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Capital Markets Weekly: Investor yield hunger underpins record Italian syndication

14 February 2020 Brian Lawson

This week's highlights were the record EUR48 billion in demand for a EUR9 billion syndicated 16-year deal for Italy while Deutsche Bank, BT and others have enjoyed rampant oversubscription for hybrid debt.

European debt

On 11 February, Italy attracted a record EUR48 billion for a EUR9 billion 16-year syndicated issue.

  • This was priced at 1.489%, 5 b.p. over Italy's March 2035 BTP, versus guidance of 9 b.p.
  • Demand surpassed Italy's prior record of EUR45 billion for its EUR7 billion 30-year sale this January.
  • Investors ignored Fitch's decision to re-affirm a Negative Outlook on Italian sovereign debt, citing political fragmentation, its impact in hindering development of a credible growth and fiscal strategy, and ongoing weakness within Italy's banking sector.

The appetite for Italian risk was further confirmed by the strong reception for Banco Populare di Milano's debut senior non-preferred issue.

  • The sub-investment grade bank tightened pricing by nearly 30 b.p. from initial guidance of 220 basis points area over mid-swaps for the five-year offering.
  • It priced EUR750 million at 1.625%.

On 11 February, Deutsche Bank launched a perpetual non-call 5.75 year AT1 issue, with 6.75% initial guidance to first call, seeking at least USD1 billion:

  • Books exceeded USD10 billion.
  • The deal was upsized to USD1.25 billion and priced at 6%.
  • The bank stated that the deal forms part of efforts to manage its regulatory capital, seeking to maintain an AT1 buffer of 1.5% of fully-loaded risk weighted assets, and to support "progress towards" a 4.5% fully-loaded leverage ratio target for end-2020.
  • Deutsche Bank has an outstanding USD1.25 billion 6.25% AT1 issue first callable in April. However, it stated that the eventual decision whether to call will be based on economic factors.

Deutsche's success encouraged Unicredit to launch a perpetual non-call seven-year AT1 issue, with guidance of 4.625% area yield until first call.

  • It placed EUR1.25 billion at 3.875%, "among the lowest AT1 coupon ever paid" according to its statement, which cited "an exceptionally strong and granular order book".
  • Over 500 accounts participated, mainly fund managers (70%).
  • Demand was broadly-spread: UK (21%), France (20%), Swiss (12%), Asia (12%) and Italy (10%).

On 14 February, Iceland's Arion Bank started marketing a dollar-denominated AT1 deal. The issue - by the successor bank to Kaupthing - would be Iceland's first AT1 sale.

Three corporate borrowers also raised hybrid debt, along with Société du Grand Paris issuing a 50-year Green bond, the longest such instrument to date (see ESG below):

  • Sweden's Akelius Residential Property tightened pricing from an indicated 2.75% to 2.25%, after gaining EUR2.4 billion of demand for a EUR500 million 61.25-year hybrid issue, first callable after 6.25 years.
  • It was followed by the UK's BT, which tightened pricing on a EUR500 million 60. 5 year, non-call 5.5. year deal from 2.5-2.625% to 1.875%.
  • AT&T followed on 12 February with a EUR2 billion sale of perpetual debt using a US preferred structure to improve its accounting treatment, which cleared at 2.875% to the five-year initial call.

After last week's clear success for Alpha Bank's subordinated sale, Piraeus Bank also sold a strongly received 10-year subordinated offering:

  • It gained over EUR4 billion in demand for the EUR500 million deal, with over 350 investors.
  • The issue was priced at 5.5%, versus 6% initial guidance.
  • It had paid 9.75% for a similar EUR400 million issue late last June.
  • On the same day, Greece's 10-year bond yield fell to 0.96%, its first breach of the 1% level.

The UK's Debt Management Office undertook a GBP2.5 billion syndicated reopening of its 1.625% 2071 gilt.

  • The tap was priced at 2.25 basis points below the yield on the 3.5% 2068 gilt, the low end of guidance, to yield 0.9295%.
  • The issue - which was launched in May 2018 - will now expand to GBP13.8 billion, reflecting the UK's strategy of establishing large liquid benchmarks.
  • 87% of the deal was allocated to domestic buyers, reflecting the natural requirements of UK pension funds and life insurers for long-dated assets.

Carrier Global made a debut USD9 billion six-part offering, which gained over USD40 billion in demand.

Emerging markets

Late last week, Turkey completed a USD4 billion five and 10-year deal, described by the country's Ministry of Finance as Turkey's largest international sale to date and priced through its outstanding curve.

  • The Ministry's statement claimed the deal was almost three times subscribed. Over 200 accounts were involved.
  • 51% of demand was from UK-based buyers, with 18% taken in the USA and 14% by other European buyers.
  • The five-year tranche, for USD2 billion, was sold at 4.45% while the 10-year portion was placed at 5.45%.
  • Proceeds were fully converted to Euros through currency swaps, with an average cost of 2.7%.

A Mexican leasing firm undertook a highly successful debut late last week, while two further Latin American borrowers tapped existing deals:

  • Operadora de Servicios Mega sold USD350 million of five-year debt at 8.25%. Proceeds will refinance existing liabilities and expand the company's activities. Pricing was tightened by over half a percentage point versus initial guidance.
  • Beverage firm Femsa added USD300 million to its 30-year bond at 3.423%. Pricing equated to a margin of 137.5 basis points over US Ttreasuries, versus initial guidance of 150 b.p.
  • In addition, Banorte sold CHF225 million of four-year bonds at 0.47%, 108 basis points over mid-swaps versus price talk of a 100-120 basis point margin.
  • Brazilian healthcare provider Rede D'Or also tapped its 4.5% 2030 deal with an extra USD350 million, pricing the add-on at 100.784% to yield 4.4%, 10 basis points tighter than guidance.

Yiwu State-owned Capital Operation attracted USD2.6 billion for a USD400 million bond sale, the first Chinese local government vehicle to issue since the COVID-19 outbreak. 124 accounts participated, but USD1.08 billion of the demand was from its lead-managers.

Indonesian state energy company Pertamina gained USD3 billion of demand for a USD800 million 40-year bond, its longest to date, following on from a 30-year offering earlier this year. It also placed further 10-year debt. Pertamina is tendering to repurchase its USD1 billion 5.25% 2021 bonds.


Toyota Motor Credit undertook a USD750 million Green Bond sale within a USD2.5 billion package placed on 10 February, the first such sale in US dollars by a US automotive company.

  • According to Bloomberg, the deal is the first US corporate sale of green debt in 2020.
  • Toyota had completed prior green securitizations of low emission vehicle loans and leases in 2014 and 2015 and sold a EUR600 million 0% 2021 Green Bond in 2017 with total outstanding debt in Green format totalling USD5.3 billion.
  • The Green tranche was priced at 2.15%, 65 basis points over US Treasuries, which equated to a 2 basis point premium to the spread implied by its existing non-Green curve according to market calculations.
  • Initial price talk was set at a "high-70s" margin.
  • Proceeds will fund purchases of hybrid and electric cars.
  • Its latest Green Bond - the first such borrowing directly undertaken within the US auto sector -reflects the company's wider environmental agenda, which aims to reduce CO2 emissions of its new vehicles by 90% by 2050, while fully eliminating net CO2 emissions from vehicle manufacture and company facilities.

Société du Grand Paris, a state agency responsible for rail development around Paris, has launched a EUR2.5 billion 50-year Green bond, the longest such issue to date.

  • SGP was established in 2010 to finance some 200km of new metro lines, including four new lines, 68 new stations and seven technical support centres: all trains are electrically powered and will have high-density usage.

Implications and outlook

Both the record success for Italy's further syndicated sale of long-term debt and the multiple hybrid and ultra-long dated corporate sales this week clearly indicate investor yield hunger, and a willingness to shrug off credit uncertainties to achieve enhanced returns. These developments continue this year's trend, also highlighted by last week's successes for Ghana's 41-year bond and Alpha Bank's eleven-times subscribed subordinated issuance.

While Toyota's dollar Green Bond sale attracted high profile as the first direct issuance in dollars of Green debt by a US auto producer, we view the operation as an indicator of continuity. Toyota already had an established Green Bond programme, sold Euro-denominated Green debt last year, and had placed two Green securitizations dating back to 2014. As such, its latest move simply continues this past strategy, while setting an interesting precedent for the wider auto sector.

As an aside, although the deal established clear criteria for vehicle eligibility, these do not seem to adhere to a strict "no harm" policy, in that hybrid vehicles still make use of some petrol fuel, and thus cause carbon emissions. Additionally, the deal did not appear to achieve tangible cost savings, in contrast to most such operations denominated in Euros. Despite this, the operation is a further indicator of the trend towards companies seeking to establish their environmental and social qualifications.

Posted 14 February 2020 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, IHS Markit


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