Obtain the data you need to make the most informed decisions by accessing our extensive portfolio of information, analytics, and expertise. Sign in to the product or service center of your choice.
Debt issuance volumes have revived sharply, with US companies
raising a record volume during March and a sharp revival in ESG
activity during the last few days, but pressures on emerging market
borrowers continue to grow, with South Africa having lost its last
non-junk rating, increasing EM reliance on official funding sources
such as the International Monetary Fund.
ESG
Despite the difficult and volatile environment, ESG issuance has
revived substantially:
On 26 March the regional government of the Basque Country sold
its second sustainable debt issue, a EUR500 million offering priced
at 0.85%, 25 basis points over comparable Spanish government debt.
The deal was seven times subscribed, with demand split evenly
between domestic and international subscribers. EUR355 million will
be used in the fight against COVID-19, "our absolute priority"
according to the region's statement: EUR130 million will be applied
for healthcare and EUR255 million in related social programs.
In addition, Pfizer issued USD1.25 billion of sustainable debt
while Consolidated Edison of New York issued a two-part Green
bond:
Pfizer sold its first such issue as a 10-year deal priced at
2.625%. Proceeds will support environmental sustainability projects
and improve access of vulnerable groups to its drugs and medicines.
Pfizer's statement describes the deal as the "first in the industry
sustainable bond". Use of proceeds will include improving energy
efficiency, water conservation, reduced waste and improved
recycling. Among other goals it will also focus on key development
projects including COVID-19 and antimicrobial resistance, while
helping to improve health systems in lower-income countries.
Consolidated Edison placed USD1 billion of 30-year bonds at
3.988%, a 255-basis point margin over US Treasuries, along with
USD600 million of 10-year debt at 3.377%, at the same spread over
Treasury bonds. The firm is sensitive to ESG issues: in addition to
focusing on wind and hydro power, it published a climate resilience
study in December 2019 looking at historical and projected climate
impacts to its service area, including "extreme heat, coastal storm
surge, inland flooding and more violent storms". The study showed
the company's energy systems to be subject to increasing flooding
risk, with its electrical system also challenged by extreme heat:
the New York City/Westchester region's temperature is expected to
move from exceeding 103 degrees Fahrenheit on two days a year at
present to 26 days by 2050.
The African Development Bank (AfDB) raised a USD3 billion "Fight
Covid-19 Social" bond, designed to "alleviate the economic and
social impact" of the pandemic. The three-year bond, priced at
0.75%, gained demand of over USD4.6 billion. According to AfDB's
statement the deal is the largest social bond arranged to date, as
well as its own largest offering. 53% of the allocations went to
central banks and other official institutions, with bank treasuries
and asset managers taking 27% and 20% respectively.
Lastly, InterAmerican Development Bank sold USD2 billion of
five-year debt. On 26 March it announced a four-pronged program to
help its members, focusing on
COVID-19 mitigation by strengthening healthcare systems and
buying medical supplies
Provision of "safety nets" for vulnerable groups along with
transfers to workers in the informal sector and support to
companies in badly damaged sectors such as tourism.
Helping SMEs, described as providing 70% of the region's
employment.
Funding fiscal measures in response to COVID-19 and to
encourage recovery.
Other debt
According to Dealogic data cited by the Financial Times, despite
the much higher cost of borrowing, high-grade corporate issuance
during March has reached USD244 billion including a record USD150
billion for US firms, as companies rushed to lock in additional
liquidity. Supply from US firms reached USDS73 billion last week,
also a record. Monthly supply rises to USD408 billion after
including bank debt sales.
One adverse development last week was the downgrading of Ford by
two major agencies to junk ratings, moving USD36 billion of its
debt into the sub-investment grade category. Media reports claimed
that the company is drawing on its USD15.4 billion bank credit
lines.
While spreads remain much higher, on 26 March Air Liquide, which
manufacturers industrial gases, priced EUR500 million tranches of
five and 10-year debt at 120 and 140 basis points respectively,
which represented a zero or negative premium to its outstanding
curve, unlike the significant new issue premiums generally required
recently.
On 30 March, European supply has restarted vigorously, with
multi-tranche offerings by Volkswagen and AB Inbev, with three,
five and eight-year supply from the former and long seven year, 12
and 20-year bonds from the latter. By mid-morning these had
attracted EUR5 billion and EUR16 billion respectively, with a EUR1
billion deal for Nordic Investment Bank also nearly three times
subscribed.
Funds flows
According to Investment Company Institute data cited by the
Financial Times, in the week to 25 March, mutual and exchange
traded money market funds attracted a record USD286 billion of new
inflows. The report claims that the main beneficiary group was
funds that invest in government debt, while those holding
short-term corporate debt such as commercial paper faced outflows
of USD53 billion. According to the US Department of the Treasury,
one, three and six-month bills all yielded zero on 25 March, having
all started March at yields of over 1%.
The same source also cited EPFR Global data showing outflows of
USD17 billion from Emerging Market debt funds in the week to 25
March, following USD18.8 billion of outflows, a record, in the
preceding week. The report noted that USD47.7 billion have been
withdrawn in four weeks from such funds, equating to 10.2% of
assets under management. The report provides interesting reference
points to evaluate these outflows:
According to Bank of America, net inflows to such funds totaled
USD140 billion during the prior four years.
While very severe, redemption percentages are below those
recorded during the Fed "taper tantrum" and the 2008/9 financial
crisis, when outflows reached 16% and 34.5% of assets under
management respectively.
Unsurprisingly the withdrawals have led to sharp declines in EM
bond prices: JP Morgan indices for hard-currency and local currency
EM debt have fallen 10.9% and 14% during 2020.
South Africa's loss of its Moody's investment grade rating for
its domestic debt (international bonds were already all junk rated)
threatens new outflows from rand-denominated portfolio holdings,
although investors have been aware of the downgrade risk for an
extended period.
Outlook and implications
Recent developments indicate three main developments:
High-grade issuers are stepping up their issuance of new debt to
boost liquidity and tide them through COVID-19 related production
disruptions. While some details of the Federal Reserve's support
for the corporate debt market still await clarification, the large
volumes of completed issuance indicate the success of quantitative
easing measures in underpinning the high-grade segment of the debt
market. While reported fund flows continue show a rush towards
safe-haven cash instruments, it is clear that investors have been
successfully attracted by the far-higher bond returns available,
with some indicators that new issue premia have at least
stabilized, and in Air Liquide's case, declined back towards
zero.
Outflows from Emerging Market debt are sizeable but
unsurprising, given the dual shocks from COVID-19 and weak energy
and natural resource prices. As previously highlighted, there are
clear risks of growing stress in this segment.
In turn, this increases the need for official support to
Emerging Market countries for them to avoid a squeeze in liquidity
and the threat of having to choose between essential healthcare and
welfare initiatives or servicing their debt. Fortunately, as
reported last week, there are clear signs of encouraging policy
responses by official lenders.
On 27 March, IMF Managing Director Kristalina Georgieva reported
that over 80 countries have approached the fund for emergency
financing. She stated that some 50 of the requests were low income
countries, and that requests for help from this group were "coming
fast". Additionally, she noted that middle income countries were
engaging "very actively" with the Fund, and that "we encourage them
to do so".
To face these challenges, the IMF specifies four measures that
it is taking to increase its support capacity:
It proposes to double its Emergency Financing capacity from
USD50 billion, while simplifying its processes.
It is reviewing its set of lending instruments to identify
potential gaps in addressing COVID-19 requirements, including
consideration of expanded use of precautionary credit lines and
short-term liquidity facilities.
Its Board has approved changes to its Catastrophic Containment
and Relief Trust to provide debt relief to poorer countries and has
asked its members to increase the capacity of this lending
segment.
Finally, the IMF is seeking new arrangements to increase the
borrowing capacity of the fund, citing components of the US
stimulus package as a positive indicator.
Overall, the proactive stance of official lenders is a strongly
positive indicator. Active support from the IMF and World Bank,
among others, lowers the risk of debt stress in Emerging Market
countries and helps to preserve financial sector stability. The IMF
plans to submit a detailed set of proposals to the April G20
meeting, the outcome of which is crucial for Emerging Markets.
Posted 30 March 2020 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, IHS Markit