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The three major themes of the last two weeks have been rising
reference yields, debt market resilience and signs of improvement
in primary equity markets.
Rising reference yields
Key reference rates in the international bond market have risen
further given worsening inflationary expectations and greater
projected monetary policy tightening, with the FOMC minutes
suggesting Federal Reserve balance sheet reduction at USD95 billion
per month, versus a peak USD50 billion reduction in the prior
cycle.
From 1.71% on 1 March, the 10-year US Treasury yield rose to
2.6% (6 April). The 10-year Bund traded as low as -0.1% in early
March but reached 0.66%. Two-year Bunds remain at narrowly negative
yields, but their yield rose from -0.75% to -0.02% during March
(and reached -0.01% this week before rallying). The stock of
negative yielding debt is rapidly approaching zero (versus USD4.5
trillion at end-February and a late 2020 peak of USD18 trillion).
New dollar and Euro-denominated debt supply thus will be priced
using significantly higher reference rates, indicating higher
borrowing costs even where spreads remain stable. The Wall Street
Journal reported that US bond performance - as measured by the
Bloomberg US Aggregate bond index - returned minus 6% in 2022 up to
30 March, indicating the largest quarterly loss since 1980.
Market resilience
Rising reference yields have not translated into flight from
riskier asset classes. Of 19 EM countries we studied, each of the
sample tightened their EMBI+ spreads between end-February and 29
March: as an example Turkey's spread eased from 598 to 523 basis
points and Poland's spread fell from 71 to 21 basis points. This
aligned with a revival of EM supply with five MENA offerings
completed in the week to 1 April.
Nor has the adverse trend undermined corporate supply. According
to IFR, the US investment grade bond market recorded its third
highest issuance level to date during the first quarter. It
attributes this to borrowers accelerating issuance given the
tightening stance projected by the Federal Reserve. Using Bloomberg
Data, BondEvalue estimated that global corporate issuance reached
USD750 billion, 29% higher than the prior quarter, although down
20% on Q1 2021.
The EU tested market appetite for long-dated asset with a
"no-grow" EUR6 billion long 20-year Green Bond for its Next
Generation EU programme, due on 4 February 2043. The issue showed a
healthy "duration bid", gaining an impressive EUR78 billion in
demand, pricing at 1.374%, nine basis points over mid-swaps. The EU
has now raised EUR99.5 billion for NGEU including eight syndicated
transactions: EUR29.5 billion have been in Green Bond format. As a
further indicator of appetite for riskier instruments, both
Rabobank and Italy's Banco BPM have successfully completed
Additional Tier 1 sales, Spanish insurer Mapfre sold a rate Tier 3
deal, and there has been longer-dated Latin American corporate
issuance.
Portugal brought the most recent sovereign syndicated supply, a
EUR3 billion 10-year deal. The issue was priced at 1.694%, 35 basis
points over mid-swaps. Demand reached EUR15.5 billion from over 160
accounts.
Equity
First quarter equity supply fell sharply, but there have been
several signs of improvement recently, with a major increase to the
first in a series of privatizations in Dubai.
According to Renaissance Capital data for US IPOs, excluding
SPACs just eighteen firms raised a total of USD2.1 billion in the
first quarter, versus 84 firms that sold USD35 billion of equity in
Q4 2021, and 101 firms that had raised USD39.2 billion in Q1 2021.
This trend is not restricted to the US market: Latin Finance
reported on 28 March that 23 Brazilian firms withdrew planned IPOs
this year. According to Bloomberg, global IPO supply reached just
USD65 billion in Q1, versus USD219 billion in Q1 2021.
By contrast, a sizeable MENA flotation was very strongly
received and increased substantially. Dubai Electricity and Water
Authority announced its flotation on 24 March, the first of ten
planned listings for state-owned entities in Dubai. Initially it
planned the secondary sale by the government of 3.25 billion shares
to raise up to AED8.06 billion (USD2.19 billion), the largest
flotation in Dubai since DP World was floated in 2007. Domestic
cornerstone investors pre-circled the equivalent of USD1.3 billion.
The issue, which initially represented 6.5% of the company's share
capital, was more than doubled on 30 March, to 8.5 billion shares
(17% of DEWA's capital) and was still oversubscribed despite the
large increase to raise USD5.7 billion equivalent.
Having delayed its sale of shares in Life Insurance Corporation
(LIC), the Indian government placed 1.5% (post greenshoe) of oil
and gas producer ONGC, in which it owned a 60.41% majority. The
offering raised INR30 billion (USD397 million). It comprised the
sale of 9.43 million shares with the option to raise this to 18.86
million shares, which was exercised. On 31 March, the institutional
portion was announced to be 3.5 times subscribed.
According to Indian media sources, the Indian government has
contacted bankers suggesting that it may launch its planned share
sale in Life Insurance Corporation (LIC) in early May, with
Moneycontrol News noting that the current approvals for the sale
expire on 12 May. Bloomberg reports previously had suggested that
the sale would be for 5% of LIC, to raise some INR50 billion
(USD6.6 billion) but IFR reported on 6 April that up to 7% might be
sold if market conditions and appetite so permit.
China's state-owned energy company CNOOC, currently listed in
Hong Kong, issued a prospectus on 30 March announcing plans to sell
2.6 billion shares on 12 April, representing 5.5% of its enlarged
capital base. The offering is slated to raise some CNY 35 billion
(USD5.5 billion) in connection with CNOOC seeking a Shanghai
listing. On the same day, Xinhua agency reported that the China
Securities Regulatory Commission had approved the sale of up to
2.99 billion shares, leaving room for a 15% greenshoe facility.
CNOOC was forcibly delisted from NYSE last year over alleged ties
to the Chinese military.
The firm is benefitting from higher energy prices, forecasting a
62-89% increase in first quarter earnings versus the same period in
2021. For 2021, it reported oil and gas sales of CNY222.1 billion,
up 59.1% year-on-year, while net profit rose to a record CNY70.3
billion, a 181.7% increase versus the prior year.
Our take
Overall, markets are showing diverse trends:
Reference bond yields have adjusted to the deterioration of
inflation expectations by undergoing a sizeable downside correction
since early March, exacerbated by widespread expectations of
tighter central bank actions to seek to stem inflationary
pressures. The stock of negative yielding debt has almost entirely
been eliminated.
Despite this, emerging market spreads not only did not widen -
a sign of flight from riskier assets - but tightened across a
diverse sample of countries in March. There has been encouraging
supply of long duration and EM debt and the equity calendar also
has shown some promising developments, with DEWA's upsizing
representing a relatively unparalleled increase in a major equity
sale.
LIC's planned flotation and the large pending CNOOC sale will be
important further tests of equity market appetite.
For those operating in India, LIC is also of considerable
importance to India's overall budgetary position. For fiscal
2022-23, its government has targeted asset disposals of INR 650
billion (USD8.57 billion). It is reported to have raised INR124.2
billion in fiscal 2021/22, versus a divestment target of INR780
billion, with the shortfall largely attributable to the delayed and
downsized sale of LIC. The 2021-22 privatization target originally
had been INR1.75 trillion but this was reduced sharply in February
2021: the LIC sale initially had been projected to raise around
INR1 trillion (USD13.3 billion).
Posted 07 April 2022 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, IHS Markit
This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.