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Capital Markets Weekly: Late-summer European supply indicates favorable issuance environment

26 August 2021 Brian Lawson

After KFW's EUR5 billion sale last week, Finland, BNG, and NWB Bank pre-empted the traditional rush of issuance in September with deeply negative-yielding debt sales. EnBW, Castellum, and Evonik launched hybrid deals in Euros, while Nordea set a new low coupon for the hybrid sector with a heavily oversubscribed dollar AT1 deal.

Emerging markets

Egypt's Finance Minister Mohamed Maait announced on 24 August that the country plans to launch its debut sukuk issue in the second half of fiscal year 2021/22. He stated that the deal size and maturity will be determined later and failed to clarify if the issuance will be in local currency or internationally.

Global Capital reports that Nigeria is likely to undertake international issuance shortly.

ESG

The Luxembourg branch of China Merchants Bank raised USD300 million of two-year floating rate sustainability debt at SOFR plus 55 basis points, versus guidance of an 85-basis point margin. It also sold USD300 million of five-year Green bonds at 1.345%, 55 basis points over comparable US treasuries, and 40 basis points inside price talk. The package gained USD5 billion of demand. The issue is reportedly the first Chinese sale of SOFR debt this year (and only the second after Bank of China used the new reference rate in 2019).

Austrian bank Bawag brought its first Green covered bond, a EUR500 million eight-year issue which gained over EUR1.4 billion of demand.

Other debt

In the week to 21 August, primary issuance fell sharply despite a EUR5 billion 0% 2028 issue (priced at 103.065%) for German state development agency KFW, after the particularly busy prior week. High yield primary markets remained open, led by Southwestern Energy and Multiplan with USD1.2 billion and USD1.05 billion sales.

After the brief lull, primary markets have been active this week, with heavy issuance on 24 August including sizeable Euro-denominated sales for Finland, BNG, and Credit Suisse, along with a USD3 billion seven-year dollar issue by the EIB, described in trade media as having achieved record demand.

The week started with BNP Paribas selling a EUR1 billion 12-year (non-call seven-year) subordinated Tier 2 deal, priced at a 0.875% coupon and issue price of 99.885%, 117 basis points over mid-swaps.

Finland sold EUR3 billion with its first syndicated five-year deal since 2019. The issue follows 30 and 10-year sales earlier this year and is likely to represent its last syndication for 2021. Nordea research notes that after the sale, Finland will have raised 75% of its EUR17.5 billion benchmark issuance target for 2021. The deal's timing appears designed to avoid the traditional increase in supply after the European holiday season (and Labor Day), and to benefit from the recent decline in European yields. Five-year German BOBL were trading on 24 August at -0.74%, close to their (recent) 2021 low of -0.772% and some 20 basis points below levels in June. The decline in yields also applies for longer maturities: 10-year bunds trade at -0.47%, 30 basis points below their level in late July, setting a favorable reference point for further sovereign supply.

Finland's deal priced at -0.626%, with demand of over EUR15 billion from almost 100 investors. Demand was strongest from the Nordic region, which took 41% of allocations followed by UK and Ireland with 15%: 30% was placed with banks (reflecting the short maturity) and 28% with pension funds, while asset managers, official buyers, and hedge funds took 15%, 13%, and 13% respectively.

Alongside Finland, Dutch municipal agency BNG raised EUR1.75 billion of seven-year debt with a zero coupon and issue price of 102.247%. It was followed by NWB Bank - which funds Dutch water authorities and social housing associations - with a ten-year zero-coupon issue, priced at 101.158%.

EnBW (Energie Baden Wuerttemberg) reopened the corporate hybrid market, offering EUR500 million each of 60-year bonds first callable after seven and 11 years, priced with coupons of 1.375% and 2.125%, versus guidance of 1.5% area and 2.125-2.25% area. Demand reached EUR3.4 billion.

Swedish real estate firm Castellum also arranged a hybrid sale, with a EUR1 billion perpetual issue priced at 3.125%, versus guidance of 3.375-3.5%. It was followed on 26 August by German specialty chemicals firm Evonik, with a EUR500 million 60-year issue callable after 5.25 years.

In addition, Nordea launched a USD1 billion perpetual non-call eight-year deal (which gained USD6 billion of demand), pricing at 3.75%. This is described by IFR as setting a new low coupon for a dollar AT1 issue. Nordea already enjoyed a favorable capital position. It reported a CET1 ratio of 18% at end-June 2021.

Elsewhere, Credit Suisse pre-empted potential September supply with EUR3 billion of two and seven-year Euro-denominated debt, while in the corporate sector German real estate firm Vonovia is preparing a multi-tranche Euro-denominated offering, offering guidance on a five tranche sale on 26 August.

Equity

Chinese technology stocks fell sharply again on 20 August after state news agency Xinhua reported that a new law "to protect personal information" would come into effect from 1 November.

The report specifies that individual consent will be required "when processing sensitive personal information", including "financial accounts and whereabouts". Applications that process personal data "illegally" must be suspended or terminated. The new measure also includes a feature that prohibits automatic mechanisms for marketing and dissemination of information from targeting personal characteristics or incorporating "ways of rejection". According to the Financial Times, internet firms also must establish "robust personal information protection compliance systems" and "must not excessively collect personal information".

The latest decline implied that Chinese technology shares have lost around half their value from their recent peak in February 2021. The NASDAQ Golden Dragon index of Chinese shares listed on US exchanges was down on 20 August by 22.4% over 12 months, and stood at just 9847, 47% of its peak value of 20668 on 16 February. Hong Kong Stock Exchange's Hang Seng Tech Index, which measures the 30 largest technology companies listed in Hong Kong, stood at 5887, down 47% from its February peak of 10945.

The week to 20 August recorded no new US corporate IPOs and just one SPAC deal, a USD200 million offering for Waverly Capital Acquisition

Implications and outlook

While market attention - and the unusual level of US corporate issuance in mid-August - has been focused on potential tapering of the Federal Reserve's asset purchase program, expectations of a somewhat softer stance by the ECB (and ongoing concerns over the COVID-19 pandemic's case numbers) have provided an increasingly favorable environment for new Euro-denominated issuance. This was already indicated by Hesse's prior sale at levels tighter than the ECB deposit rate and by KFW's offering last week. The further sale of three sovereign and state agency deals in Euros at heavily negative yields reinforces indicators that primary market conditions are favorable in the Euro-denominated sector, a message further reinforced by the successful reopening of the market for corporate hybrid debt.

Despite Fed tapering within 2021 being under debate, this has not caused material damage to dollar market conditions either, with Nordea's dollar AT1 deal and the ongoing sizeable high-yield supply representing favorable indicators that dollar-based investors are reacting calmly to potential policy adjustment, although US Treasury yields - while below mid-July levels - have risen slightly across the yield curve during August.

While BlackRock's proposed overweighting is a positive factor for portfolio inflows into mainland Chinese debt and equity, we must caution that the tightening of regulation in its technology sector has had a severe impact on equity valuations, discouraging new supply of share sales and leaving existing investors with heavy valuation losses. Adverse valuations for recent investments and higher perceived regulatory uncertainties both represent potential constraints for investor demand. Extension of tighter regulation to other sectors - such as healthcare - would represent a further constraint on potential Chinese equity issuance, particularly in the affected areas. There is no obvious reason, however, why this would impact the consistently positive reweighting flows into Chinese government debt, which should be boosted further by more aggressive portfolio reweighting.

Posted 26 August 2021 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, IHS Markit

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