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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
