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Capital Markets Weekly: Emerging Market sovereign sales resume strongly

01 April 2021 Brian Lawson

Emerging markets

Ghana

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

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