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This week's supply showed further positive risk appetite,
indicated by highly successful sales by Brazil and Colombia,
another record order book for syndicated Italian debt, and heavily
oversubscribed perpetual issuance by Spanish oil company Repsol.
Hungary's debut Green Bond and an inaugural Green sale by Deutsche
Bank are further positive indicators of the underlying growth of
ESG finance, with sharp expansion of social finance likely to
address COVID-19 funding requirements.
Emerging markets
The Republic of North Macedonia priced a EUR700 million six-year
deal on 27 May. The offering was priced to yield 3.95%, with a
3.675% coupon. According to the Ministry of Finance, the issue will
be complemented by loans from the IMF, World Bank and European
Union (for EUR176, 140 and 160 million respectively) to cover its
2020 funding needs.
On 1 June, Republic of Colombia sold USD1 billion of 2031 bonds
at 3.165% yield, 250 basis points over US Treasuries, alongside
USD1.5 billion of 2051 debt at 4.202%, 275 basis points over UST.
Demand reached USD13.3 billion. César Arias, Director General of
Public Credit and National Treasury, stated that the deal achieved
three historical achievements: Colombia's lowest coupon to date for
a long bond, the largest level of demand and the most diverse
investor base.
Brazil sold on 3 June USD1.25 billion of five-year bonds at 3%
and USD2.25 billion of 10-year debt on at 4%, well inside initial
guidance of 3.5% and 4.6% area respectively. Demand reached USD18
billion. The Brazilian Treasury described the deal as "to promote
liquidity of the sovereign curve…provide a benchmark for the
corporate sector and to meet maturing foreign currency debt".
Cemex sold USD1 billion of seven-year debt, priced with a 7.375%
coupon, versus initial price guidance of 8% area. Proceeds will
fund debt repayments and other corporate purposes.
On 3 June, Hong Kong Electric sold a USD500 million ten-year
deal. Despite wider concerns over Hong Kong, this was completed
without pre-marketing with investors, reflecting the borrower's
rarity: it previously issued only in 2016 and 2011.
On the same day, Macau-based gaming and resorts company Sands
China sold USD1.5 billion of six and ten-year debt. The two
tranches had coupons of 3.8% and 4.375% with issue prices of 99.90%
and 99.58% respectively.
Other debt
Italy raised EUR14 billion from 10-year syndicated BTP sale on 3
June, ahead of an ECB meeting expected to announce expansion of its
Pandemic Emergency Purchase Program. Demand reached EUR108 billion,
setting a new record for a single-tranche deal. Pricing was set at
1.707%, set at nine basis points over its outstanding August 2030
BTP, versus initial guidance of a 15 b.p. spread.
While the issue relies on strong primary market support, Italy
has benefitted significantly from ECB secondary market backing.
Using UniCredit data, a Reuters report on 2 June noted that during
April and May the European Central Bank bought EUR51.1 billion of
Italian government debt, while the country had net new supply
during the period of EUR49 billion.
Repsol gained an impressive EUR11.5 billion in demand for an
increased two-tranche perpetual deal. The offering comprised two
tranches of EUR750 million each callable after 6.5 and 8.5 years,
priced at 3.75% and 4.25% respectively, versus initial price talk
of 4.5% and 5.125%, and was upsized from EUR1 billion. Part of the
proceeds will redeem an existing perpetual deal close to its first
call. Repsol's clear success followed a similarly positive response
last week to a EUR750 million 3.875% perpetual non-call 5.25-year
issue for Swiss perfume manufacturer Firmenich, which attracted
EUR4.3 billion in interest. The two deals were the first hybrid
corporate issues in Europe since February.
ESG
<span/>Hungary has priced
an inaugural EUR1.5 billion Green Bond due in 2035, at mid-swaps
plus 190 basis points.
Finance Minister Mihály Varga claimed that the deal gave "a
clear message to the markets" about Hungary's "commitment to
environmental protection", set out in its May presentation on its
Green Bond program. The deal gained EUR7.7 billion in demand.
Having not borrowed internationally in 2019, Hungary recently
raised EUR2 billion of conventional debt. Its target borrowing for
2020 entails international issuance worth EUR4 billion, four times
its original projection for 2020: its overall deficit is expected
to reach 3.8% of GDP in 2020 according to debt agency ÁKK. Total
borrowing is projected in the agency's May revised Debt Management
Outlook at HUF10.1 trillion (EUR28.6 billion) within which foreign
currency issuance of HUF1.6 trillion (EUR4.6 billion) would be
sought including EUR4 billion of public debt sales. Overall,
however, Hungary's issuance remains projected below the HUF10.89
trillion raised in 2019.
Deutsche Bank has issued its first Green Bond. It sold EUR500
million of six-year debt at 1.375% to finance the bank's own
renewable energy projects, under the categories of energy
efficiency, renewable energy and green buildings. The issue was 9.5
times subscribed and pricing trimmed from an indicated 200 basis
points over mid-swaps to final pricing at 167 basis points. CEO
Christian Sewing described the deal as "a further building block of
our sustainability strategy". The bank recently announced a
commitment to expand its green financing activities, targeting an
expansion in such lending to EUR200 billion by 2025, roughly double
its current level. Within the second quarter it also plans to
announce a new oil and gas lending policy.
Rainforest Action Network, an interest group, claims that the
bank already has made progress in changing its lending
environmental footprint: the Financial Times reported that it lists
the bank as the 19th largest provider of funding for
carbon-intensive projects, having halved such exposures between
2016 and 2019 to USD12 billion.
The World Resources Institute claimed that by end-2019, 23 of
the largest 50 private-sector banks globally already had specific
quantitative sustainability objectives publicly established.
Our Take
Both Colombia's successful deal and the revival of the European
corporate hybrid debt market are positive indicators of bond risk
appetite. Colombia has faced some adverse market scrutiny amidst
fears that its energy exposures increase the risk of it losing
investment grade ratings over time, but sentiment has recently
improved considerably. Its EMBI+ spread index, which traded at
under two percentage points over US Treasury bonds prior to the
COVID-19 pandemic, surged to peak at 494 basis points on 17 March,
but has now recovered to 280 basis points (as of 2 June).
The Green Bond debuts for Hungary and Deutsche Bank are further
indicators of the revival and longer-term expansion of the ESG
sector, following closely the announcement of three ESG innovations
on the same day last week - the first educationally-targeted social
bond, the first Green bond from the chemical sector and an
inaugural convertible Green bond.
Momentum will be encouraged by the growing number of investors
establishing ESG-oriented investment vehicles and greater
shareholder activism encouraging firms to show clear ESG
commitments. A further major positive factor which will benefit
"social" debt issuance is the growing outlay by governments and
supranational bodies on issuance to mitigate social impacts from
the COVID-19 pandemic and to meet expanded healthcare outlays and
investment in potential vaccines and treatments.
Lastly, Italy's latest syndicated deal appears another
overwhelming success. This reflects widespread backing from
international investors when arranging new issuance, but its
reliance on ECB demand is flagged by the sizeable volume of ECB
purchases in the secondary market in recent months, making the
ECB's decision on 4 June to expand the size and extend the duration
of its PEPP program a key positive indicator for its future debt
trajectory, and that of other EU members with strained debt
metrics, such as Greece and Spain.
Posted 04 June 2020 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, IHS Markit