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Capital Markets Weekly: Healthy emerging market and heavy US bank supply well received

22 April 2021 Brian Lawson

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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