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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, S&P Global Market Intelligence