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Capital Markets Weekly: Ecuador’s bonds surge after unexpected election outcome

16 April 2021 Brian Lawson

This week's stand-out development is the dramatic improvement in Ecuador's trading levels after the unexpected outcome to its presidential election, with other highlights including two successful perpetual deals by Emerging Market borrowers, and a broad-ranging ESG calendar including the first bank sustainability-linked deal and several debut Green Bond borrowers.

Emerging markets

Ecuador's EMBI+ bond spread fell on 12 April by 345 basis points, from 1169 basis points over US Treasuries on 9 April ahead of its election to 824 basis points, reflecting Guillermo Lasso's surprise victory in Sunday's second round run-off and the expectation that the country will now honor most of its commitments to the IMF and those under its 2020 bond restructuring.

Turkey is also in focus. Ahead of its monetary policy meeting on 15 April, Turkey's current account deficit for February was reported at USD2.61 billion, widening from the prior month (USD1.87 billion) and bringing its rolling 12-month accumulated deficit to USD37.8 billion. The reported unemployment rate rose to 13.4% from 12.2% in January. Market expectations are that replacement Governor Sahap Kavcioglu will maintain the one-week reference repo rate at 19%: a reduction would be likely to renew severe pressure on the lira and Turkish bond spreads.

Dubai Islamic Bank sold a USD500 million perpetual sukuk issue on 13 April, priced at 3.375% to the initial call after six years, versus guidance of 3.625-3.75%. Demand reached USD2.7 billion. The coupon set a new record low for GCC Additional Tier 1 debt (the prior record was held by Saudi Arabia's National Commercial Bank with 3.5%).

Petron, the Philippines' largest oil refining and marketing firm (68% owned by San Miguel Corporation), sold a USD550 million perpetual non-call five-year issue on 12 April. The offering gained demand exceeding USD1.9 billion and was priced at 5.95% to initial call, versus 6.3% initial guidance. Asian buyers subscribed 90% of the deal, with demand dominated by asset managers with 57% and banks taking 37% of allocations.

Metallurgical Corp of China also sold perpetual debt, placing USD500 million first callable after three years at 2.95% versus guidance of 3.3%. Demand exceeded USD1.7 billion with 46% allocated to asset managers and 27% each to banks and official institutions: 99% of the order book was from Asia.

Resorts and gaming group Genting Malaysia sold USD1 billion of 10-year debt at 3.882%, 220 basis points over US Treasuries and 40 basis points tighter than initial price talk after demand reached over USD2 billion. US buyers took 44%, followed by EMEA with 32% and 24% in Asia, reflecting the firm's US and international footprint (including UK presence). 86% of allocations went to asset managers.

Colombia's Banco Davivienda has mandated banks for a benchmark dollar perpetual issue first callable after 10 years and has started pre-marketing the deal.

IHS Markit Banking Risk specialist Alejandro Duran Carrete notes that the bank is the country's second largest with roughly 15% of total sector assets at end-2020. The bank's Tier 1 capital ratio was 10.1%, versus the sector's 12.9%, potentially driving the need to seek Additional Tier 1 capital.

ESG

Berlin Hyp, already established as an issuer of Green bonds, sold the first bank sustainability-linked bond. It placed EUR500 million of senior preferred debt at 0.411%, 35 basis points over mid-swaps versus initial price talk of a 50-basis point spread. 73 investors were involved, led by German buyers with 71%: 55% and 32% respectively were sold to asset managers and banks.

The bank already was an active ESG issuer: it claims to be the "most active European bank issuer of Green bonds" with 13 benchmark green deals outstanding spanning covered, senior preferred and senior non-preferred structures. It also claims to have been the first issuer of a Green Pfandbrief (mortgage backed bond).

On 9 April, it had announced plans for a term bond whose coupon will step up 0.25 percent if the bank fails to reduce the carbon intensity of its loan book by 40% in the next ten years, implying that the coupon penalty only would apply to the bond's final year, making its impact more reputational than cost-changing.

Portuguese electricity network REN (Redes Energéticas Nacionais) has sold a debut Green bond. The EUR300 million eight-year offering was priced at 0.5%, mid-swaps plus 60 basis points. According to REN's statement, "demand for the bond was very high, covering more than five times the amount to be issued". The statement claimed investor interest "came essentially from Germany and France" followed by Portuguese buyers, with over 60% of the buyers "of Green origin".

Kia arranged its first bond issue since 2017 in the form of a USD700 million two-part offering comprising USD300 million and USD400 million of 5.5-year bonds in Green format, the first such offering by the company. The deal was well received, with final pricing of 1.105% and 1.789% (75 and 90 basis points over US Treasuries respectively) coming 35 basis points through initial guidance on both tranches.

Bank Mandiri, 60% owned by the Indonesian state, raised a USD300 million sustainability bond. The deal was priced at 2.231%, 135 basis points over US Treasuries and 40 basis points inside guidance, with demand having reached over USD2.5 billion. Asia took 85% of the deal with 74% allocated to asset managers.

On 12 April, BNG, Eurofima and Île de France all were in the market with ESG deals.

The three highly rated agencies will be accompanied this week by Tatra Banka, a Slovakian bank, owned by Raiffeisen Bank of Austria and the country's third largest by assets, with a debut Green bond.

Indonesia's state-owned oil and gas company PT Pertamina also has announced plans to arrange a debut Green Bond. According to Finance Director Emma Sri Martini the bond will be issued within the coming year in efforts to expand Pertamina's Green energy business to 10-15% of its total revenues from the current 5%. She stated that "like it or not, we have to prepare to enter the energy transition period".

Equity

Last week's highlight was the HKD114.17 billion (USD14.7 billion) secondary block sale of shares in Tencent Holdings by Prosus. The overnight share sale was impressively oversubscribed, gaining over USD60 billion in demand. According to Refinitiv, the sale was the largest block trade on record.

UK-based Darktrace has announced its intention to float 20% of the company on the London Stock Exchange in a deal comprising a capital increase to fund product development and sales by existing shareholders. The company uses artificial intelligence through a combination of understanding a customer's business and continuous self-learning to detect "aberrations" in a firm's digital activity, complementing traditional "perimeter" based cyber-security products. The firm has positive EBITDA based on its 2020 results. Additionally, unlike the recent flotation of Deliveroo, it will be admitted to the premium segment of the exchange's official list (implying a simpler share structure than Deliveroo).

Coinbase will undertake the first direct listing on Nasdaq, with its equity starting trading on 14 April without a share sale. The firm operates a platform to trade crypto assets including Bitcoin. Pre-sale research estimates from brokerage and technology sources have shown an extremely wide range of valuations ranging from USD19 billion to over USD200 billion, making its listing an important indicator of crypto-sector asset valuations.

Our take

Ecuador's election result was relatively unexpected and significantly reduces the likelihood of standoff between Ecuador and the IMF and other creditors, evidenced by the dramatic improvement in the country's trading levels.

Turkey's levels also have improved and while the consensus is that a rate cut probably will be avoided in this week's meeting, future actions against the "interest rate lobby" by cutting rates despite Turkey's precarious external position will remain an ongoing risk. Sharp falls are likely in Turkish bonds, its currency, and its access to new funding if it takes the more aggressive step of cutting rates this month.

Overall, however, this week's calendar, which includes several emerging market perpetual deals and a large equity success, represents an encouraging start to the second quarter. The actual and pending ESG calendar also looks favorable, including the first sustainability-linked bank deal (a diversification from the many Green and Social bank deals already outstanding).

Posted 16 April 2021 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, IHS Markit

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