Capital Markets Weekly: Highly-active primary markets continue, reflecting seasonal factors

Market Flows

According to Bank of America data, investment grade debt issuance reached a record EUR90 billion in the Euro-denominated sector last week, along with USD69 billion in dollars, the second-highest volume on record. Activity has remained high this week.

Emerging markets

Mexico followed its heavily-oversubscribed dollar sale last week with a successful Euro-denominated 10-year benchmark and a EUR500 million tap of its outstanding 2039 issue.

• It raised EUR1.25 billion of 10-year notes at 1.241%, with the 2039 tap sold at a 2% yield, 96 basis points below its yield when the issue originally was sold in April 2019.
• The package was 3.8 times covered, with demand of EUR6.6 billion from over 350 investors.
• The 10-year tranche provides Mexico with funding at a record low for the country in Euros, according to the Treasury Ministry's statement.
• EUR1 billion will be dedicated to the early redemption of a 2.375% bond maturing in April 2021, smoothing and extending its debt profile.
• Together with its dollar issuance in the prior week, Mexico has now covered roughly 80% of its sovereign external funding requirement for 2020.

Treasury Sub-secretary Gabriel Yorio flagged in Mexican media that the country's debt to GDP ratio improved in 2019 to 44.7% from 44.9% in 2019.

Brazilian healthcare firm Rede D'Or increased a ten-year dollar sale by USD100 million to USD850 million.

• The issue was priced at 4.5%, versus initial price talk of 4.875%.
• Proceeds will repay existing debt and fund new investments.

Philippine conglomerate Aboitiz Equity Ventures, which is active in power, banking and agriculture, has completed a rare corporate sale from the country.

• Its debut issue raised USD400 million at 4.2%, versus initial price talk of 4.5%, with demand exceeding USD1 billion.
• The issue is to pay for a 2019 acquisition and further overseas assets.

Other debt

Sovereign supply this week has been very sizeable. It includes a 10-year EUR10 billion syndicated benchmark for Spain and a EUR1 billion 10-year deal for Cyprus, along with a EUR750 million 20-year tranche for the same borrower. These were followed by Italy with 30-year debt and Belgium with a 10-year syndicated benchmark.

• Spain attracted a new record EUR53 billion of demand: a similar benchmark 10-year deal on 22 January 2019 gained its prior record of EUR46.5 billion.
• The deal was priced at 32 basis points over mid-swaps, three basis points inside initial guidance.
• On a gross basis, Spain plans to issue EUR196.5 billion in debt, versus EUR192.8 billion raised in 2019.
• Cyprus has estimated its borrowing needs for 2020 at EUR2-2.25 billion.
• Cyprus projects that roughly 80% of its funding will be from syndicated issuance, with the remainder coming from bills and retail debt instruments.
• It priced the two tranches at 0.73% and 1.33% respectively, with demand of EUR13 billion according to Finance Minister Constantinos Petrides.
• It plans to use some of the proceeds for early repayment of its IMF loan which would reduce its debt service costs.
• Italy has launched a syndicated 30-year deal, awarding the mandate on 14 January: on the same day it sold EUR3 billion, 2.5 billion and 1.25 billion of three, seven and 20-year bonds through regular auction, the maximum slated amounts. The auctions cleared at 0.18%, 0.94% and 2.14% respectively.
• Belgium has mandated banks for a 10-year syndicated OLO.
• Also, Canada sold a five-year dollar benchmark and KFW three-year dollar funding.
• On 13 January, the European Financial Stability Facility gained a record EUR12 billion in demand (excluding lead manager interest) for a EUR3 billion 30-year benchmark priced at 0.756%. 49% was allocated to Eurozone buyers, with 39% taken by UK and Swiss investors. 48% was bought by fund managers, while pension and insurance investors took 24%.
• Meanwhile, EIB has attracted EUR1.5 billion of demand for a EUR1 billion €STR-linked FRN, further cementing its migration to the new safe rate away from Euribor.

In the financial sector Italy's UBI Banca sold a EUR400 million Additional Tier 1 issue, priced at 5.875% to first call, versus initial guidance of 6.5%.

• Demand exceeded an impressive EUR5.5 billion.
• This encouraged BPM (Banca Populare di Milano) also to mandate banks for a EUR350 AT1 deal, which was grown to EUR400 million.
• The deal was priced at 6.125%, versus initial guidance of "6% high" and subsequently at 6.25%, with demand exceeding EUR4.5 billion.
• Troubled MPS also is in the market, with a EUR400 million Tier 2 deal with initial guidance at low 8%.

ESG debt

The UK's National Grid gained EUR3.2 billion of demand for its Eur500 million Green Bond debut.

Indian asset-financing firm Shriram Transport Company placed the first "social" bond from India, issued under the ICMA social bond principles.

• The USD500 million issue attracted demand of USD2.2 billion, of which 50% was from US buyers and 37% from Asia: asset managers dominated the order book with 87%.
• The deal was priced at 5.1%, 27.5 basis points inside initial guidance.
• Proceeds will target the generation of employment with a focus on SME and micro-finance lending.

According to Cristina Casalinho, CEO of Portugal's Treasury and Debt Management Agency IGCP, it is "inevitable" that the country will look at issuance of Green debt. However, the decision "very much comes from the government", with timing still unclear.

Equity

Saudi Aramco's IPO has been increased to USD29.4 billion through the exercise of its green-shoe option.

• On 12 January, 450 million extra shares were sold, on top of the initial 3 billion floated initially: the company has now floated 1.7% of its capital.

According to International Financing Review, BNDES is likely to launch the sale of its USD5.9 billion stake in Petrobras early next month.

• On 3 January, Petrobras undertook an SEC filing for an international and domestic offering of BNDES' 734.2 million shares.
• It owns 9.9% of the company's voting capital: the firm is already listed both domestically and on the NYSE.
• A similar but smaller stake held by state-owned bank Caixa was placed last June, raising USD1.9 billion.
• The Brazilian government directly owns a further 50.3%, over which President Bolsonaro has expressed "sympathy" towards the suggestion this might also be subject to eventual sale.
• However, the latter has yet to be confirmed and full privatization would face considerably more political opposition.
• BNDES CEO Joaquim Levy had stated in late-March 2019 that "to hold a Petrobras stake does not add value to the bank", which is undertaking a BRS117 billion divestment program freeing resources for infrastructure lending.

Indian mobile firm Bharti Airtel raised the equivalent of USD3 billion from a qualified institutional share placement and the sale of convertible bonds. Its issuance covers a similar amount due in airwave and license fees following an adverse court ruling by India's Supreme Court last October affecting the sector.

Implications and outlook

This has been another very busy week, again reflecting traditional seasonal factors.

In debt markets, Mexico has made a very effective and impressive start to the year, shrugging off past concerns that its credit standing could be damaged by the "AMLO" government.

• With 80% of its 2020 funding needs already covered, and having made a start on pre-financing 2021 redemptions, it appears favorably positioned.

Similarly, Spain's record demand for its 10-year benchmark is a clearly-positive indicator regarding the formation of its coalition government, despite the involvement of Podemos.

The proposed BNDES sale of Petrobras shares is a further indicator of the Bolsonaro administration's desire to reduce the role of the state in its economy but is a long way short of the government seeking to divest its own direct holdings. BNDES appears to be bolstering its capital by the sale to refocus resources towards funding new infrastructure development, very much in line with the natural functions of a state development bank.

Lastly, the full exercise of Saudi Aramco's green-shoe facility is a positive indicator but is the natural technical consequence of its share price performance.

• Since the shares started trading, they have remained consistently above the USD32 issue price, making it necessary for the sponsoring banks to use the green-shoe facility to cover their initial overallocation.

Posted 16 January 2020 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, IHS Markit