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Capital Markets Weekly: Multiple emerging-market sovereign bond sales well-received

27 September 2019 Brian Lawson

On 23 September, South Africa sold a record USD5 billion debt package of 10 and 30-year dollar debt. Initial price talk was at 5.25% and 6.125% for a USD4 billion package. South Africa priced USD2 billion of ten-year debt at 4.85% and USD3 billion of 30-year bonds at 5.75%, with the increased deal 2.7 times covered.

On the same day, Abu Dhabi raised USD10 billion, its first international sale for two years, comprising USD3 billion each for five and ten years, and USD4 billion for 30 years. Initial guidance was set at margins of 80, 100 and 125 basis points over US Treasuries: all three tranches were tightened by 15 basis points given final demand exceeding USD24 billion.
On 24 September, Bahrain started the sale of 12-year conventional debt at 5.875%-6%, alongside a 2027 sukuk with an indicated profit rate of 4.875%-5%. Both tranches were represented as being of benchmark size: the package subsequently was sized at USD2 billion. In a particularly busy week for MENA issuers, DP World, National Bank of Fujairah and Islamic Investment Bank entered the market alongside Bahrain, with the former seeking USD1 billion of conventional and sukuk debt.

On the same day, Ecuador sold USD2 billion of debt, raising USD600 million of five-year notes at 7.5%, and USD1.4 billion of 10-year liabilities at 9.5%. According to Ecuador's Finance Minister Richard Martínez, the latest funding was 2.4 times subscribed and "will allow us to complete the funding programme for this year".

Additionally, Republic of Uruguay launched a tap of its 2055 issue, with initial price talk at US Treasuries plus 200 basis points. According to El Observador newspaper, USD500 million of funding was planned for this tenor, with subscription being for new cash or by tendering existing global bonds maturing in 2022, 2024 and 2027. In parallel, Uruguay's 2031 issue was reopened, but exclusively for bond exchanges. Uruguay sold USD750 million of the longer maturity at the initial guidance, alongside a further USD250 million of 2031 debt through exchanges, with roughly USD500 million of shorter-dated liabilities being retired. Total demand reached USD2 billion.

Further supply remains pending from Kazakhstan, which has met investors over a potential benchmark sale of seven and/or 15-year debt. Also pending this week is Euro-denominated issuance by Montenegro.

Other emerging market supply also has been active:

  • Chilean state miner Codelco, the world's largest copper producer, opened books on 23 September on 10 and 30-year dollar bonds, with price talk of 150 and 180 basis points margins. Codelco placed USD2 billion in total: USD1.1. billion was sold for 10 years at 3.02%, with USD900 million raised for 30 years at 3.71%, with each tranche priced 15 basis points inside initial guidance. The company's statement noted that it was taking advantage of favourable bond market conditions to extend its debt profile and meet upcoming redemptions between 2020-23, while helping to fund its strategic projects. In a statement, Codelco flagged that it had enjoyed demand from over 250 investors, with the deal four times subscribed. The rates achieved are "the lowest obtained by Codelco" for the maturities selected. In parallel, Codelco announced it would repurchase up to USD639 million of outstanding debt maturing between 2020 and 2023.
  • Minera México sold USD1 billion of 30-year debt priced at 4.578%. The company noted that the deal was some 4.3 times subscribed and enjoyed participation of over 200 investors.
  • BRF, a Brazilian meat producing firm, placed USD750 million of ten-year bonds at 5%. BRF initially had launched a USD500 million deal but gained USD3.6 billion of demand, permitting the increase. The deal is linked with a liability management exercise. BRF now plans to repurchase up to USD650 million of debt maturing between 2022 and 2024, with USD369 million being targeted to buy back its USD4.75% 2024 notes.
  • Later in the week it was followed by Brazilian petrochemical firm Unigel, which raised an increased USD420 million (versus USD400 million initially) at 8.75%, versus 9% guidance.

Russia's State Transport Leasing Company reportedly has gained USD1.3 billion of demand for its USD500 million issue, with strong US account participation.

Peru's Interbank sold USD400 million of 3.25% seven-year bonds, with an issue price of 99.69% to yield 3.3%, versus price guidance of 3.5%. The issue was downsized from an initially-indicated USD500 million size, with a subsequent sol-denominated issue making up the shortfall. The new debt will finance repurchase of its 5.75% 2020 issue.

Implications and outlook
This week's emerging market calendar is both sizeable and impressive.

South Africa's successful sale is particularly positive: the deal was reported by South Africa's National Treasury to have been 2.7 times subscribed and upsized from USD4 billion to reflect the healthy demand. It comes against a challenging background, with adverse recent focus on Eskom's debt among various factors leading to concern the country may soon lose its last investment grade rating for domestic debt, forcing international investors to curtail their local exposures.

Bahrain enjoyed demand of at least USD4.5 billion for its USD2 billion sale. It is among the weakest credits in the Gulf region, but its trajectory has stabilized since it enjoyed a USD 10 billion support package from other GCC states: IHS Markit has viewed it to enjoy a stable outlook since the 2018 support was provided. Given its perceived recourse to GCC support and the prevailing yield hunger, its success this week is perhaps less surprising.

Overall, although key reference bond yields have backed up in September, there has been no sign of risk aversion towards emerging market credits, and their spreads have been tightening. As such it is unsurprising - and welcome - that supply from the segment has revived significantly.
With investors showing some hesitancy to locking in low or negative long-term yields for strong credits, and with short-dated bonds at historical lows, especially in Euros, it is logical that investor would favour higher yielding instruments, such as emerging market bonds, to provide at least some positive returns. This aligns with the strong recent demand obtained recently for weaker financial-sector credits and capital instruments. Recent policy rate reductions have increased the pressure on investors to take more risk, and this is also visible in the high-yield markets, where Elis, a French laundry firm with a BB rating, this week achieved a 1% coupon for a EUR500 million 5.5-year deal and paid 1.625% for an 8.5-year EUR350 million tranche. Proceeds will be used to repay bank term loans in full, with the company reporting cash savings of EUR13 million per annum from the new issuance, which leaves it with no significant maturities until 2023, and an average cost of debt of 1.5%. This transaction is one of the lowest-yielding junk bonds on record, although several shorter-dated junk bonds denominated in Euros have been trading at negative yields for some months now.

Posted 27 September 2019 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, IHS Markit

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