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Capital Markets Weekly: Equity supply and sovereign Green Bond issuance revival

03 June 2022 Brian Lawson

Equity supply-MENA

Following the highly successful USD6 billion initial privatisation of Dubai Electricity and Water Authority in April, which was sharply increased from 6.5% to 18% of the firm's share capital after the offering was 35 times subscribed, there has been another clear success in the region with further potentially sizeable supply under consideration.

Borouge, a petrochemicals joint venture between Abu Dhabi National Oil Company and Borealis, announced on 23 May the sale of roughly 10% of the company, with an offering of 3 billion shares at AED2.45 (USD0.67) each to raise roughly USD2 billion. Abu Dhabi's stock market has recorded gains in 2022 and was 52.4% up year on year as of the launch date, with 17.4% gains in 2022. The issue closed on 30 May with total demand of USD83.4 billion, according to a company statement.

Against a background of stock market appreciation, more MENA equity supply is reportedly being prepared.

  • Energy media including have published unconfirmed reports that Saudi Aramco is exploring the idea of listing and selling a minority stake in its trading unit, Aramco Trading, suggesting that this could be for up to 30 percent of the entity, and claiming that market analysts have suggested this block could be worth USD30 billion.
  • Ongoing unconfirmed reports also suggest that a further sale in Saudi Aramco itself could be considered. A recent Wall Street Journal article suggested that this could target up to US50 billion and involve additional secondary listings (on exchanges such as London, Singapore and elsewhere). Aramco reported impressive first quarter net income of USD39.47 billion, versus USD21.72 billion in the equivalent quarter of 2021. Its initial flotation in December 2019 raised USD29.4 billion, through the sale of 3.45 billion shares at SAR32 each in January 2020. During 2022, Aramco's share price has risen from SAR 32.2 on 2 January to SAR41.40 on 31 May.
  • As of 31 May, Saudi Arabia's Tadawul index was recording year to date gains of 13.5%, and 12 month appreciation of 21.9%.
  • Marafiq, the Saudi Arabian "Power and Water Utility Company for Jubail and Yunbu" has appointed banks to prepare the sale of a 30% stake in the company later in 2022. At present, Saudi Aramco, SABIC, the Royal Commission for Jubail and Yanbu and the Public Investment fund each own 24.81%. The sale is forecast to be worth SAR4.5 billion or USD1.2 billion.
  • Dubai's Emirates Central Cooling Systems Corporation (Empower) is also reported to be appointing banks for its future flotation, similarly slated for 2022. The firm, part owned by Dubai Electricity and Water Authority, is one of ten government linked firms identified for flotation in a programme established by Dubai's deputy ruler, Sheikh Maktoum bin Mohammed last November.

According to a filing on 27 May, Eletrobras is planning to issue 628 million new shares, bringing the government's holding to below 50%. In parallel, BNDESpar, the private equity unit of state bank BNDES, plans the secondary sale of 69.8 million shares. A 15% greenshoe facility will be made available, potentially increasing the deal by a further 105 million shares. Pricing is projected for 9 June, with trading in the new shares to start on 13 June. Based on the share price at the time of announcement, the deal -including the overallocation facility - could be worth around BRL35 billion (USD7.4 billion), the second largest volume on record for a Brazilian share sale behind the 2010 offering for Petrobras.

Despite the overhang from the proposed capital increase, the privatization is viewed positively by the market: the company's traded share price has risen from BRL32.3 at the start of 2022 to BRL42.76 on 27 May, the date of announcement. The BOVESPA index also is in positive territory for 2022, with year-to-date gains of 7.52% as of 31 May, reflecting Brazil's strong natural resource footprint.

ESG sovereign debt

Austria has made its Green Bond debut, a May 2049 issue sold on 24 May. It placed EUR4 billion (EUR250 million being retained by the issuer) at mid-swaps plus 22 basis points, three tighter than opening price guidance, with demand reaching EUR25 billion according to Reuters sources.

According to Markus Stix, Managing Director at Austria's Treasury, the deal achieved a "Greenium" - the cost saving from ESG format - worth 2.5 basis points. He highlighted that this yield saving had enabled Austria to issue at a yield below Austria's bond "maturing in 2040, despite…being nine years longer".

Denmark also debuted as a Green bond issuer earlier in 2022 with a domestic sale, while Greece is suggested as likely to follow in the second half of 2022.

AFT, the French debt management agency, announced on 24 May the sale of an innovative syndicated Green inflation-linked bond due in July 2038. The EUR3 billion issue was launched on 25 May with demand reaching EUR24 billion and was priced at a real return of -0.926%, "the lowest level of real rate ever observed" in a syndicated OAT, according to AFT's statement.

While details are still to be established, Prime Minister Fumio Kishida stated on 17 May that Japan would need JPY150 trillion in investment in the next decade to become carbon-neutral, specifying that this would include issuance of JPY20 trillion (USD157 billion) of Green Transition JGB debt. More specific plans are to be developed later this year by a panel on climate transition.

Our Take

Both debt and equity markets have recovered globally in recent weeks, suggesting that investors are adjusting to an environment of persisting inflation, higher energy and food prices, and tighter monetary policy. The improvement does not imply that equity supply in general now faces a materially more favourable environment: as of 30 May the Nasdaq and S&P 500 indices were down by 23.4% and 13.3% in 2022, with Euro STOXX 50 11.2% weaker. The Renaissance US IPO index also has improved recently but still is showing losses of some 48% for 2022.

Within the global picture, MENA markets have been prominent for going against the adverse global trend. The DEWA privatization was highly successful while the Borouge flotation also has enjoyed a "hot" market response. In turn, this provides a positive background for further sales in Saudi Arabia and UAE if energy prices remain high.

Brazil's stock market also has performed relatively well, benefitting from the country's natural resources. While a large deal, Eletrobras's planned capital increase previously had been welcomed by market investors, on the grounds that dilution of the state's role might improve corporate performance.

Prior to the sale, however, electoral uncertainties, and the former President Lula's opposition to the sale, appeared to indicate generate future risks to performance for those investing now. This was highlighted by the Financial Times on 18 May, when it stated that Lula had "cautioned prospective buyers against participating". Given Brazil's strained fiscal position, and the goal of an incoming Lula-led administration to spend elsewhere, our Country Risk specialist Carlos Caicedo suggests that he would be unlikely in practice to seek to reverse the current operation and restore majority state ownership, with limitations on state repurchases of the new shares further constraining his policy options.

A further technical constraint relates to liabilities of Madeira Energy, which controls the Santo Antonio hydroelectric facility and is minority-owned by Eletrobras subsidiary Furnas. Eletrobras previously suggested that resolution of the issue would be needed for it to proceed with its own capital increase.

Given the deal's sizeable nature, its reception will be important in determining the appetite for further market sales of state assets, if the post-electoral political environment makes this feasible (i.e. if President Bolsonaro were re-elected).

Elsewhere, Austria's Green Bond debut and the French index-linked green syndication both continue the ongoing expansion of sovereign ESG issuance in Europe, with Greece projected to follow later this year. Japan's plans for Green Bond issuance are a sizeable potential boost to global sovereign Green issuance, although the USD157 billion equivalent targeted is to be spread over a decade. By way of comparison, in 2021, the US was the largest country for Green Bond issuance according to Climate Bonds Initiative's reports, with USD81.9 billion of new issuance in the year versus USD50.3 billion in 2020. Its cumulative stock reached USD304 billion, ahead of China with USD199 billion of outstanding Green debt by end-2021. A further constraint is the "Green Transition" label: depending on its scope, this might allow for investments that fall outside the global standards for Green bonds, reducing appear for non-domestic ESG investors.

Posted 03 June 2022 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, S&P Global Market Intelligence

This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.


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