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Capital Markets Weekly: France and Greece continue long-dated issuance within rallying bond markets

30 January 2020 Brian Lawson

Overview

As expected, this week's supply was curtailed by the Lunar New Year holiday, with equity markets also adversely affected by the potential impacts of China's Coronavirus outbreak on economic growth.

  • According to the Financial Times, the stock of negative-yielding debt has risen by over USD2 trillion since mid-January to exceed USD13 trillion, howbeit well-short of the late August 2019 peak of USD17 trillion.

Within market issuance, France and Greece arranged long-dated syndicated deals, while Latin American corporate supply has remained strong.

Greece/France Long-dated syndicated sales

Greece attracted EUR18.8 billion in demand from 378 accounts for a EUR2.5 billion syndicated 15-year deal, its longest market funding to date.

  • The issue was priced at mid-swaps plus 165 basis points, yielding 1.911%, 212.9 basis points over the 2034 Bund.
  • 16% was placed domestically, while 32% was taken by UK buyers, followed by French investors with 14%.
  • 68% of allocations went to asset managers, 14% to banks, and just 5% to hedge funds.
  • Finance Minister Christos Staikouras claimed the deal was a "vote of confidence", improving the country's yield curve, and strengthening "public debt's sustainability".

For 2020, its Public Debt Management Agency forecasts issuance of EUR4-8 billion, with its goals including lowering debt costs, broadening its market access, including the development of its yield curve, and reducing refinancing risks. The country's 2020 budget forecasts a primary surplus of 3.6% of GDP, versus the 3.5% agreed with its official creditors. Greek bonds have enjoyed a strongly-positive recent trajectory: its 10-year bond currently yields 1.14% having breached the 2% level in August 2019.

France also sold syndicated long-dated debt.

  • It placed a May 2052 issue, with initial price guidance of seven basis points over its 1.5% 2050 OAT.
  • It priced EUR5 billion on the same day, 28 January, at a four-basis point margin, to yield 0.727%, which Agence France Trésor describes as "a new record low" yield for long-term 30-year debt.
  • Demand reached EUR26.5 billion from over 250 investors.
  • Asset managers took 26%, banks 24%, pension funds 20% and insurers 16%.
  • Demand was widely and evenly distributed, with France receiving 20% of allocations, Italy 15%, Germany 12%, the United Kingdom 10%, North America 9%, Netherlands 8%, Scandinavia 4%, other Eurozone countries 16% and the rest of the world 6%.

Emerging markets

Latin American supply remains active:

  • Bancolombia sold USD950 million of five-year debt to fund the repurchase of its 5.95% 2021 issue.
  • The deal was increased from an initial USD900 million and priced at a 3% coupon and issue price of 99.293%.
  • Colombian financial services group Grupo Aval sold USD1 billion of ten-year debt at 4.6%, 280 basis points over US Treasuries, 20 basis points inside guidance. The issue is its first international offering since 2012.
  • Brazilian steel producer Siderurgica Nacional placed USD1 billion of eight-year debt at 6.75%.
  • Camposol, a Peruvian fruit producer, raised USD350 million of seven-year debt at 6.2%, versus initial price talk of high 6% area. Proceeds will repay existing debt.
  • Paraguayan meat firm Frigorifico Concepcion sold USD100 million of five-year bonds, with a coupon of 10.25% and 99.045% issue price.

CEE bank supply also is growing. Sovcombank is marketing ahead of a transaction, with Credit Bank of Moscow having successfully completed a five-year benchmark bond.

  • It raised USD600 million at 4.7%, the lowest rate paid by a Russian bank for five year funding and the bank's cheapest issuance to date.
  • The deal was upsized from USD500 million and priced 55 basis points inside initial price guidance after demand reached over USD1.6 billion.
  • 34% of the deal was taken in Continental Europe, 20% in the USA and 15% from the UK: Russian buyers accounted for 22%.
  • The bank was the first Russian financial entity to tap Middle Eastern demand, holding roadshow meetings in Dubia and Abu Dhabi: 9% of the offering was placed in the region.
  • The deal was the third international debt sale by the bank in the last 12 months.

These deals follow a USD300 million sale by Arshinbank from Armenia, which raised USD300 million of 6.5% five-year bonds, gaining demand of over USD450 million.

Romanian cable television and mobile telecommunications group Digi is marketing EUR800 million of five and eight-year callable debt, both tranches being on a secured basis.

ESG

According to Environmental Finance's database, ESG issuance grew by 40% in 2019, reaching USD290 billion. Within this total Business Green website claims that USD255 billion were in Green format.

Leveraged debt

A Bloomberg report suggests that European junk bond markets are displaying "peak greed". It notes that January issuance is likely to reach USD11 billion equivalent with many issues displaying weak financial protection for investors or using riskier structures.

As an indicator of the favorable market environment, German-based Techem, a global energy services group, has added a EUR600 million bond and is refinancing a EUR2.3 billion term loan at far tighter pricing. The existing facility paid a 350-basis point margin, while the company offered a revised margin of 300-325 b.p. (with a 0.125% issue discount), before pricing at 287.5 basis points at par.

A Reuters report notes that low European yields are encouraging more funds to be established dedicated to riskier European debt. This flagged that KKR is seeking USD1.5 billion for such a fund, its third, with PIMCO also fundraising for a "special situations" fund, while noting that JP Morgan Asset Management and CVC raised a combined total of USD2.4 billion for like purpose in November and June 2019 respectively.

Equity

The Brazilian state sold BRS1.06 billion (USD252 million) worth of shares in Banco do Brasil as part of the government's ongoing asset disposal program.

It was undertaken in parallel to the far-larger sale by BNDES of equity in Petrobras. This could reach BRS23.5 billion (USD5.6 billion) if the green-shoe is exercised: in its latest filing Petrobras has announced the deal will be priced on 5 February, with the new shares trading from 7 February.

Implications and outlook

Greece's bond market performance was truly impressive during 2019, and its latest issue also appears highly-successful.

  • In its annual debt forecast, PDMA flags that its funding costs fell sharply during the year, dropping by 257 basis points on its 10-year benchmark, while its 10-year spread versus Germany "narrowed by more than half" over the nine months to December 2019, from 396 to 175 basis points.
  • Its latest deal represents a further step in developing its yield curve, as well as extending its market debt profile at a historically attractive cost.
  • According to Greece's PDMA agency, its debt stock is on an improving trend, falling to an estimated 173% of GDP in 2019, from 181% in 2018.
  • An overall fiscal surplus of 1% of GDP is forecast by PDMA for 2020, with the country projecting that it will continue to exceed its primary surplus target of 3.5% which applies until 2022.
  • Given relatively low redemption flows in 2020 and 2021, Greece will focus this year on reducing the stock of its short-term Treasury Bills, projecting that this will decline by EUR4.4 billion from the EUR12.6 billion outstanding at end-2019.
  • The shift from short to long-term debt is risk positive, in that it reduces rollover risk and locks in attractive long-term borrowing costs, although the former was limited by consistent demand from Greece's banking system.

On a repeated basis, we have reported on the impact of low European yields in driving the "search for yield".

  • Previously, we noted how the Bank for International Settlements had identified clear deterioration of lending standards in the high-yield loan market.
  • While just a single example, the degree of price tightening enjoyed by Techem is a clear indicator of the narrowing of spreads in high-yield markets, while its decision to seek an additional bond financing highlights the favorable conditions that these are now offering.

Posted 30 January 2020 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, IHS Markit

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