Obtain the data you need to make the most informed decisions by accessing our extensive portfolio of information, analytics, and expertise. Sign in to the product or service center of your choice.
During October, a key area of adverse market focus has been
mainland China's property sector, particularly potential defaults
relating to Evergrande and other developers. The adverse changes in
Chinese property sector debt are severe. By mid-October, according
to BondeValue research, some two-thirds of the Chinese property
sector bonds yielded over 10%, with almost a quarter of their
sample (over 80 issues) yielding over 50%, levels indicating
expectations of default and sizeable haircuts.
Despite forecasts that Chinese property-sector problems risk
major wider dislocations, potentially affecting Chinese issuers and
emerging markets more widely, we conclude that there is minimal
contamination. Instead, successful recent issuance by borrowers
from China and elsewhere has shown minimal impact on EM demand.
As a starting point, China's sovereign sale of USD4 billion on
19 October - an annual dollar borrowing - attracted over USD26
billion in demand and priced at tight spreads (of 6, 12, 23 and 53
basis points for 3, 5, 10 and 30-year bonds, versus initial price
talk of 35, 45, 55 and 85 basis point margins).
There are several other positive examples of Chinese
issuance:
China Cinda Asset Management attracted USD4.7 billion of demand
on 27 October for a USD1.7 billion perpetual Additional Tier 1 deal
first callable after five years, priced at 4.4% to initial call
versus 4.8% guidance. Cinda describes itself as China's leading
asset management company, focusing on distressed asset management:
the deal is to "replenish" its AT1 and provide capital for "the
sustainable development" of the firm. The issue was conducted by
way of Preference Shares, rated B1 by Moody's and ranking behind
subordinated and senior debt.
Chinese financial sector supply has been strong, while other
borrowers from the country continue to access the market.
In recent days, ICBC has raised some USD3 billion from a
multi-currency Green Bond sale, including USD1.05 billion of
three-year bonds priced at 1%, along with sales in sterling and
Euros: the tranches were issued by its Singapore, London and
Luxembourg branches.
It was followed by Bank of China, which raised USD300 million
of "sustainability relinked" debt at 1.084%, 32 basis points over
UST versus guidance of a 75-basis point margin: demand reached
USD700 million. The issue incorporates a base 1% coupon and from
the second year has an annual coupon adjustment of 5 basis points
(upwards or downwards) depending on the achievement of key
performance indicators regarding lending.
Dah Sing Bank, based in Hong Kong SAR, sold USD300 million of
subordinated debt. The 10-year bond, first callable after five
years, priced at 3.133% to first call, 195 basis points over UST
and 35 tighter than initial guidance.
ICBC Financial Leasing sold USD1.35 billion of three and
five-year bonds. The shorter-term debt was priced at 1.654%, 88
basis points over comparable US Treasury bonds (UST) versus
guidance of 125 basis points area: demand reached USD1.2 billion of
which 83% was from Asia, with banks taking 60% of allocations. The
five-year bond was a Green instrument to fund wind power projects,
which priced at 2.296%, 110 basis points over UST and 35 tighter
than initial price talk.
A debut international sale was completed on 20 October by
China's Hualu Holdings: the firm owns state assets on behalf of the
Shandong provincial government with assets spanning coal-related
chemicals, real estate, and pharmaceuticals. It placed USD300
million of five-year bonds at 2.2%, versus 2.8% guidance, gaining
USD2 billion in demand. On the same day, Hunan Xiangjiang New Area
Development Group sold USD330 million of five-year bonds at 2.65%,
versus 3% guidance: demand exceeded USD1.5 billion. The issuer is a
local government financing vehicle promoting development in
Changsha City, Hunan.
An ample range of borrowers from elsewhere in Asia have issued
successfully.
Most recently, this includes Philippines' Globe Telecom which
raised USD600 million of perpetual debt first callable after five
years, priced at 4.2% versus 4.5% guidance after demand exceeded
USD2.25 billion.
Other examples include Muang Thai Life and Indonesian food
company Indofood CBP Suskes Makmur. The former sold USD400 million
of 15.25-year Tier 2 subordinated dollar debt, first callable after
five years. The issue was priced at 3.552%, 240 basis points over
US Treasuries versus guidance of a 275-basis point spread. CBP
arranged USD1 billion of dollar finance with 10.5 and 30-year debt
marketed at 220 and 300 basis points over US Treasuries, placing
USD600 million for the shorter maturity at 3.541%, a 190-basis
point spread, with its longer tranche placed at 4.805%, a 270-basis
point spread.
The positive new issue environment also applies elsewhere.
Peru raised 12 and 50-year sustainable debt within a USD4
billion three tranche offering on 28 October. The package included
USD2.25 billion of 12-year liabilities at 3.082%, 150 basis points
over UST and 30 inside guidance, and a USD 1 billion 50-year
portion at 3.77%, 180 basis points over UST and 20 inside initial
guidance. It also tapped its conventional 3.55% 2051 issue with
USD750 million at 3.44%, 150 basis points over UST, 20 inside
guidance and at 15 basis points above the outstanding issue. Part
of the proceeds will cover 2022 budgetary needs.
Economy Minister Pedro Franke noted that the sale was Peru's
first issue of sustainable debt: ESG proceeds will fund health,
education, and social programs. His statement flagged the "elevated
demand", which reached USD10 billion at its peak, as indicating
that "international investors continue to believe" in the solidity
of Peru's macroeconomic fundamentals. Peru's statement noted that
the package attracted over 250 investors with 57% of allocations
placed in the USA and 56% with asset managers.
Last week, Colombia raised USD1 billion through a tap of its
5.2% 2049 bond. This was priced at 5.125% versus 5.4% guidance,
with the final pricing providing a modest six basis points yield
premium to the outstanding issue. According to La República
website, the issue attracted USD4.2 billion of demand: it cited
César Arias, Director General of Public Credit noting that the new
tap was sold 10 basis points more cheaply than when the 2049 bond
was first sold in early 2019.
Also from Colombia, Ecopetrol, the country's majority
state-owned energy company, sold USD2 billion of 10 and 30-year
debt, priced at 4.625% and 5.875%, versus price talk at 5% and low
6% area, after gaining USD7.8 billion of demand.
Peruvian tin and copper mining firm Minsur sold USD500 million
of 10-year bonds at 4.75%, gaining some USD2.2 billion of demand
and tightening pricing from initial guidance of low 5% area. The
issue will fund the repurchase of its 6.25% 2024 notes in a tender
worth up to USD186 million, completing a liability-management
process started in July 2021.
As a further indicator of resilience, there has been ample
supply from the Russian corporate sector:
Lukoil Capital sold USD2.3 billion split between a long
five-year and ten-year bond, priced at 2.8% and 3.6%. Russia's GTLK
(State Transport Leasing Company marketed a long seven-year
benchmark dollar deal with price guidance of 4.75%-4.875% on 20
October. It sold USD600 million at 4.349%. On the same day, Norilsk
Nickel also raised USD500 million of five-year debt at 2.6%.
Lastly, Anglo Gold Ashanti raised USD750 million of seven-year
debt at 3.375%. Proceeds will fund a tender for its 5.125% 2022
issue.
Our take
Recent supply continues to indicate that the debt distress
within mainland China's property sector is not contaminating wider
issuance in the country or region. This is shown by the
broad-ranging calendar including perpetual corporate debt, bank
subordinated debt, and significant supply from China at sovereign
level. In this context, the Cinda AT1 deal is a particularly
positive indicator.
Similarly, Ecopetrol's successful sale, following last week's
sovereign-level issuance, is a positive indicator of investor
appetite for Colombian risk, after the country's downgrades from
investment grade status earlier this year. Developments in recent
months, including a record number of new borrowers in the US
high-yield bond market during September followed by an active
calendar this month, further indicate the continued appetite for
risk, and the absence of dislocation either from Evergrande's debt
stress or from the prospect of near-term US tapering.
This is not to suggest that markets are easy: yields have risen
over the last month and primary equity markets also are showing
greater selectivity, with Volvo's laborious re-flotation
highlighting investor sensitivity both to pricing and to the use of
multi-class equity structures designed to limit dilution of the
majority shareholder's control.
Posted 29 October 2021 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, IHS Markit