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This week's highlights include a USD3 billion package for
Colombia, Malaysia organizing the first sustainability sukuk, two
transactions for Russian issues despite growing sanctions risks,
historically low-cost issuance by the Republic of Georgia, and
20-year funding for Ireland.
Emerging markets
Colombia raised USD3 billion of 2032 and 2042 bonds on 19 April.
The sale, described by the Ministry of Finance as the country's
largest to date, was 3.4 times subscribed with demand of USD10.2
billion. The USD2 billion 2032 tranche priced at 3.356% with the
remaining USD1 billion of 2042 debt priced at 4.235%.
Republic of Georgia sold USD500 million five-year deal priced at
2.75%. On 16 April Georgian Finance Minister Lasha Khutsishvili
flagged the deal's favorable cost, noting that its rate "has never
been seen before in the region" and that Georgia had paid 6.875%
when it last borrowed in 2011, permitting a GEL350 million (USD102
million) reduction in debt service costs going forward.
The Philippines has sold EUR2.1 billion of four, 12, and 20-year
bonds, priced at 0.374%, 1.248%, and 1.807% respectively,
representing margins of 75, 105, and 135 basis points over
mid-swaps. All three tranches were tightened by 25 basis points
from initial guidance.
AA-/AA3 rated Taiwan Semiconductor Manufacturing (TMSC) sold
USD3.5 billion (of the USD4.5 billion it has projected to borrow
this year) spanning five, seven, and 10-years, with the three
tranches priced at 1.3%, 1.788%, and 2.269% yields, margins of 50,
55 and 75 basis points over US treasuries respectively. All three
tranches priced 25-30 basis points inside guidance.
Russian private sector Alfa Bank sold USD350 million of Tier 2
subordinated debt, priced at 5.5% versus initial price talk set at
5.875%. The bank described pricing as the tightest for Russian bank
subordinated debt since 2014, stating that some 50 institutional
investors had been involved. The deal was roughly 1.5 times
covered.
Majority state-owned shipping company Sovcomflot also sought
finance, marketing a seven-year dollar deal at 4.375% area, while
preparing to use up to USD400 million of the proceeds to repurchase
existing 2023 debt. It priced USD430 million at 3.85%.
Bosnian region Republika Srpska is raising EUR350 million in
bond funding to cover its 2021 budgetary needs, despite Bosnia
& Herzegovina failing to agree funding with the IMF. It placed
EUR300 million of five-year bonds at 5%.
Abu Dhabi National Energy Company, a state-owned power and water
utility, sold USD750 million each of seven and 30-year dollar debt.
The seven-year bonds priced at 2.03%, 80 basis points over US
treasuries, versus guidance of a 110-basis points area margin. The
30-year bond was a Taiwan-targeted Formosa deal, which priced at
3.40%, a 113-basis point margin versus guidance of 3.75%.
ESG
EU Budget Commissioner Johannes Hahn announced on 14 April that
the European Commission will borrow at least €150bn annually until
2026 to fund its Recovery and Resilience Facility (RRF). One-third
of the facility will target environmental projects. The commission
plans to start issuance in June if all member states have passed
appropriate national legislation.
So far, Hahn noted that 17 states have approved the program, but
Germany, Estonia, Austria, Poland, Hungary, Finland, the
Netherlands, Romania, Ireland, and Lithuania are still to make the
required ratification.
Hahn noted that countries may request pre-funding, implying
potential needs of EUR45 billion in 2021.
Malaysia has sold the first sustainability sukuk, its first
borrowing since 2017. It placed USD800 million of 10-year
sustainability sukuk debt at 2.07%, a margin of 50 basis points
over US Treasuries, and 40 basis points inside guidance. It also
sold USD500 million of 30-year sukuk debt at 3.075%, at UST+80
basis points, 35 basis points inside initial price talk. Demand
reached USD2.3 billion.
Other debt
The Republic of Ireland raised EUR3.5 billion from the sale of a
20-year deal on 15 April, pricing at 0.585%. Demand exceeded EUR35
billion with over 200 accounts involved. Banks took 31%, with asset
managers and pension and insurance buyers taking 29% and 18%
respectively. By region, Germany/Austria/Switzerland was most
prominent with 25%, followed by the Nordic region with 21% and 15%
in the UK.
Tencent marketed a four-part dollar deal with 10-, 20-, 30- and
40-year tranches, with initial price guidance of 165, 175, 185 and
195 basis points over US Treasuries. It priced the tranches with
coupons of 2.88%, 3.68%, 3.84% and 3.94% in a USD4.15 billion
package.
US banks have been highly active, with JP Morgan raising USD13
billion in a five-part sale, its largest on record. Maturities
spanned from 2027 to 2052, including a floating rate tranche. The
deal was the largest US bank sale on record and brings JP Morgan's
2021 issuance volume to USD. It was accompanied on 15 April by
Goldman Sachs which raised USD6 billion of 11 and 21-year
liabilities (while also raising USD685 million of perpetual
non-call five-year debt at 3.8% on 19 April). JPM's record was
short-lived: on 16 April Bank of America priced a USD15 billion
six-part package. Morgan Stanley then added USD7.5 billion on 19
April, bringing aggregate US bank supply to over USD42 billion.
Implications and outlook
The EU's borrowing plans, while very sizeable, are smaller on an
annualized basis than the needs of some member states. Under its
SURE program there has been consistently strong demand with no
signs of saturation. The new program will give further momentum to
ESG issuance in Europe.
Malaysia's issuance of the first sovereign sustainability sukuk
is also a positive development bringing additional flexibility to
Islamic ESG funding.
This week's calendar continues to provide positive indicators
regarding demand for emerging market debt. Colombia has faced
adverse recent focus with concern that its debt trajectory
eventually could jeopardize its investment grade ratings, but its
latest sale was both sizeable and well received. In March 2021, its
Finance Ministry had projected a fiscal deficit of 8.6% of GDP in
2021, reflecting continuing adverse trends in the COVID-19
pandemic, coming on top of a 7.8% deficit in 2020.
Also of note is the successful sale of two deals from Russian
borrowers, a positive development for the country coming against a
background of additional US sanctions.
The other major feature this week - of very heavy US bank debt
issuance - appears driven by the regulatory need for major banks to
increase the pool of instruments available for bail-in in the event
of financial stress (Total Loss Absorbing Capital or TLAC) rather
than any liquidity or capital stresses. Instead, the process has
been ongoing since 2017, when banks initially faced a TLAC
shortfall of over USD250 billion. Nevertheless, the rush of new
supply suggests that banks are moving quickly to lock in current
favorable rate levels and benefit from strong investor demand,
especially given the first-quarter adverse trends and volatility in
US Treasury bond yields. Given the prospect of higher rates over
time as US economic activity recovers post-pandemic, this appears
prudent.
In this regard, Canada has set an interesting precedent. On 21
April, Bank of Canada announced that from 26 April, it will reduce
its weekly net purchases of debt by CAD1 billion to CAD3 billion,
citing "progress made in the economic recovery", noting that
stronger commodity prices have boosted the Canadian economy and
citing "considerably stronger" first-quarter growth. It noted that
Canada continues to suffer "considerable excess capacity" and
announced it will hold policy rates stable at least until its 2
percent inflation target is "sustainably achieved" with its
forecasts suggesting this will occur in the second half of 2022.
The move provides a clear indication that participants in global
financial markets should expect extraordinary monetary policy
measures to be "tapered" once economic recovery permits this, while
also suggesting that ample warning of rate changes will be provided
to reduce scope for market dislocation.
Posted 22 April 2021 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, IHS Markit
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May 06
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