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New longer-dated bond sales remained strong and equity sales
active despite US stock market correction particularly affecting
large technology companies: this week's issuance highlights include
Luxembourg's debut Sustainable bond, highly successful long-dated
syndicated sales by Italy and the UK, further hybrid debt issuance
and a record-breaking IPO in Hong Kong (SAR).
ESG
Having announced its Sustainable Bond framework last week,
Luxembourg launched a 12-year Euro-denominated deal on 7 September.
It raised EUR1.5 billion at -0.123% with final demand exceeding
EUR12.5 billion. Proceeds will be divided between Green projects
and those with positive social outcomes, according to a Luxembourg
Finance Ministry spokesperson.
Along with its hybrid debt sale described below, on 8 September
EDF sold a 0% EUR2.4 billion Green convertible bond due in 2024.
Bonds were issued at 107% of nominal value, producing an interest
rate of -1.68% for investors. The conversion price was set at a
32.5% premium. The company's statement described the deal as "the
first of its kind", "the largest green convertible bond ever
issued" and the largest Green Bond sale by a European corporate
issuer.
On 3 September, Daimler AG completed its first Green Bond, a
EUR1 billion 10 -year deal which was priced at 0.835%. The issue
was at least four times subscribed, and pricing tightened by 60
basis points from initial guidance according to press reports.
According to trade media, the issue pricing also "blasted through"
the company's outstanding debt levels. Peter Zirwes, head of
Corporate Finance at Daimler, noted that "it was more than a
positive surprise to everybody involved how well it went".
Emerging markets
Bahrain has returned to the market with a two-tranche dollar
sale. In May, it had gained over USD11 billion in demand for a USD2
billion sale of 4.5-year sukuk debt and 10-year conventional debt,
sold at 6.25% and 7.375% respectively. Initial reports suggested
that the sale would include three-year conventional dollar debt, a
seven-year sukuk, and a longer dated conventional tranche for 12 or
30 years. According to IFR, Bahrain opened books on a two-tranche
sale on 9 September, offering a seven-year sukuk and a 12-year
conventional bond with initial price guidance of 4.5% and 5.75%
area respectively. It went on to place USD1 billion at each
maturity at 3.95% and 5.45% respectively, with total orders
reaching USD7.6 billion.
Other debt
Having raised equity last week (see below), Ryanair also
conducted the sale of a five-year investment grade debt issue this
week. It placed a EUR850 million sized deal at 3% (75 basis points
tighter than initial guidance), with total orders of EUR4.4
billion.
Commerzbank brought its second Additional Tier 1 issue this
year. On 8 September it sold EUR500 million of perpetual debt at
6.5% until first call from October 2029 until April 2030. Demand
reached EUR2.4 billion. In May, the bank announced a EUR3 billion
issuance program for subordinated debt, selling EUR1.25 billion of
AT1 debt under this in June.
On 8 September, EDF raised EUR2.1 billion from two tranches of
perpetual hybrid debt. A EUR850 million tranche, first callable
after 6.5 years, was priced at 2.875%, with EUR1.25 billion first
callable after 10 years priced at 3.375%.
On 8 September Italy opened syndication of a July 2041 issue,
priced 1.822%, at 7 basis points over a comparable outstanding
January 2040 BTP, versus initial guidance of a 12-basis point
margin. Within hours of launch, demand reached EUR84 billion versus
the eventual EUR10 billion size for the offering, a record for the
maturity.
The UK also launched its latest syndication, of 2035 debt, on 8
September. It attracted 220 orders totaling GBP76.2 billion in the
one-hour sale period, a record number of participants for a
syndicated gilt sale. The issue was priced at 13 basis points over
the 4.5% 2034 outstanding gilt, the tight end of the initial range.
UK buyers dominated, taking 82% of the issue although the UK DMO
claimed "a wide diversity of institutional investors" overall. The
next syndicated UK gilt sale will be in the week of 21 September,
for a reopening of the 0.5% 2061 existing issue.
Equity
On 4 September, European low-cost airline Ryanair placed 35.24
million shares at EUR11.35 each, a discount of some 2.6% to the
prior close. The issue raised approximately EUR400 million and
represented 3.2% of the company's share capital prior to the
placement.
Chinese bottled water firm Nongfu Spring obtained record demand
of HKD677 billion (USD87 billion) for its IPO in Hong Kong. The
deal involved the sale of 388.2 million shares at HKD21.50 each,
with the HKD8.35 billion of proceeds to fund the company's
expansion. The retail portion of the deal was 1147 times subscribed
according to a company filing. The prior record for demand had been
held by China Railway Construction Corporation, which gained HKD541
billion in demand in 2008 for its HKD20.2 billion offering.
Unsurprisingly, the shares opened at a sizeable premium. Trading
started at HKD39.8 before easing to around HKD35.
A similar example of excess demand was seen in the South Korean
market, where gaming firm Kakao is reported by local broker SK
Securities to have gained KRW115 trillion (USD97 billion) in retail
bids for the USD65 million-equivalent retail portion of its USD323
million IPO.
Outlook and implications
Markets have been overshadowed this week by sharp falls in US
technology company valuations, which generated downward pressure on
key US indices. These have been sizeable: as examples, Apple's
market capitalization has fallen by over USD200 billion in just a
few days to under USD2 trillion, while Tesla's stock price fell
over 21% on 8 September after the firm was not added to the S+P500
index.
This technology-focused stock market correction has not been
associated with wider market instability:
In debt markets, we would highlight EDF's ability to raise
EUR4.5 billion of hybrid and convertible debt on the same day, with
its convertible bond also setting records for the European Green
Bond sector, along with Commerzbank's second AT1 offering.
Bahrain's return to the markets is also encouraging: it is one
of the more debt-stressed issuers in its region, with the new sale
suggesting continued ability to access markets following earlier
recourse to a GCC support package.
Given the severe pressures on the airline sector, Ryanair's
highly successful bond sale and its placement of new equity are
also a positive indicator, although the company is one of the
strongest credits within the segment.
Elsewhere, the clear success of Italy's syndicated deal and the
record number of orders for the UK's syndication continue to show
strong investor interest for European long-dated government debt,
and no signs of market saturation of the "duration" bid.
A Financial Times article on 9 September gives further
background: using Refinitiv data it suggests that US corporate
issuers have sold roughly double the volume of 20-30-year debt
issued by the sector in 2019, and some five times the value of
40-year bonds. Overall, it notes that US corporate issuance
includes USD250 billion of bond sales where refinancing debt was
cited as the main use of proceeds, roughly double the equivalent
volume in the same period for 2019, with a sizeable USD870 billion
where it is listed as one of the uses of funds raised.
Such refinancing and debt extension is risk positive for
companies, extending their liability profiles at historically very
low rates while reducing near-term refinancing risks. The new
funding also serves to ease the severe liquidity pressures caused
by the COVID-19 pandemic. Conversely, it indicates risk
accumulation by investors, with bond buyers pushed to take longer
maturities and weaker credit exposures in the quest to obtain
better returns.
Lastly, the exceptional levels of oversubscription for Nongfu
Spring's IPO also are encouraging. While the firm has enjoyed rapid
growth, the huge oversubscription came at a time of growing share
supply including the pending jumbo sale by Ant Financial. The
deal's success reinforces the growing use of local markets by major
Chinese firms to reduce their reliance on US funding, despite US
investors continuing to receive Chinese deals favorably. Ant's deal
will be a key test in the weeks ahead, potentially representing the
largest-ever share sale.
Posted 10 September 2020 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, IHS Markit