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This week's highlights include Ecuador announcing a
restructuring package already accepted by around half its
bondholders, Argentina's improved offer to creditors, El Salvador's
long-dated dollar issuance and Oman exploring a USD2 billion bank
bridge loan.
Emerging markets
On 6 July, Argentine filed an improved exchange offer for its
bondholders, which led to sharp gains in internationally quoted
equities and debt: the country's EMBI+ bond spread index traded
down to 2388 basis points, its lowest level in four months.
According to Ámbito newspaper, the new proposal implies a net
present value of 53.5% on exchange, versus 40 and 47 percent in
Argentina's two prior offers. The newspaper noted that the new
proposal also permits holders of existing issues from 2005 and 2010
to retain the legal rights provided therein, rather than adjusting
to the subsequent "anti-holdout" clauses introduced during the
Macri administration, thus removing a key sticking point. For
bondholders who accept the terms voluntarily, it offers the
incentive of starting interest payments from late 2021, with
coupons rising thereafter. Investors were granted until 4 August to
accept the offer.
On the same day, Ecuador announced a preliminary agreement with
key bondholders to restructure ten issues maturing between 2022 and
2030 into three new issues maturing in 2030, 2035 and 2040. In
response, Ecuador's EMBI+ bond index fell by 15.13 percent from
3279 basis points to 2783 basis points over US Treasuries, versus
its late-March high of 6063 b.p.
In a Twitter message, President Lenin Moreno claimed the deal
would save USD16 billion over the next ten years, while the Finance
Ministry referred to "significant relief". Media reports claim that
among those accepting are high-profile investors including Ashmore,
BlackRock, BlueBay and Wellington, with local newspaper El Comercio
claiming that almost 50% of bondholders already accepted. The
proposals still need to gain approval from a qualifying majority
and negotiations are continuing.
The key proposals of the current restructuring involve:
Reduction of capital from USD17.375 billion to USD15.835
billion, saving USD1.54 billion.
Extension of the average life from 6.1 to 12.7 years.
Five-year grace period for repayment of principal, and one
year's grace on interest.
Reduction of average interest cost from 9.2% to 5.3%.
Argentina's YPF announced an exchange offer to swap its USD1
billion 8.5% 2021 issue for USD950 billion of new 8.5% 2025 debt,
plus USD50-100 million of cash. The larger sum of USD100 in cash
per USD1000 bond is available for bondholders who accept by 16 July
within a tender running till 30 July. The offer is conditional on
gaining at least 70% acceptance. According to El Cronista website
the new deal will amortize in four equal instalments from 2022.
On 8 July, El Salvador sold USD1 billion of 2052 debt at 9.5%,
versus mid-9% area guidance. The deal significantly expands its
international borrowings: Latin Finance cites Refinitiv data
showing it previously had USD6.65 billion of outstanding public
dollar debt. Since March it has borrowed just over USD1 billion
from the IMF, Inter-American Development Bank and other official
lenders, with a USD600 million CABEI loan deal still being
negotiated. According to El Salvador.com, the bond sale attracted
demand of USD1.6 billion.
On 6 July its central bank, Banco Central de Reserva, forecast
that its GDP would decline between 6.5 and 8.5 percent in 2020,
versus a March projection of a 2-4% decline. It also forecast a
12.9% drop in fiscal receipts, while government spending was
projected growing 26.6% versus 2019 levels. Additionally, it noted
that Q1 FDI reached only USD48.1 million, an 82% fall versus the
USD256.9 million obtained in Q1 2019.
According to Reuters sources, Oman has started discussions with
banks regarding a USD2 billion one- year bridge loan, pre-financing
a bond issue. Such discussions also were held earlier in 2020 but
stopped when market conditions deteriorated in March. Omani Finance
Ministry sources declined to comment, while media commentary
suggests bank proposals were submitted last week.
Romania/ Cyprus
Romania gained over USD7.3 billion in demand for 2031 and 2051
debt sales, selling USD3.3 billion of debt versus an initial
reported target of USD2.5-3 billion. The two tranches were priced
at 240 basis points over mid-swaps and 4%, versus initial guidance
of 265 basis points and 4.25% respectively. Demand reached USD2.9
billion and USD4.4 billion, according to Bloomberg data. The deal
is Romania's first dollar sale since 2018.
Cyprus continued the recent run of successful syndicated EU
sovereign sales in Euros. It placed EUR500 million taps of both its
2024 and 2040 deals at 0.349% and 1.493% (70 and 140 basis points
over mid-swaps), with demand of EUR 2 billion and EUR 3 billion
respectively.
Leveraged finance
After 13 consecutive weeks on inflows with cumulative inflows of
USD54 billion, US junk bond funds recorded USD3.4 billion of
withdrawals in the week ending 1 July, according to EPFR Global
data published by the Financial Times.
Despite this more cautious indicator, Thyssenkrupp's leveraged
buyout was reported on 3 July to have attracted over EUR25 billion
for the EUR10.3 billion bond and loan refinancing package.
ESG
BBVA has arranged the first Green AT1 issue. In its presentation
it flagged that as of March 2020, the bank held EUR2.9 billion of
Green assets, with 70% of this total having been accumulated since
2018. 49% of the Green portfolio is for renewable energy, 22% for
clean transportation, and 19% for energy efficiency projects. While
supporting such Green projects, proceeds also may refinance an
existing AT1 issue first callable in April 2021. The EUR1 billion
deal was priced at 6% to the initial 5.5-year call, versus initial
price guidance of 6.5% area, after gaining EUR2.75 billion in
demand.
Generali has completed its debut Tier 2 Green Bond with a very
positive reception. The EUR600 million subordinated issue, which
matures in July 2031, was priced at 2.429%, 255 basis points over
mid-swaps. Demand reached EUR4.5 billion from over 350
accounts.
Our take
Both Ecuador and Argentina have made considerable progress
towards agreed debt restructuring.
Ecuador's Economy Minister Roberto Martínez has specified that
the deadline to accept the current proposal is 15 August. According
to El Comercio newspaper, approval requires 66% approval from
bondholders in all but Ecuador's 2024 issue, where the threshold
for the collective action clause is 75%. Given the high-profile
nature of those already supporting the proposals it appears close
to achieving such approval.
Argentine media have flagged that the country has made
considerable concessions to bondholders, moving from an initial net
present value of around 40% with a three-year grace period to the
current compromise. Local commentary recognizes, however, that
Argentina had not obtained formal backing from two of the three
organized bondholder groups when announcing its latest proposal,
with suggestions that it would like to gain at least 50% acceptance
and then hope that moral suasion and IMF pressure might encourage
other key funds to sign up. In Argentina's favour is the relatively
modest gap in valuation now seemingly separating the country from
its creditors' demands.
El Salvador's deal was widely viewed as challenging for the
market, given the country's B-/B3/B- rating with major rating
agencies and its lengthy planned maturity. As such it is
unsurprising that demand appears relatively modest and the coupon
elevated in nominal terms.
Oman's bond trading levels have improved dramatically since
March. Its 4.75% 2026 deal is now trading at around 93%, according
data from Bourse Berlin, versus under 65% of nominal value in late
March. This still implies a yield increase of around 1.5 percentage
points from the over-par valuations the bond enjoyed in early 2020
but is nowhere near the debt-distressed levels seen in late March
and April. Rather than paying a premium for issuance at present,
Oman appears to be projecting further improvement in funding
conditions by seeking a bridge loan with planned take-out within a
year.
Both Cyprus and Romania have continued the strong recent
reception for syndicated sovereign issuance, with Cyprus attracting
almost double the demand volume it attracted in April when selling
EUR1.75 billion of seven and 30-year debt. Even after accounting
for yield-curve adjustment, the latest cost also looks attractive
versus the 1.564% and 2.339% offer yields required for the prior
sale.
Posted 09 July 2020 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, IHS Markit