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Capital Markets Weekly: Successful Emerging Market primary transactions indicate improved stability

16 November 2018 Brian Lawson

Nigeria sold a USD2.86 three-part package on 14 November, placing USD1.18 billion of seven year bonds, USD1 billion at 12 years and USD750 million of 30-year obligations. The tranches, all with bullet maturities, were priced at 7.62%, 8.75%, and 9.25% respectively. Nigeria claimed that peak demand reached USD9.5 billion.

Even larger demand was obtained on 8 November when Indonesia Asahan Aluminium (Inalum), a state-owned enterprise, completed a debut USD4 billion package of three, five, 10 and 30-year debt, priced at 5.23%, 5.71%, 6.53% and 6.76% respectively. The package funds its USD3.85 billion purchase of a majority stake in the gold and copper mining unit of Freeport McMoran in Indonesia giving 51% control of the Grasberg mine. The issue was the largest ever corporate sale in Indonesia, priced well inside initial guidance, and enjoyed peak demand of some USD20 billion.

Gazprom sold its first bond issue since the latest round of sanctions against Russia. On 13 November it marketed a long five year Euro-denominated issue with initial price guidance of 3.125%, pricing EUR1 billion at 2.95%.

Despite these successes, there have also been some deal withdrawals. Naftogaz, the Ukrainian state energy company, tried unsuccessfully to sell its first international issue since 2009, marketing a USD500 million five year US dollar deal, with indicated pricing of 10.9%. However, according to Interfax agency, the deal was withdrawn due to "the unfavorable situation on the market".

On 14 November, Latin Finance claimed that Peru also had delayed its issuance plans - to raise USD1-2 billion - given domestic political instability and the volatile market environment.

After many recent IPOs were pulled, there have been two relative successes in Emerging Markets, howbeit with both priced at the bottom of indicated price ranges. On 9 November Slovenia's Nova Ljubljanska Banka priced its IPO at EUR51.5 per share, selling 11.8 million shares, representing 59.1% of the bank's capital, and raising EUR608.5 million pre green-shoe, which could expand the deal to 13 million shares (65% of the bank). Trading started on 14 November, with the London listed Global Depository Receipts trading to a first-day premium at EUR11.5, versus issue pricing of EUR10.30.

Kazakh uranium producer Kazatomprom priced its IPO at USD11.60 per share, the floor of the USD11.6-15.4 range. The sale represents 15% of the company's share capital, raising USD450 million, versus initial discussion of selling 25%. In initial trading shares traded to a slight premium at USD12.

Finally, the QAR2.73 billion (USD737 million) IPO of Qatar Aluminium Manufacturing Company (Qamco) has been oversubscribed. The deal involves the sale by Qatar Petroleum (QP) of 49% in Qamco to domestic buyers. Demand was obtained worth 2.5 times the retail tranche (44% of the company's shares).

Among these various developments, most are positive. Nigeria's issuance fits within its longer term strategy, and the deal was clearly well received. In 2016, Nigeria set the goal of increasing the share of foreign borrowings in its public debt to 40% to lower nominal funding costs versus naira-denominated issuance. This ratio stood at 30% in June 2018, and is now expected to reach 32%.

Looking at the borrowers delaying debt sales, Ukraine is among the riskier credits within the Emerging Market segment, with its EMBI+ spread index trading at over 6 percentage points over US Treasuries: this margin has widened 44% in 2018, versus a 25% rise for global EM debt, making Naftogaz a challenging sale from the onset.

Peru's delay in issuance is an adverse indicator, but should not be misinterpreted. The country is highly regarded in bond markets: its average spread over US Treasuries is just 132 basis points, and despite political instability it has outperformed the wider EMBI+ Emerging Markets index this year. In mid-September, the country's latest Finance Minister Carlos Oliva flagged a flexible issuance policy, stating it could choose when to issue, how many deals to undertake and the split between domestic and international issuance. If Peru fails to issue soon, a sale in 2019 appears more likely.

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Posted 16 November 2018 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, IHS Markit


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