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On 29 March Ghana arranged a USD3. four-part dollar package.
The deal presented some challenges, in that Ghana's debt to GDP
ratio reportedly reached 76.1% at the end of 2020 with IBRD
projections suggesting it will exceed 80% by 2023. The IMF's
September forecast projected an end-2020 level of 76.7% as a part
of its Sub-Saharan African Regional outlook. Debt stock trends
clearly were adverse even prior to the COVID-19 pandemic, with the
debt to GDP ratio rising from 44% in 2016, 58.3% in 2017, and 59.1%
and 62.8% in 2018 and 2019 respectively. Counterbalancing this,
debt sustainability potentially would be improved by potential
future revenues from the country's Pecan and Afina oilfields.
The offering included four, eight, 13, and 21-year tranches. The
issuer sought to ease its near-term debt service by selling the
four-year tranche on a zero-coupon basis. Initial price guidance
for the four-year note involved an issue price in the mid-70% area
of nominal value, implying a maturity yield around 7.3%, with the
other tranches offering 8%, 9%, and 9.5% guidance respectively.
Ghana's Finance Ministry claimed the sale was twice subscribed.
Ghana tightened pricing on the four-year tranche by over one
percent (from 7.5%) to 6.309%, placing the other tranches at 7.75%,
8.75%, and 9.25% respectively (tightening by 25 basis points
thereon). The longer portions were for USD1 billion, USD1 billion,
and USD500 million, and each amortizes equally in three
installments, with USD525 million nominal value of four-year
zero-coupon bonds.
IHS Markit's latest forecast projected Ghana's GDP growth to
have remained positive in 2020 and to reach 4% in 2021 and 3.8% in
2022 on the back of improved global demand, along with "sustained
commodity price strength and improved oil prices". Despite fiscal
consolidation efforts, it projects the central government balance
at -7.4% and -7.2% of GDP for 2021 and 2022, reflecting ongoing
outlays to mitigate the COVID-19 pandemic.
The Maldives
The Maldives started marketing on 26 March for a five-year sukuk
deal. Initial guidance was set at 10.5%.
It went on to raise USD200 million at 10.5%, with demand of
USD370 million. In parallel, Maldives has offered to repurchase its
USD250 million 7% 2022 issue at par, a generous level versus its
prior trading level of around 95 percent.
The country was downgraded to CCC by Fitch in November 2020,
reflecting severe economic deterioration stemming from the
curtailment of tourism. Fitch forecast its debt to GDP level would
reach 110.7% by end-2020 given economic shrinkage of some 30% of
GDP: it had stood at 62.9% at end-2019. The same report projected
government deficits of 21.7% and 18.8% of GDP in 2020 and 2021,
based on the expectation that tourist receipts will remain badly
affected in 2021. Overall, the report claimed the economic shock
had made Maldives "heavily dependent" on international official
support with risks over debt sustainability "having increased".
In June 2020, Moody's downgraded the country's rating to Bs with
a negative outlook, a position it affirmed on 22 March.
IHS Markit's economist Andrew Vogel is more pessimistic than
Moody's: his latest forecast noted that the pandemic effectively
halted all tourism for most of 2020, likely continuing through the
first half of 2021, and estimated GDP to have declined 19.7% in
2020 before recovering 10.3% in 2021, although this assumed that
"tourism revenues return and construction projects resume in full",
which may face downside risks.
Pakistan
After regaining access to the IMF, Pakistan became this week's
third sovereign issuer, placing USD2.5 billion in a three-tranche
sale of five, ten, and 30-year bonds priced at 6.0%, 7.375%, and
8.875%. Guidance had been set at 6.25% area, 7.5% area, and
8.875-9%. Demand reportedly reached USD5.3 billion for the
package.
The issue came after Pakistan resumed its IMF program, which had
been suspended over debt disclosure concerns relating to
inaccurately disclosed government guarantees, which led to a breach
of performance conditions. In a statement on 24 March, the IMF
recognized that "strong corrective actions" had been taken to
address "institutional and technical shortcomings", including the
formation of a specific working group and publication of a
semi-annual debt bulletin.
In a separate statement on the same day, the IMF approved an
immediate release of USD500 million for Pakistan, describing
overall program performance as "satisfactory" despite COVID-19
impacts, and noting that the government was committed to "ambitious
policy actions and structural reforms".
Elsewhere, Nigeria's Seplat Petroleum sold USD650 million of
five-year debt on 30 March at 7.75%, versus 8% guidance reached
after pre-marketing. The issue, reportedly the largest from
Nigeria's oil and gas sector to date, attracted USD1.1 billion of
demand from 120 subscribers in over 20 locations. It was last in
the market in 2018, with its USD350 million debut deal priced at a
9.5% yield. Proceeds will repay the 2023 notes, repay bank facility
drawings, and be used for general corporate purposes.
ESG
Austrian utility Verbund, the country's largest electricity
generator, has for the first time issued a bond that is both
sustainability-linked and Green, pledging both to use issue
proceeds for eligible projects (a hydropower plant and
energy-saving projects within its grid) and to meet wider
sustainability performance indicators or face a coupon penalty.
Verbund has set performance targets for renewable energy production
and the installation of transformer capacity to permit grid
connectivity for renewable production.
The EUR500 million 0.9% 20-year deal was four times subscribed.
ESG-oriented investors were given priority in allocations and took
over 90% of the deal.
UK property group Canary Wharf Group sold its debut Green bond.
The crossover (split investment grade/ high yield rated) issue
comprised GBP350 million of four-year bonds and GBP300 million for
seven years, priced at margins of 245 and 285 basis points over
comparable gilts versus initial guidance of 265 and 310 basis
points, with combined demand of GBP1.3 billion. It also sold EUR300
million of five-year debt at 210 basis points over mid-swaps,
versus 225 b.p. guidance: demand reached EUR500 million. Proceeds
will be spent on green buildings, renewable energy, and clean
transportation.
French insurer Axa has sold its debut green bond, gaining peak
demand of EUR3.4 billion for the EUR1 billion Tier 2 offering.
Demand abated by over EUR1.5 billion after the issue was priced an
estimated 15 basis points through fair value.
Chile sold USD1.5 billion of sustainability bonds targeting
Taiwanese investors. The issue was placed at 3.5%, 111.9 basis
points over US treasuries, and was 2.3 times subscribed.
Our take
Both Ghana and the Maldives have overcome recent market
volatility and adverse credit metrics to achieve a positive
reception in the international bond markets. Both countries have
shown a rapid increase in their debt to GDP levels: in Maldives
case, this reflects the collapse of tourist income, while Ghana's
debt burdens have been growing steadily in recent years. The
success of both deals, and the package for Pakistan, is risk
positive, representing a favorable indicator of a wider demand for
riskier assets.
In addition to its underlying credit risks, investors have
focused on the zero-coupon feature in Ghana's four-year bond. The
structure has the benefit of easing near-term debt service burdens,
helping the country's cash flow while it continues to fight to
recover from the COVID-19 pandemic. Conversely, it concentrates
risk at the time of maturity, generating a "spike" from the need to
pay accumulated interest for the full life of the bond in one go.
This is counterbalanced by the amortizing structure in its other
tranches, which spreads their principal repayment over three years
rather than using a concentrated "bullet" repayment.
Verbund's combination of Green and sustainability-linked debt
was used for the first time in the European market. The combination
addresses the perceived weakness of Green bonds that firms issuing
debt targeted to environmental purposes still may be active (and
continuing) polluters within other segments of their business
activity. This feature merits wider application in ESG-targeted
deals, as it would resolve one of the main criticisms of Green
bonds, namely that issuers can remain highly polluting
elsewhere.
The strong focus on allocating bonds to ESG-dedicated buyers
also is of note: while rewarding funds with an ESG orientation -
which is a positive incentive for such entities- this approach
risks curtailing demand interest from non-ESG buyers, which would
reduce potential pricing benefits. Given the set-up costs of ESG
programs, many borrowers are more likely to seek to benefit from
the combination of ESG and non-ESG specific demand to achieve a
larger order book and tighter pricing, exemplified by Axa's
approach.
Posted 01 April 2021 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, IHS Markit
