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Capital Markets Weekly: Grenada tests scope for low-income debt relief while Bahrain extends sovereign risk threshold

14 May 2020 Brian Lawson

This week's highlights were Grenada's efforts - howbeit involving a very limited group of bondholders in a single small issue - to agree moratorium on its private-sector debt, Bahrain's successful return to the international market, and successful bond sales by Republic of Serbia, Finland, the UK and Australia, with both the latter amply setting new records for syndicated sales.

Emerging markets

Grenada tested scope for wider IDA debt relief on publicly held bonds. On 11 May Latin Finance reported that the country had requested an eight-month moratorium from May on Grenada's outstanding 2030 bond. Scope for negotiation was assisted by Grenada having only one small public issue outstanding, its USD100 million 7% amortizing 2030 notes. Interest of USD6.455 million and principal repayments of USD8.893 million were due on 12 May, and duly paid (suggesting at best partial acceptance of its proposal).

Bahrain gained over USD11 billion in demand on 7 May for a USD2 billion two-part offering of 4.5-year sukuk debt and 10-year conventional funding. Pricing was tightened to 6.25% and 7.375% versus initial guidance of 6.625-6.75% and 8% area respectively.

Mamoura (formerly Mubadala), the Abu Dhabi state fund, marketed a three-part deal on 12 May, seeking six, 10 and 30-year debt. Initial price guidance was set at 250 and 275 basis point margins over mid-swaps and 4.375% for the 30-year tranche, a Formosa bond targeting Taiwanese institutional buyers, with final pricing of 210 and 235 basis points and 3.95% respectively. It launched USD4 billion with total demand of USD23.5 billion.

Kuwait's Equate Petroleum also issued a USD1.6 billion offering of five and 10-year bonds. The USD1 billion five-year tranche was priced at 5%, with the ten-year portion at 5.875%: both tranches were tightened by 50 basis points versus initial guidance. The offering is the first private-sector corporate sale from the region since February, according to Reuters.

According to El Cronista newspaper, only 15-20% of Argentina's international bondholders accepted the initial proposal made by the Argentine authorities by its 8 May initial deadline: President Fernández subsequently extended the offer until 11 May, stating that the government would continue "discussions in good faith" with creditors in "pursuit of an agreement Argentina and its creditors can sustain". On 11 May Argentina announced it would continue discussions until 22 May, sparking a sharp bond reflecting the greater perceived willingness to negotiate. On 12 May, Argentina's EMBI+ index closed at just over 3000 basis points, down 10 full percentage points since 27 April.

Colombian electricity and gas distributor Grupo Energía de Bogotá gained over 11-times subscription for a USD400 million ten-year deal with pricing chopped from "high 5% area" to 5%.

On 11 May junk-rated Republic of Serbia sold EUR2 billion of seven- year debt at 3.375%. Its press release noted that "more than 300 foreign investors" were involved with demand of almost EUR7 billion. Serbia's Fiscal Council warned on 6 April that the country would need EUR6.5 billion to meet COVID-19 pandemic-related expenditure. However, Serbia remains unwilling to borrow under lower-cost IMF or EU facilities.

Other debt

The UK conducted its first "extraordinary" syndicated sale, of 0.375% 2030 gilts on 12 May. The deal was priced at 0.3539%, gaining GBP82.6 billion in demand from 171 orders, and sized at a record GBP12 billion, GBP4 billion larger than the UK's prior syndicated record. Sir Robert Stheeman, CEO of the UK's Debt Management Office, described the sale as "unprecedented", noting the "record number of orders" and highlighting that demand was "more than double the size of the largest in any previous syndication". A second syndicated sale, of October 2061 gilts, is slated for Tuesday 19 May. The DMO also announced a syndicated sale in June 2020 of a 2050 issue.

On 14 May, Australia's Office of Financial Management sold a domestic syndicated issue of December 2030 debt. The deal attracted record demand of AUD53.5 billion and was sized at AUD19 billion. Pricing was set at 1.025%. The prior record was set in April, with AUD26 billion of demand for an AUD13 billion November 2024 bond, with the previously largest book having been AUD11 billion in February 2017.

Robust supply has continued with USD25 billion of dollar high-grade sales on 11 May, when Walt Disney also brought a "jumbo" offering, raising USD11 billion from a six-tranche sale. 14 borrowers followed on 12 May, targeting a further USD14 billion. On 14 May, US healthcare provider United Healthcare gained USD25 billion of demand for an increased USD5 billion five-tranche package of five to 40-year debt, permitting partial redemption of a revolving credit facility drawn earlier this year.

Implications and outlook

Grenada's request reflects the recent G-20 proposal for debt relief for International Development Association countries, , offering them a debt moratorium on official debt during 2020 and calling for private-sector bondholders, "working through the Institute of International Finance, to participate in the initiative". Subsequent IFF research noted that 26 of the 73 eligible countries have outstanding publicly held bond debt, totaling USD70 billion, with projected 2020 debt service of USD4.9 billion within aggregate debt service of nearly USD13 billion.

Grenada's debt volumes are very small compared with other eligible countries such as Nigeria, Ghana, Cote D'Ivoire and the Dominican Republic, although others like Benin and Rwanda also have just one outstanding bond. Grenada's announcement it would make its 12 May payment to avoid default implies it failed to gain consensus: we currently have no details how many bondholders waived payment. It remains a significant challenge - especially for larger borrowers - among IDA states to establish agreement for private-sector relief without facing investor resistance and potential default events.

Argentina remains at elevated risk of default, but its extension of discussions with bondholders indicates preference for a negotiated solution. Investors widely hope for some borrower concessions, potentially permitting modest debt service during the next three years and reduced overall capital haircuts. IHS Markit sources continue to report a government desire to avoid "hard default" if possible, given the adverse impact on Argentine access to FDI and portfolio inflows for years ahead.

Bahrain's issue represents a very positive indicator, showing an important extension of risk appetite. The deal was the first B rated sovereign deal sold during the COVID-19 pandemic crisis and comes after Bahrain having needed a USD10 billion GCC rescue package in 2018. Bahrain also had been pushed within 2020 to seek an interim facility to obtain funds, reflecting earlier difficulty in accessing international debt.

The UK's successful gilt syndication is a clearly positive indicator. It comes against an unprecedented fiscal background. UK media reports on 13 May suggested the UK budget deficit will reach GBP337 billion in fiscal 2020, versus GBP55 billion forecast in the March Budget. The UK's DMO has set the goal of raising an ambitious GBP225 billion in gilt sales between April and July, and has now issued GBP85 billion, which led DMO CEO Sir Robert Stheeman to express "great confidence" on meeting its target successfully.

Australia's success is similarly encouraging. While it has not yet announced revised funding targets, local media claim it may need AUD250-300 billion more over the next 15 months.

Lastly, Serbia's seemingly irrational choice to seek market funding while failing to use IMF and EU facilities reflects domestic political factors. Country Risk specialist Dijedon Imeri explains that domestically: "IMF loans still carry a stigma, and Serbia is keen to demonstrate it doesn't require financial aid like the rest of the region. It also coincides with elections; Serbia will hold a general election in June".

Posted 14 May 2020 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, IHS Markit


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