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This week's main new issue development was Germany's latest
Green bond, a 30-year sale priced throughout marketing at tighter
levels than the country's "twin" bond - with the same size and
terms and conditions in non-ESG format - finally achieving a 2
basis point "greenium" saving. Amazon's USD18.5 billion package was
a further highlight.
ESG
Germany has sold its third green bond, extending its curve to 30
years (after a 10-year debut in September 2020 and a five-year sale
in November). The issue was originally marketed with a one basis
point "greenium" or yield saving to reflect its incremental ESG
audience. It priced at 0.391%, two basis points under its
conventional "twin", attracting EUR39 billion demand. According to
Reuters, this represented a record, beating the EUR33 billion
obtained for its Green debut. The same source claims Germany is
planning to raise a further EUR6 billion from a ten-year auction
and tap in late 2021. Overall, Finanzagentur (the German debt
agency) flagged "very impressive" demand "in its extent and
diversity", stating that "this renewed high interest" confirmed the
merits of its "innovative twin concept".
According to a government report, Uruguay is working towards the
sale of a sovereign Green bond. It is also planning "to develop the
global local currency bond market" with a peso-denominated sale
targeting international buyers.
Australia's Port of Newcastle has arranged the "first
sustainability-linked financing by an Australian seaport",
according to arranged National Australia Bank. The bank consortium
loan raised AUD595 million in 2.5 and 5-year funding and AUD50
million specifically for Green purposes. Funding margins will be
lowered if the port meets five key performance indicators including
emissions reduction and various social goals including Australia's
first use of a modern slavery metric. A premium is applicable if
they are missed.
The transaction has gained high profile given the port's role as
a leading location for coal exports, with Australian Financing
Review describing the deal as "peak greenwashing", claiming that
NAB had "stepped in to fund the world's largest thermal coal
terminal when ANZ pulled out". Within the criticism, it was
suggested that NAB's role brings into question its own use of Green
bonds.
Emerging markets
Late last week, Tullow Oil sold a USD1.8 billion five-year issue
priced at 10.25%, with demand exceeding USD4.2 billion. Proceeds
will extend the company's liabilities, being used to redeem its
USD300 million 6.625% 2021 and USD650 million 6.25% 2022 issues
among other liability management, with the operation "leverage
neutral" overall. The firm also has raised USD600 million of bank
facilities.
The Asian calendar was particularly active on 10 May, with 12
deals being launched from the region.
It included a debut issue for JSW Hydro, described by Mint
newspaper as "the largest private hydropower producer in India".
Demand exceeded USD2.6 billion, permitting pricing of 4.125% versus
4.5% guidance. 64% was placed in Asia with 22% and 14% respectively
sold in EMEA and the US.
Turkey's LimakPorts, which owns and operates Iskenderun
container port and provides port services has sold a 15-year
amortizing dollar bond with an average life of 10.6 years in a
positive test of appetite for investor enthusiasm for Turkish risk.
It placed USD370 million at 9.5%.
Other debt
Amazon raised a record USD18.5 billion eight-part package on 10
May. Its maturities ranged from a two-year sustainability bond,
priced at just 10 basis points over US treasuries, through to
40-year debt at a 95 basis point spread. Pricings were tightened by
20-25 basis points across the deal from initial guidance with
demand close to USD50 billion.
Press media have focused on "cheap borrowing costs" being "too
tempting to resist" for the firm despite its sizeable cash
holdings, with Bloomberg suggesting companies like Amazon might use
cash to fund acquisitions and "dividend hikes" and claiming
"borrowing might not be needed". While Amazon have not commented,
IHS Markit views the borrowing as boosting Amazon's current
asset/liability balance.
In its first quarter results, Amazon reported holdings of
USD33.8 billion of cash, along with holdings of marketable
securities of USD39.4 billion, within total current assets
(including inventories and accounts receivable) of USD121.4
billion. However, it also had USD63.9 billion of accounts payable,
and USD40.9 billion of accrued expenses, within current liabilities
of USD115.4 billion. Its cash and securities holdings had declined
in Q1 2021, having stood at USD42.1 and USD42.3 billion
respectively at end-2020, with its overall current balance down
from USD6.48 billion to USD6.04 billion. While far from
"necessary", the borrowings boost Amazon' operating flexibility and
resilience, as well as facilitating distributions and
acquisitions.
Canada has raised USD3.5 billion of five-year US dollar debt,
priced six basis points over comparable US Treasuries with a 0.75%
coupon. It last sold dollar debt in January 2020, when it paid the
same margin. The deal serves to "supplement and diversify Canada's
liquid foreign reserves" according to Canada's Department of
Finance.
Hong Kong-based airline Cathay Pacific sold USD650 million of
5.25-year bonds at 4.875%, versus 5.2% area guidance. The unrated
deal gained over USD1.5 billion of demand. The issue is Cathay's
first dollar sale since 1996 and follows 2020 full-year losses of
HKD21.65 billion (USD2.8 billion). The company sold HKD6.74 billion
of five-year convertible debt in February.
Implications and outlook
Germany's latest Green Bond included the innovative step of
marketing the deal from the initial stage with price guidance
tighter than its conventional twin. Demand was impressive although
far smaller than that for syndicated sales by Spain and Italy
earlier this year, which is likely to reflect the lower yield on
German debt, and the decision to start pricing at a level already
charging a "green premium". The deal's success nevertheless further
formalizes the trend of price advantage for ESG debt, particularly
in the Euro-denominated sector, given the incremental target
audience of dedicated ESG funds and the relative scarcity of Green
instruments. In turn, such price savings encourage further
sovereign issuance of such instruments, with the borrower
population likely to expand in 2021. However, the direct comparison
between conventional and ESG "twin" instruments may overstate
actual savings as it does not reflect any hypothetical benefits
that might have been obtained if Germany had instead issued a EUR12
billion single issue, given its larger size and thus better trading
liquidity.
The Port of Newcastle loan syndication is a clear example of ESG
instruments being used by borrowers whose activities may be viewed
as environmentally unfriendly. As with recent bond issuance
relating to coal infrastructure (see last week's report for details
of the Newcastle Coal Infrastructure bond), it shows that there is
still demand for coal-related assets. The sustainability-linked
format is obviously controversial - using a growing segment of ESG
funding that does not specify the use of proceeds - but raising
debt under an ESG banner despite the port's obvious links to coal.
Such developments make clear that despite interest group pressure,
firms in carbon-intensive segments still enjoy access to bond and
bank financing, although this will in turn face continued and
potentially heightened pressure and criticism ahead.
High media focus has been made on Amazon's high cash balances
and liquidity, but in an environment where interest rates look
likely to rise within a two to three-year outlook, or even sooner,
it is potentially prudent for companies to boost liquidity and to
lock in current rates for extended periods. Amazon's stance aligns
with our repeated forecasts that the corporate sector has - and
will continue - to manage its liability structure to extend
duration, lock in current long-term rates and raise liquidity in
advance of higher long-term rates.
In this context, the volume of Tullow's issue is impressive,
with the firm paying up significantly to replace 2021 and
2022-maturing debt with five-year funding. This suggests it may
have concerns about future market conditions (and the credit
direction of some of the countries, like Ghana, where it has a
significant presence).
Lastly, Cathay Pacific's bond is a positive indicator - along
with prior sizeable financings involving US carriers and a EUR825
million 1.125% seven-year convertible issue for IAG this week -of
the continuing ability of the global airline industry to resist the
severe impacts of the COVID-19 pandemic on their operations. The
latest issuance enables these major carriers to preserve
liquidity.
Posted 13 May 2021 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, S&P Global Market Intelligence
