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Capital Markets Weekly: Emerging Market supply-rush indicates borrower haste before potential policy tightening

08 July 2021 Brian Lawson

Emerging markets

Emerging Market supply has remained highly active. Turkey, Cameroon, and Latvia issued on 1 July to follow the pre-4 July issuance by the Philippines, Mongolia and Brazil earlier in the week, while Chile conducted a sizeable internationally clearable sale of peso debt.

Turkey sold EUR1.5 billion for six years at a 4.5% coupon and issue price of 99.355%. The sale follows its recent arrangement of a USD2.5 billion sukuk sale at 5.125% for five years. Additionally, Turk Eximbank raised USD750 million of five-year debt swapped to Euros. CEO Ali Güney reported that demand exceeded USD3 billion, with the deal priced 62.5 basis points tighter than initial guidance. He reported that 30% of allocations went to non-UK European buyers, 27% each in the USA and UK, and 16% in the Middle East.

Cameroon also issued, placing EUR685 million of 11-year debt at 5.95%: it reported that demand had reached EUR2.258 billion. Business in Cameroon website noted the improvement in cost versus its 2015 sale, which bore a 9.5% coupon in US dollars and was swapped into Euro at around 8.8%. The issuance is largely to refinance this existing USD750 million 2025 issue, easing near-term debt service burdens.

Finance Minister Louis Paul Motaze described the market reception as "welcoming", claiming that it demonstrated investor confidence in the country, flagging the successful completion of its first IMF program and the prospects of a further one alongside its 2020-2030 development strategy as positive factors.

The positive relationship with the IMF appears a contributing feature to the deal's success. On 17 June, Kenya had provided the other sub-Saharan sovereign supply during June with a USD1 billion 6.3% issue with a 12-year average life repaying in two installments in January 2023 and 2034, which gained USD5.4 billion in demand, after it also had agreed to IMF backing (in May).

Latvia placed EUR500 million of eight-year bonds, priced at six basis points over mid-swaps with a 0% coupon, priced to yield 0.003%. Demand is reported to have reached over EUR2.6 billion. The pricing reflects Latvia's A+/A3/A- rating.

Chile sold CLP1.5 trillion (USD2.05 billion) of peso-denominated domestic seven-year debt priced at 4.6%, its largest local currency sale this year. The issue, in social bond format, can be cleared via Euroclear and was marketed to international investors as well as domestic buyers. According to a Finance Ministry statement, the deal was 1.8 times subscribed with 47% sold outside Chile. Local institutional buyers were reported to have taken 28% of the offering with 19% sold to banks according to spokesperson Andrés Pérez Morales.

After the latest sale, 18.4% of Chile's debt stock is in ESG format. The country has sold USD18.6 billion of ESG bonds: USD8.9 billion in social bond format, USD7.7 billion of Green bonds, and USD1.5 billion of sustainable debt.

Pakistan issued a three-part tap in dollars on 6 July. Earlier this year it raised USD2.5 billion from a three-part sale of five, 10, and 30-year debt priced at 6%, 7.875%, and 8.875%. According to Dawn.com, it gained some USD3 billion of interest for a USD1 billion sale tapping the three tranches with USD300 million, 400 million, and 300 million at 5.875%, 7.125%, and 8.45% respectively. The deal follows the announcement of USD800 million in new World Bank loans to Pakistan at the end-June.

On the same day, Mexico launched a EUR-denominated 15-year sustainable development goals (SDG) bond, placing EUR1.25 billion versus a pre-launch target of EUR750 million. According to Deputy Finance Minister Gabriel Yorio, "there was higher demand than expected for a low-risk premium" to justify the increase. The deal is priced at 2.259%, 195 basis points over mid-swaps, and 25 basis points inside initial guidance, representing the lowest rate achieved to date by Mexico for this maturity. Demand was 2.6 times the issue size with allocations made to 154 accounts. The offering is the second SDG instrument sold by Mexico, which started its SDG program last October.

On 7 July, Romania sold a EUR3.5 billion package. It placed EUR2 billion for nine years and EUR1.5 billion for 20 years: following a EUR3.5 billion sale in April it has now covered the lower end of its EUR7-7.5 billion funding target for 2021. The tranches were priced at 2% and 3.2%, 180 and 260 basis points over mid-swaps, 25 and 20 basis points inside initial guidance, but with the 20-year margin of 25 basis points wider than in April. Demand reached EUR9.5 billion, with EUR5.75 billion favoring the five-year tranche.

Gazprom gained some USD2 billion in demand for a USD1 billion 10-year issue, priced at 3.5% versus guidance of 3.875%.

Sharjah has arranged a USD750 million 10-year sukuk, at 3.2% versus 3.5% guidance. It raised USD1.25 billion of 12 and 30-year debt in March 2021.

Qatar's Dukhan Bank raised USD500 million of perpetual non-call 5.5-year Additional Tier 1 debt. The issue was priced at 3.95%, versus initial guidance of 4.375% after the issue gained some USD2.25 billion in demand.

ESG

Sovereign issuance by Chile and Mexico is described above.

Repsol has sold two tranches of sustainability-linked debt, raising an upsized EUR1.25 billion for 8 and 12 years, having initially sought EUR1 billion. The EUR625 million eight-year (no-call six-year) tranche was priced at 50 basis points over mid-swaps, 30 inside guidance, with a coupon of 0.375%, having attracted EUR1.5 billion demand. The 12-year EUR600 million tranche is priced with a 0.875% coupon, at 75 basis points over mid-swaps versus guidance of 90 basis points. The early call is permitted in the last two years. The bonds are subject to additional payments of 25 basis points (for the last three years of the eight-year portion) and 37.5 basis points (for the last two years of the 12-year bond) if Repsol fails to meet its carbon intensity indicator by 12% by 2025 and 25% by 2030 respectively.

The UK Debt Management Office published an investor presentation on 2 July on the UK's Green Bond Framework, released last week in preparation for the country's debut Green Bond sale in September. More than half its program is projected to fund clean transportation, with renewable energy and living and natural resources (such as planting trees) also prominent. A key goal within transportation is to decarbonize the UK's bus fleet.

Bank of China has raised CNY1.5 billion (USD232 million) from an offshore "dim sum" bond (CNY sold outside mainland China) which was sold in Green Bond format.

Other debt

The UK Debt Management Office has announced a further syndicated deal, its third this year. It plans to launch a conventional gilt maturing on 31 January 2039 in the week commencing 12 July.

The European Financial Stability Facility (EFSF) tapped its 0% 20 January 2031 bond with a further EUR 2 billion priced at 0.014%, five basis points under mid-swaps, bringing its size to €5 billion. Demand exceeded €16.5 billion.

Nomura returned to the market on 6 July, placing USD3.25 billion of five, seven, and 10-year debt at 1.653%, 2.172%, and 2.608%, representing margins of 85, 105, and 125 basis points over comparable US Treasuries. All three tranches were sold 25 basis points inside initial guidance. The deal enjoyed tighter spreads than an earlier offering of the same size withdrawn after pricing over expected losses related to Archegos Capital.

Our take

In the week of 2 July, an impressive list of six sovereign borrowers completed international bond sales, raising close to USD8.7 billion according to JP Morgan analysis, complemented by the international portion of Chile's sizeable peso sale. This has been followed by Pakistan, Mexico, and Sharjah this week.

The recent rush of supply is likely to reflect seasonal factors - with borrowers moving simultaneously to raise funds prior to the potential slowdown of issuance during July and August to reflect the US and European vacation season. However, it is also likely to indicate borrower concern that market conditions will deteriorate later in the year if there are further signs of an earlier move by the Federal Reserve to alter its policy stance, and especially if this is shared by other major central banks. It aligns with our repeated forecasts that borrowers are likely to "front load" issuance and manage their liabilities to take advantage of favorable current conditions.

Posted 08 July 2021 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, IHS Markit

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