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Capital Markets Weekly: Debt and equity issuance remaining strong despite technology-oriented equity market correction

10 September 2020 Brian Lawson

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

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