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Capital Markets Weekly: Nigeria, Egypt, UK Green Bond debut confirm investor resilience despite Evergrande debt stress

24 September 2021 Brian Lawson

This week's highlights have been Nigeria's ability to increase a USD3 billion debt sale by USD1 billion, with over USD12 billion demand, a USD3 billion three-part sale by Egypt, and record interest for a sterling bond for the UK's Green Bond debut. These successes were achieved despite earlier concern - and a brief but significant jump in Asian bond spreads - over the potential default by Evergrande, mainland China's second-largest property developer, which has some USD300 billion of indebtedness.

Emerging markets

Nigeria successfully launched its planned international debt sale, its first dollar offering since 2018, on 21 September, increasing the issue from USD3 billion to USD4 billion after gaining USD12.2 billion of peak demand. Proceeds will be used to fund the 2021 budget. In its statement, Nigeria's Debt Management Office flagged the "exceptional performance" of the offering, describing it as "one of the biggest financial trades to come out of Africa in 2021".

It flagged demand from "Europe and America" while citing "good participation" by local buyers. It placed: USD1.25 billion for seven years at 6.125% versus 6.5% guidance, USD1.5 billion for 12 years at 7.375%, in line with price talk, and USD1.25 billion for 30 years at 8.25%, versus initial price guidance of 8.5-8.625%.

Post-FOMC, it was followed by Egypt with a three-part sale which raised USD3 billion. Egypt sold 6, 12 and 30-year debt at 5.8%, 7.3% and 8.75%, versus price talk of 6.125%, 7.725% and 8.875%. The operation is Egypt's second three-part debt issuance this year, after it obtained USD3.8 billion in February. A Reuters report cites sources suggesting demand had reached USD8.25 billion. Pricing has clearly deteriorated during the year for Egypt: in February it sold five, ten and 40-year bonds at 3.875%, 5.875% and 7.5%.

Despite the adverse market focus on possible default by Evergrande, two Chinese property firms have managed to issue debt this week. On 23 September, Jiayuan International gained USD600 million of demand for a USD100 million tap of its 11% 2024 issue at 13%, 25 basis points tighter than initial price talk. Earlier this week, Xinhu Zhongbao sold USD250 million of three-year bonds at 11%, in line with guidance.

Brazilian airline Gol also issued, tapping its 8% 2026 bonds with a further USD150 million, increased from a targeted USD100 million after gaining some USD450 million of demand. The tap was priced at 100.75%, to yield 7.728%, after the guidance of 100.25%.

ESG

On 21 September, the UK sold its debut Green gilt, a GBP10 billion issue maturing on 31 July 2033. The issue was priced with a 0.875% coupon to yield 0.872%. The issue was marketed at 7.5-8.5 basis points over the 4.25% 2032 outstanding gilt, pricing at the bottom of the range when books closed one hour after opening.

The transaction gained a record of over GBP100 million (USD137 billion) in demand, with UK buyers taking 83% of the offering according to the UK Debt Management Office's statement, within an order book involving 217 orders.

A second syndicated bond sale - in the 20-30 year maturity range - and the domestic introduction of retail Green savings bonds will further expand the UK's ESG issuance this year.

In development for ESG disclosure, the UK committed to reporting on "social co-benefits" from Green expenditure funded by the bond as well as its direct environmental impact. The items so covered will include "job creation, access to affordable infrastructure and socioeconomic advancement".

According to HSBC estimates, the offering was priced 2.5 basis points tighter than would have been achieved for a comparable conventional sale.

Enel arranged a further sizeable sustainability-linked deal, attracting over EUR11 billion for the EUR3.5 billion sale including "significant participation" from ESG investors allowing it to "continue to diversify its investor base". It placed EUR1.25 billion for five years at 0.064%, EUR1 billion for eight years at 0.388%, and EUR1.25 billion for 13 years at 0.915%, with the package having an average life of some nine years at a 0.4% cost.

Other debt

Bond spreads were damaged on 20 September by concerns relating to Evergrande's pending default and perceived wider implications for China's real estate sector. Asia ex-Japan CDS spreads widened 21.5 basis points on the day, having traded at low 60s spreads previously, with CDS levels for lower rated entities affected on a broader global basis.

The impact on supply from Evergrande - which reportedly missed interest payments to two of its leading banks after informing creditors of its inability to continue debt service - was brief, with heavy new issue activity on the following day. This included a debut dollar sale by coffee producer JDE Peet, guaranteed by Jacobs Douwe Egberts and Peet Coffee, Inc. The firm sold USD1.75 billion of three, 5.3 and 10-year bonds at 0.8%, 1.375% and 2.25%.

On the same day, Rentenbank gained a record EUR5.2 billion of demand for a EUR1.5 billion five-year issue.

France's La Banque Postal sold EUR750 million of Additional Tier 1 perpetual debt first callable after 7.5 years. The deal attracted peak demand of EUR1.4 billion, before declining to 1.5 times coverage from 122 investors after being priced at 3% to first call, a "record for a European bank

Tobacco firm BAT sold a two-tranche perpetual issue on 22 September, with tranches first callable after 5.25 and eight years. According to IFR, "yield addiction" was a key factor as "the market lapped up" the company's debut hybrid sale. It placed EUR2 billion with the tranches bearing coupons of 3% and 3.75%, with issue prices of 99.412% and 99.154% respectively.

Caisse Francaise de Financement (Caffil) placed a EUR500 million 15-year covered bond, the longest such deal since January 2020. The deal was strongly received, with IFR reporting a EUR2.5 billion order book. The tranche was priced at a 0.5% coupon and 99.509% issue price. Caffil also sold EUT750 million of eight-year covered bonds with a 0.01% coupon and an issue price of 100.755%.

Our take

At first sight, Evergrande's debt stress is significant, in that the firm is reported to have indebtedness of some USD300 billion, including loans from across the Chinese financial system involving 171 domestic banks. It is also a possible indicator of wider problems within mainland China's real estate sector after government measures to reduce leverage among property developers and slow appreciation in house prices. The bulk of its liabilities are domestic, but some USD20 billion of international debt is outstanding.

One mitigating factor is the high likelihood of state intervention to manage the restructuring of Evergrande's liabilities: there is widespread prior precedent for the country's largest banks restructuring debt under national or regional government guidance to avoid outright corporate defaults. Conversely, if other major property firms similarly face the need to restructure their liabilities, this would represent an obvious negative indicator for the Chinese banking sector's capital position and profitability, and for affected domestic and international bondholders.

While the initial impact on Asian spreads was marked, these have improved subsequently amidst reports that bond coupon payments have been met. In any case, the new issue calendar on 21 September - which included the UK's Green Bond debut and Nigeria's increased USD4 billion sale - already clearly showed that wider global dislocation was brief.

The UK's so-called Greenium is encouraging for ESG issuance: with estimated cost savings of some GBP28 million over the life of its debut bond, price benefits from the larger investor base involved appear likely quickly to exceed the costs of establishing and maintaining a Green Bond program, a concern raised by the UK's Debt Management Office. The impressive GBP10 billion size for the deal also should help to avoid a loss of liquidity, which the DMO also had voiced as a potential negative.

Within emerging markets, Nigeria's ability to upsize its offering from a position of heavy oversubscription is a positive indicator of prevailing appetite, while the long duration and spread of its borrowings avoid near-term liquidity and rollover risks.

Despite wider pricing compared with its February package, Egypt's successful offering was conducted after the US FOMC minutes were released and seemed little affected by the "dot print" of FOMC members suggesting expectations of a tighter Fed stance. This provides further evidence of investors seemingly adjusting to policy adjustment without "taper tantrums".

Posted 24 September 2021 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, IHS Markit

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