.

IBM also placed a sizeable offering spanning four tranches ranging from seven to 30 years.

The two sales followed an unusual but impressive sale by Southwest Airlines on 28 April comprising USD2 billion each of common stock, convertible debt and conventional bonds.

The bond sale raised USD2 billion, comprising three and five-year debt with coupons of 4.75% and 5.25% respectively. The company plans to apply the bond proceeds to reduce borrowings under a 364-day credit agreement.

The above-mentioned debt offerings brought US investment grade corporate issuance to a new monthly record of USD288.9 billion according to IFR data, surpassing the prior month's record of USD259 billion. In parallel, high-yield sales exceeded USD32 billion last month, after minimal supply in March, the highest sale volume in recent years.

On 4 May, Apple continued recent heavy supply with a USD8 billion four-part offering comprising three, five, 10 and 30-year debt, priced at 0.75%, 1.125%, 1.65% and 2.65% respectively. The three-year tranche was priced at 60 basis points over US treasuries, 35 b.p. inside initial price talk, while the 30-year tranche was set at a 145 b.p. spread, versus guidance of 170 basis points. Proceeds are for general corporate purposes: the company also has USD8 billion of bonds maturing in 2020.

On 5 May, technology firm Broadcom also sold USD8 billion of debt through a three, five, 10 and 12-year package with coupons ranging from 2.25% to 4.3%. Proceeds will repay existing debt including sums due under its November 2019 credit agreement. In late 2019, it acquired Symantec's Enterprise Security business for USD10.7 billion.

Australian insurer QBE joined Qatar Insurance in selling perpetual debt, placing USD500 million of perpetual debt first callable after five years, and priced at 5.875% until initial call. The issue initially had been slated at USD400 million.

SSA

Federal Republic of Germany gained over EUR35 billion of demand for a rare syndicated offering. The 15-year deal was sized at EUR7.5 billion and priced two basis points inside initial guidance.

Finland has been taking an unusual route to cover its additional COVID-19 related funding needs. On 16 April its Ministry of Finance published its latest Economic Survey, warning that its GDP will shrink 5.5% in 2020, with its budget deficit increasing by almost EUR14 billion to EUR16.6 billion, equating to 7.2% of GDP, due to COVID-19 related extraordinary measures. To address its expanded funding need, Finland has placed EUR5.65 billion of private placements, undertaking 34 operations since 17 March ranging from EUR50 million - EUR550 million.

The UK is planning two syndicated debt sales in May. It has appointed banks for the first, an offering of October 2030 gilts.

Implications and outlook

Bahrain's issue represents an important extension of risk appetite, being the first B rated sovereign deal sold during the COVID-19 pandemic crisis, and with Bahrain having needed a USD10 billion GCC rescue package in 2018. As recently as late April, regional media had highlighted how Bahrain and Oman might struggle to raise finance, despite the success of large-scale issues for stronger-rated GCC states like Qatar, UAE and Saudi Arabia. Reuters has flagged that the IMF previously had warned Bahrain could face a fiscal deficit of as much as 15.7% of GDP in 2020, versus 10.6% in 2019, with a projected fall in GDP of 3.6%.

Within this week's calendar, the completion of two perpetual deals by distinct insurance companies is a further indicator of renewed risk appetite, further supported by the robust demand for Boeing, Kraft Heinz and Apple among others. Finland's initial use of private placements to cover its extra funding needs is unconventional. Multiple countries already have undertaken or are planning syndicated benchmark deals to fund their sharply higher fiscal needs. According to Mikko Spolander, Director General of the Ministry of Finance's Economics Department, Finland's projections remain uncertain, depending on "how deeply the economy plunges and how long it stays there" as a result of COVID-19.

For most OECD borrowers, we continue to expect increased syndicated issuance and expanded auctions as the core funding tools. Increased use of syndication is further confirmed by Germany's 15year deal and the UK's pending long-dated sale.

Posted 08 May 2020 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, IHS Markit

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