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Capital Markets Weekly: Emerging market issuers continue pushing debt maturity threshold

17 July 2020 Brian Lawson

Among this week's highlights indicating emerging market focus on accessing long-term debt are a 30-year issue for the Emirate of Sharjah and plans by Brazilian petrochemical company Braskem to raise hybrid debt, following recent perpetual sales by Emirates NBD, Banorte and DP World: the only long-dated emerging market issue which appears to have faced some investor resistance was the recent USD1 billion 9.5% 2052 issue for El Salvador, but this is unsurprising given its past debt history including Selective Default events in 2017, making its ability to access USD1 billion of long-dated funding in significant volume an impressive positive development.

Emerging market issuance

The Emirate of Sharjah has priced a Formosa offering, long-dated dollar debt targeting Taiwanese investors. On 14 July it sold USD1 billion at 4%, versus price guidance of 4.375%: demand reached some USD3.7 billion. The offering is Sharjah's first benchmark deal in non-Islamic format.

Brazilian petrochemical company Braskem has announced plans to sell hybrid debt. It has appointed banks to arrange a dollar sale of 60.5-year debt.

Mexican real estate investment trust Fibra Uno gained USD2 billion in peak demand for a USD650 million tap of its outstanding 4.869% 2030 and 6.39% 2050 notes. It sold USD325 million for the shorter term at 4.95% (versus low to mid 5% area guidance) and raised USD275 million for 30 years at 6.25%. The fund-raising was upsized from USD500 million given the strong demand, according to the company's statement.

Additionally, Ultrapar, a Brazilian conglomerate, tapped its 5.25% 2029 notes with a further USD350 million, priced at 5.25% yield versus mid-5% area guidance. Demand exceeded USD500 million.

Tengizchevroil opened books on its planned dollar deal with guidance for a five-year tranche at 3.125-3.25% and 3.875% for a ten-year portion. It priced USD500 million for five years at 2.75%, with USD750 million raised at 3.375% for the 10-year tranche.

ESG

Dutch utility TenneT, which is in discussions with both the Dutch and German governments regarding possible state participation in its equity to assist its development program, sold a Euro-denominated Green perpetual hybrid deal, first callable after 5.25 years.

On 15 July it launched the deal with price guidance of 2.625-2.75% until the initial call. The deal was sized at EUR1 billion and priced at 2.374%. According to the company the deal "sparks the hybrid market", given "keen interest" that left the deal 2.5 times oversubscribed.

During the past five years all the company's debt sales have been in Green format, including a hybrid offering in 2017. In this case, proceeds will be used for projects in the Netherlands and Germany to connect offshore wind facilities to the onshore grid and enhance onshore transmission capacity for renewable energy, according to TenneT's statement of 16 July.

The Kingdom of Sweden has clarified in a statement that its debut SEK20 billion Green Bond will have a maturity of 7-10 years. The sale, slated for August, will set the eventual maturity based on feedback in late August. Johan Bergström, Acting Head of Funding at the Kingdom's Debt Office stated that demand "seems to be strongest" for such maturities, which is "well suited to our current borrowing plan and overall debt management".

Chinese property-oriented investment company CIFI Holding has sold an inaugural Green dollar bond. It placed USD300 million of 5.95% 5.25-year debt, gaining peak demand of USD2.4 billion. Proceeds will repay a maturing syndicated loan. Its Green Bond was sold under a framework aligned with ICMA's Green Bond Principles including the involvement of an independent external reviewer. Two-thirds of demand was from Asian buyers with European interest covering the remainder of the book.

Italian grid operator Terna has launched a EUR500 million 12-year Green bond, with initial price talk at 125/130 basis points over mid-swaps.

High yield debt

The European high yield market faced a test this week from Gamenet, an Italian firm operating betting shops. It is seeking to raise EUR340 million of senior secured five-year floating rate bonds, callable after one year, and EUR300 million of five-year fixed rate debt callable after two years. The offering is slated to repay bridge facilities incurred by Apollo, a private equity firm, in purchasing the company, along with two outstanding floating rate notes from 2018, which both mature in 2023. Sources involved with the deal suggest that existing holders of floating rate debt could swap into the new floating rate instrument.

The deal has been pending for some months but has been affected by the closure of its operations between March and mid-June. It is now being marketed in improved conditions, with the average yield on Euro-denominated junk bonds having declined from its late March peak of almost 9% to around 4.5% on 10 July, and benefits from reportedly encouraging activity levels since the firm's facilities reopened.

On 16 July Bloomberg reported that the terms of the issue were being adjusted "after meeting resistance from investors" over the financial covenants. The report suggested that investors were demanding tighter controls on its ability to pay dividends and other corporate actions.

Melco Resorts, a sub-investment grade rated Hong Kong based firm operating gaming and leisure resorts in Asia, has sold USD500 million of 5.75% 2028 notes, priced at par. Proceeds will repay an existing bank facility and be used for general corporate purposes.

Our take

Braskem's plans for a hybrid sale follow successful completion of perpetual debt offerings by a growing range of emerging market borrowers. In late June, Dubai port logistics firm DP World gained USD3.8 billion of demand for a USD1.5 billion perpetual deal, priced at 6.125% to initial call. Mexican bank Banorte's AT1 deal also was well received last week, and Emirates NBD also completed a perpetual AT1 sale in the same week. Along with Indonesian oil firm PTT's recent 50-year bond, such offerings all represent risk-positive indicators for the emerging market asset class, suggesting that stronger borrowers within the category can gain relatively attractive funding for very long periods.

One note of caution - running against the generally favorable EM duration trend - was the 9.5% coupon that El Salvador needed to pay for its recent 2052 bond sale, but this is likely to reflect its relatively weak credit and - as highlighted by our country risk specialist Dr. Kari Prius - its unusually adverse past debt history, including having come close to technical default on two occasions.

These included a brief period in 2017 when it was lowered to a "selective default" rating by S&P after failing to make timely payment of amounts due in April 2017 when the government was unable to obtain timely Congressional clearance for the release of payment amounts due. In the same year, S&P repeated its action of moving El Salvador to an SD rating after its Congress approved changes to restructure sovereign debt incurred over domestic private pension liabilities, with USD91 million of liabilities facing a five-year extension of maturity (to 30 years), reduced interest coupons and a grace period for debt service.

Despite this poor record, the country nevertheless managed to raise USD1 billion for a 32-year term, a significant achievement in our view for such a weakly-rated credit.

Sharjah's successful entry to the Formosa market is risk-positive, diversifying the Emirate's investor base and extending the duration of its debt. Moody's recently rated its global MTN program Baa2, with stable outlook, citing its "relatively diversified economy, low external vulnerability risks and a credible currency peg" as among the factors justifying a stable rating outlook, noting that "ample funding sources" contributed to its shock absorption capacity.

Lastly, Gamenet's slow progress with its high-yield bond is further confirmation of growing investor sensitivity to covenant protection in the European high yield market. The adjustment of terms follows similar pushback to Thyssenkrupp's jumbo package, although this was comfortably oversubscribed after covenants were improved by its owner. Such increased scrutiny is risk positive in limiting default risk within the segment and reducing the prospect of imprudent investments.

Posted 17 July 2020 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, IHS Markit

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