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Capital Markets Weekly: Debt markets make promising start to 2019, but uncertainties remain

11 January 2019 Brian Lawson

Successful sovereign issuance by the Philippines, Saudi Arabia and Slovenia, TLAC-eligible finance for Danske Bank and Unicredit and a well-received junk bond for Telecom Italia all provided positive indicators of recovering debt-market risk appetite. Activity was particularly vigorous in European sovereign and agency debt. Belgium and Portugal enjoyed strong demand for 10-year syndicated deals, with Ireland also targeting this maturity. Although equity markets have stabilised, there has been minimal news relating to new share sales.

Emerging markets

Philippines successfully became this year's first emerging market borrower, selling a USD1.5 billion 3.75% 10 year deal which attracted USD4 billion of demand and priced 20 basis points inside initial guidance. Saudi Arabia opportunistically raised USD7.5 billion of 10 and 31-year debt, attracting over USD27 billion and with the involvement of many leading banks despite heavy recent political scrutiny. Pricing was tightened by 25 basis points and 20 basis points for the two tranches.

Emerging market demand is being further tested by pending supply from Israel and Uzbekistan, the latter with a debut deal. Israel is marketing a two-tranche 10 and 30-year Euro-denominated offering, but as a very highly-rated borrower enjoying an S+P AA- rating, Israel is not fully-representative of the asset class. Uzbekistan has been planning a debut deal for some time, but with limited clarity on its exact plans.

Turkey's Yapi Credit is completing an Additional Tier 1 perpetual issue. On 9 January, it set pricing at a very-substantial 13.875%, claiming total demand of USD800 million. However USD400 million is from its shareholders: the bank is majority-owned by Koç Group and Italy's Unicredit.

European Sovereigns

Slovenia brought the first EU syndicated sovereign deal of 2019. On 7 January, it sold EUR1.5 billion of ten-year debt at 40 basis points over mid-swaps, versus guidance of "high 40s" area. The deal was over-twice subscribed, with 41% of demand coming from the UK and Ireland. Domestic buyers took 9%.

Belgium, Portugal and Ireland also announced 10-year syndicated deals. On 8 January Belgium sold EUR6 billion at 0.944%, 8 basis points over mid-swaps, versus guidance of 11 basis points. The final order book reached EUR28.5 billion, a record. It was followed by Portugal selling a EUR4 billion 10-year deal at 1.978%, with demand exceeding EUR24 billion from over 300 accounts with 14.8% of the deal being purchased domestically. Ireland also has appointed banks for a ten-year deal expected to raise EUR3 billion. Germany, Austria and the Netherlands held domestic auctions as well. Overall, Reuters suggests that European governments will have issued over EUR35 billion this week, exceeding first-week supply in 2018.

Our Take

There have been other positive debt market indicators this week including Italian bank Unicredit gaining a USD8 billion order book for 3-year TLAC-eligible dollar debt, having been criticised for raising similar instruments privately in late 2018 at relatively-high cost. Improved sentiment towards Italy also was indicated by Telecom Italia selling EUR1.25 billion due April 2024, the first European junk bond in 2019, which attracted EUR4.5 billion of demand. Additionally, after its recent money-laundering problems, Danske Bank attracted over USD10 billion of demand for a senior non-preferred MREL-eligible three and five-year deal.

By contrast, there has been minimal equity supply: the only sizeable deal announced was a rights issue worth EGP11.2 billion (USD624.7 million) for Egyptian-listed Global Telecom Holding, a mobile telecommunications company (formerly known as Orascom Telecom) quoted in Egypt and operating networks covering over 100 million customers including networks in Algeria, Pakistan and Bangadesh. In a WSJ interview, Uber CEO Dara Khosrowshahi advised that it would like a "positive, stable market" for its planned flotation, claiming that Uber has a "strong balance sheet" and did not need to float in 2019 if markets were difficult.

Despite the encouraging bond market start, significant uncertainties remain. Recent IHS Markit PMI reports for the US, China and the Eurozone all point to economic slowdown. The World Bank this week adjusted its global economic forecasts downwards. Overall, IHS Markit forecasts suggest global slowdown -discouraging for equity markets and higher-risk debt instruments - but without US recession in 2019. The JPMorgan Global Composite Output Index (compiled by IHS Markit) fell 0.5 points to a 27-month low of 52.7 in December. We currently forecast global GDP growth to fall to 3.0% in 2019 and 2.8% in 2020, versus 3.2% in 2018. Increased financial volatility also remains a relevant risk, but we do not see fundamentals as sufficiently adverse to trigger recession within 2019.

Posted 11 January 2019 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, IHS Markit

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