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Capital Markets Weekly: ICBC jumbo AT1 sale well-received alongside other long-duration issuance

22 September 2021 Brian Lawson

The well-received sale of these three deals, alongside other long-duration corporate hybrid debt and the launch of Medline's USD7 billion LBO, the largest leveraged buyout since 2008-9, all represent further indicators of strong continuing risk appetite.

Emerging markets

ICBC, Bank Negara Indonesia ("Negara") and Ayala Group, the Philippines' largest conglomerate, all sold dollar denominated perpetual debt on 16 September. The issues offered price guidance of 3.65%, 4.3% and 4.7% area to initial calls after 5. 5.5 and 5 years respectively.

ICBC sold USD6.16 billion at 3.2%, 45 basis points inside guidance, with demand exceeding USD9 billion. The issue is the first Chinese AT1 deal sold internationally this year and the largest AT1 deal since Postal Savings Bank of China (PSBC) placed USD7.25 billion of 4.5% perpetual non-call five-year AT1 bonds in 2017. It achieved the lowest coupon to date for a dollar AT1 deal for a mainland Chinese borrower, and the second lowest from Asia (South Korea's Shinhan Financial Group sold USD500 million of sustainability AT1 debt first callable after five years at 2.875% in May, versus 3.4% guidance and with USD3.9 billion of demand). The issue was the largest single-tranche sale by any Asian borrower since PSBC's AT1 deal.

Negara gained almost USD3 billion for its USD600 million issue, priced at 4.3%, 40 basis points inside guidance. versus initial price talk of 4.7% area. The bank reported a non-performing loan ratio of 4.3% at end-2020, but this is largely provisioned, with a net ratio of 1%.

Ayala sold USD400 million at 3.9%, also 40 basis points through guidance, with demand having reached USD1.7 billion. 31% of the deal was purchased by domestic buyers and a further 67% was sold elsewhere in Asia, with asset managers taking just over half the issue.

ESG

The Republic of Serbia has sold its first Green bond, after announcing its Green Bond program on 9 September, claiming it was the first Balkan country to commit to ESG issuance.

It placed EUR1 billion of seven-year debt attracting EUR3 billion in demand. The issue was priced at 1.26%, described by the National Bank of Serbia (NBS) as the lowest to date for the country. At the same time, it placed EUR750 million of conventional debt, attracting over EUR2.5 billion for the tranche, priced at 2.3%. This was described as Serbia's longest international borrowing to date, with over 200 investors participating in the package. NBS Governor Jorgovanka Tabaković noted that pricing was tightened by 35 basis points for the Green bond, and by 30 for the long-dated instrument, versus initial guidance.

Minister of Finance Siniša Mali noted that the 15-year tranche was "not new borrowing", as it would be used to refinance exiting dollar debt from 2012 maturing this September. He noted that this was "old, too expensive debt", highlighting the large coupon saving achieved versus the prior instrument.

São Paulo stock exchange operator B3 has sold USD700 million of sustainability-linked debt. The issue was priced at 4.125%, versus mid to high 4% area guidance. The issue's KPIs link coupon step-ups to the exchange's ability to increase its employment of women. Its deal was accompanied by a USD500 million sustainability-linked 10-year deal for rail operator Rumo, priced to yield 4.25% versus initial price talk at the high 4% area. Both deals were strongly received.

Other debt

A USD7 billion seven-year leveraged loan facility was launched on 15 September to finance the buy-out of Medline, a medical supply company. The transaction is worth over USD30 billion and represents the largest LBO for over a decade according to Bloomberg. A USD7.8 billion high-yield bond sale is planned shortly.

Julius Baer has set a new low for Additional Tier 1 issuance. It sold USD320 million of perpetual debt first callable after seven years, priced at 3.625%, "the lowest for USD-denominated AT1 bonds issued by a European bank". The deal gained demand of over USD4.3 billion, permitting a 62.5 basis point tightening from initial guidance of 4.25% area.

Trading company Trafigura sold a USD400 million perpetual non-call six-year issue at 5.875%, versus price talk of 6.25%. On the same day (15 September), Banco Santander placed EUR1 billion of perpetual non-call eight-year AT1 debt, pricing at 3.625% versus guidance of 4% area.

UK health care insurer BUPA adjusted plans for a debut Tier 2 deal to sell a Restricted Tier 1 offering, which was over ten times subscribed, confirming UK demand for deeply subordinated perpetual debt. The issue represented a liability management exercise, being held in conjunction with a tender for GBP250 million of 5% 2023 subordinated notes.

Republic of Austria sold EUR5 billion of 15-year bonds on 16 September at 0.286%. The syndicated deal, Austria's first syndicated 15-year deal for over a decade, attracted a record EUR42 billion of demand: Christian Schreckeis, Head of Issuance and Portfolio Management at the Austrian Treasury, noted that "yields remain low and so investors want to pick up yield by extending maturity". The deal is Austria's last syndication for 2021. Austria also has announced plans to debut in the Green Bond sector in 2022.

Greece's Alpha Bank has arranged an "inaugural" senior preferred bond. It placed EUR500 million of 6.5- year (non-call 5.5-year) bonds at 2.625%. The bank's statement claimed the deal "significantly enhances the Bank's presence in the international capital markets, diversifies its investor base and improves its funding profile. It claimed "strong institutional support" with some 60 accounts involved, and the deal twice subscribed.

Implications and outlook

This early blog covers the highly active debt markets in the period following Labor Day. Of particular note is the heavy supply of perpetual debt, ranging from ICBC's jumbo offering through to the far smaller, but also "record-breaking" European AT1 sale by Julius Baer. The favorable reception for such issues comes despite ongoing debate about central bank tapering and clearly suggests that markets continue to favor long-duration assets. In turn, this is permitting firms to manage their liabilities to lock in attractive term finance and reduce near-term debt service obligations, improving their overall debt sustainability profiles.

IHS Markit analysis notes that the bank's total capital adequacy ratio stood at 17% in Q1 2021, with Tier 1 capital of 14.4%, versus Q2 levels for the sector of 14.5% and 10.5% respectively. Our banking expert Angus Lam reported that the ratios "indicate strength" and were well above regulatory requirements. However, he cautions that reported impairment levels will have been masked by regulatory forbearance, with particular concerns that bad debts are yet to materialize in the micro and SME lending segment, with this only likely to show through in early 2022, or later if measures are extended.

With all but Bank of China showing first quarter double-digit asset growth rates (year-on-year), further issuance of capital instruments by other leading state-owned Chinese banks appears likely. Accelerated supply of hybrid debt sales from elsewhere in the financial and corporate sectors also is probable given the current receptivity.

Revived activity in the leveraged debt market also appears risk-positive - particularly for those firms with relatively strained balance sheets. It comes after marked improvement in the terms available for firms in sectors like cruise lines and airlines which have been badly affected by the pandemic. Such scope to access attractive funding is positive for near-term economic growth, and to enable stressed firms to remain in business. However, it also indicates adverse risk accumulation if high-risk firms accumulate sizeable (and potentially excessive) new borrowings, or if investments were conducted without careful scrutiny by the subscribers, increasing subsequent liquidity and performance risks for purchasing institutions.

Posted 22 September 2021 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, IHS Markit

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