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Capital Markets Weekly: Emerging market issuance largely unaffected by mainland China’s property sector stress.

29 October 2021 Brian Lawson

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

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