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Capital Markets Weekly: Debt issuance responding positively to perceived central bank support

04 March 2021 Brian Lawson

After reassurance from Federal Reserve Governor Powell of policy continuity, and with suggestions that the European Central Bank could increase its purchases to avoid rising bond yields, new issue activity has revived strongly, including Italy's Green Bond debut and a USD4 billion three-tranche (long dated) sale by Peru: the presence of three sovereign issuers from Central and Eastern Europe is also a positive risk indicator.

Emerging markets

Peru placed USD4 billion of debt on 3 March, with new benchmarks due in 2041 and 2051, and a reopening of its existing 2031 global bond, priced at 3.30%. 3.55% and 2.73% respectively. Demand exceeded USD10 billion from over 200 accounts, dominated by US buyers (71%), with European accounts taking 21% and 4% allocated both to Asia and Latin America.

Three Central and Eastern European sovereign borrowers also issued:

On 26 February Croatia announced its sale of EUR1 billion each of 12 and 20-year debt at 1.257% and 1.788% respectively, with combined demand reaching EUR6.4 billion: this permitted pricing to be tightened by "as much as 30 basis points". Despite the "complex" market conditions, its Finance Ministry flagged that the longer tranche is the country's longest debt offering to date. Proceeds will fund repayment of EUR1.5 billion of 6.375% bonds due this month.

On the same day, Serbia sold EUR1 billion 12-year debt, tightening its pricing by 35 basis points to 1.92% after gaining demand of EUR3.5 billion from some 200 investors. Serbian Finance Minister Sisina Mali flagged that proceeds will repay "old and expensive debts that are due this year": a EUR700 million 7.25% issue matures in September.

They were followed by North Macedonia, which sold a seven-year EUR700 million issue on 3 March at 1.625%, having paid 3.65% for the same amount for six years during May 2020. BNE website flagged that the issue is clearly the lowest coupon funding on record for the borrower. Demand reached EUR1.6 billion with over 130 investors involved.

These issues will be followed by Sharjah, with the emirate currently seeking 12 and 30-year funds at indicated pricing of 3.875% and 4.875-5%.

South Africa has confirmed borrowing needs of SAR547.9 billion (USD36 billion) in its 2021 Budget: according to Global Capital website it is likely to seek a sizeable (USD 3 billion) international debt sale shortly.

For the current financial year to 31 March, the government now forecasts a deficit of 14% of GDP, versus an October 2020 forecast of 15.7%. Despite this improved outcome, and Budget suggestions the debt stock would stabilize below 90% of GDP by 2025, a Moody's statement cautioned that recent adjustments were modest and would "not prevent government debt burden rising over the next three years", with uncertainty over economic recovery and "the capacity of the government to limit spending- especially interest payments and support to state owned enterprises" staying "elevated".

IHS Markit's economist Thea Fourie also highlights the difficulty of fiscal consolidation, noting that this will "hinge strongly on the containment of the public-sector wage bill and the limiting of any further financial transfers to embattled state-owned enterprises".

ESG

Italy marketed its first Green Bond on 3 March, a syndicated deal maturing in April 2045. The issue rapidly gained a positive reception, with a final book exceeding EUR80 billion. It sold EUR8.5 billion at 1.547% yield.

Ardagh Metal Packaging has sold an upsized USD2.8 billion package of sub-investment grade Green Bonds, upsized from a USD2.65 billion equivalent initial size. It placed EUR450 million of 2% 2028 secured notes alongside USD600 million of 3.25% 2028 secured debt. It also sold EUR500 million and USD1050 million of 2029 senior notes at 3% and 4% respectively. The offering, conducted on 26 February, is the largest junk-rated green bond to date, being over triple the size of French recycling group Paprec's 2018 EUR800 million two-tranche offering, previously the largest in this category. Dealogic data showed that sub-investment grade borrowers raised only USD12 billion in total in Green Bond format during 2020.

Workspace Group, which describes itself as owning 59 London properties in a 3.9 million square foot portfolio, "providing a home to over 3000 exciting companies", is planning a debut bond issue in Green format. The seven to 10-year sterling benchmark will enjoy an investment grade rating (BBB with S&P).

Mastercard and Boston Properties joined the list of companies selling ESG debt, with issuance on 2 March.

Other debt

Despite the prior recent correction, 13 high grade borrowers including Coca Cola and Keurig Dr. Pepper launched deals on Monday 1 March. Goldman Sachs raised USD7 billion from a six-part offering focused on shorter-dated maturities while Roche Holdings sold a three-part operation.

In total USD24 billion of supply was placed in a single day, clearly indicating new issue resilience after the sharp recent bond market sell-off. The market continued active during the week, including a seven-part sale by Siemens, its first since 2017, to fund its USD16.4 billion acquisition of Varian Medical Systems.

NTT raised USD8 billion in a five-tranche issue. The deal marketed last week, spans maturities of two to 10 years and was in parallel to a EUR1 billion 2030 offering.

Spain's Banco Sabadell arranged a EUR500 million perpetual Additional Tier 1 issue, its first since 2017. The deal is first callable after 5.5 years and had initial guidance of a 6.25% coupon to first call. Pricing was tightened to 5.75% after demand exceeded EUR2 billion from over 200 accounts. According to Cinco Dias website, 40% was allocated to UK buyers, with French, German and Italian subscribers also prominent.

In a busy week for hybrid debt, with HSBC selling USD2 billion of perpetual instruments callable after five and ten years, Enel sold two tranches of perpetual debt, first callable after 6.5 and 9.5 years, overlapping with the Italy Green Bond sale on 3 March. Books reached EUR6.75 billion versus an expected EUR1 billion size for each tranche, with pricing tightened by 0.375% on both tranches, leaving the portion with earlier call with a coupon of just 1.625%.

Our take

Debt markets have been nervous in recent weeks, with participants focused on the sizeable expansion in US debt linked to its planned USD1.9 trillion stimulus package, rising energy and commodity prices, and the fear that central bank monetary easing could "taper" off in response to economic recovery after the COVID-19 pandemic comes under better control through vaccination initiatives.

This week's busy and successful calendar is thus encouraging. Central bank statements in reaction to the debt sell-off clearly indicates that a low interest rate policy is likely for some time to come, and that global monetary authorities do not want debt service pressures to grow at present, prior to economic recovery acting to ease debt service burdens.

While Croatia, Serbia and North Macedonia are not under particular scrutiny over their debt sustainability, it is still positive that all three have accessed markets within a single week, especially after the recent general correction.

South Africa's planned dollar sale is perhaps a greater test, given the adverse recent developments regarding other African states, notably Ethiopia and Zambia, but there are no indicators of adverse debt stress in its own recent bond performance. Its EMBI+ bond spread index has traded in a narrow range within 2021 - currently standing at 373 basis points over comparable US Treasuries, having been as wide as 521 basis points in September 2020. This stability suggests that South Africa is relatively unaffected by debt rescheduling efforts elsewhere in the region.

Lastly, the success of Italy's Green Bond debut is unsurprising, given the large order books it has attracted during the year and the strong enthusiasm for new ESG issuers from dedicated funds. Its debut shows the further expansion of ESG issuance within European sovereign funding, with Spain and the UK also planning debut Green Bonds this year, and the EU continuing a very large-scale program of social and Green Bond issuance.

Posted 04 March 2021 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, IHS Markit

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