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Capital Markets Weekly: Issuance quietens reflecting European/US vacation seasons

30 July 2020 Brian Lawson

This week's market activity has slowed reflecting seasonal factors, notably the vacation season in both Europe and the USA, although a Hong Kong-based bank has raised perpetual debt and both Australia and the UK have completed impressive long-dated issuance. There also has been a record SPAC share flotation and a large (EUR4 billion) rights issue (for Cellnex).

Emerging markets

India's Adani Ports has raised USD750 million of seven-year debt at 4.2%. The offering is the largest corporate sale from India since the COVID-19 pandemic. Proceeds will repay existing debt.

Panama's Banistmo, a subsidiary of Bancolombia, initially was reported to be marketing five and 10-year dollar debt. It went on to sell USD400 million of seven- year notes with a 4.375% coupon and 99.25% issue price, versus initial price guidance of 4.5% area. The deal extends the bank's dollar liability structure.

Central America Bottling Corporation, a regional bottling company for Pepsico, tapped its outstanding 5.75% 2027 issue (initially sold in 2017) with a further USD200 million, sold at 4.93% with an issue price of 104.5%.

ESG

Thailand has announced plans to sell THB30 billion (USD945 million) of domestic 15-year Green bonds next month, with the sale slated for 13 August. Two-thirds of the proceeds will be used for projects within the government's programme to mitigate COVID-19, with THB10 billion to fund the Mass Rapid Transit Authority of Thailand. According to Patricia Mongkhonvanit, the Public Debt Management Office director-general, three domestic banks will conduct the sale, offered with the assistance of the Asian Development Bank. She also stated that the Bank for Agriculture and Agricultural Cooperatives and the National Housing Authority were both involved in the preparations and are planning green bond sales of their own within the current fiscal year.


Other debt

AT&T launched a USD11 billion bond sale on 27 July, split into five tranches due in 2028, 2032, 2043, 2052 and 2061. The issue is linked with an unrestricted tender for the redemption of 18 outstanding issues due between 2021 and 2025, and purchases of a further three issues on a capped tender basis. In late May the company raised EUR3 billion from three issues due in 2028, 2032 and 2038, along with the sale of USD12.5 billion of dollar bonds with maturities extending between 2027 and 2060: the USD15.8 billion package was used to redeem six bonds worth USD8.6 billion and term loans for a further USD6.3 billion. At the time it described the operation as designed to "de-risk its capital structure" by "extending debt maturities at historically low coupons".

Australia's latest syndication again raised a very sizeable amount of local currency debt. The offering, on 28 July, raised AUD15 billion of 1.75% 2051 debt, priced at a 1.94% yield, with total demand reaching AUD36.8 billion. The Australian Office for Financial Management announced that more than two-thirds of the sale was bought by offshore subscribers, according to the Australian Financial Review. This source described the deal as Australia's longest outstanding bond and its third-largest sale to date.

On the same day the UK also enjoyed a successful long-dated sale. It placed GBP1.5 billion of 1.625% 2054 gilts, at an average yield of 0.612%. Demand reached GBP2.61 billion, a coverage ratio of 1.74 times.

Hong Kong based Chong Hing Bank has continued the recent flow of perpetual debt from the emerging market banking sector, after deals earlier this month for Emirates NBD and Banorte. On 27 July, it attracted over USD1.5 billion of demand - howbeit with roughly one-third from its bookrunners - for a USD500 million perpetual non-call five-year Additional Tier 1 issue, priced at 5.5% to initial call. Initial guidance was set at 6% area: Global Capital described the final demand as "tepid" in reflection of the tightened pricing.

In its 2019 results, the bank announced that its total assets grew in 2019 by 11.6% to HKD212.8 billion. This expansion led to its total capital ratio weakening slightly, from 19.01% at end-2018 to 17.51% at end-2019, when its common equity Tier 1 ratio stood at 12.28%.

Southwest Airlines has tapped its 5.25% 2025 and 5.125% 2027 issues with an extra USD1 billion, its fourth issue this year. Proceeds are to redeem upcoming maturing debt and general corporate purposes.

High-yield debt

UK pubs group Stonegate has completed one of the largest sterling junk bonds on record, raising GBP950 million of five-year bonds at 8.25%, the upper end of initial guidance of 8-8.25%. It also raised a Euro-denominated floating rate tranche of EUR300 million with the same term. Proceeds are to help fund the firm's GBP 3 billion takeover of Ei Group, described by the Financial Times as the UK's largest pubs operator. The deal was secured by the equity of subsidiaries that hold the group's properties, with the combined group holding 4749 sites across the UK, 80% of which had restarted trading by the time of the issue. The offering was rated B3/B- by Moody's and Fitch.

Overall, while the transaction is sizeable, Stonegate appears to have paid up to obtain its funding goals. Initial reports had suggested investors were first sounded out at high7% to 8% levels. Nevertheless, the bond is the second largest on record in the sterling high-yield market, behind Virgin Media's GBP1.1 billion 2021 sale in 2013, according to International Financing Review.

Equity

On 23 July, Pershing Square Tontine Holdings completed the largest special purpose acquisition company (SPAC) flotation. It raised USD4 billion from the sale of 200 million share and warrant units at USD20 each and gained 6.5% in first-day trading.

The entity plans primarily to target "high quality IPO candidates", tracking a list of "mature unicorns" including Airbnb and Palantir, both previously reported as candidates for flotation.
French semiconductor firm ST Microsystems has raised USD1.5 billion of five and seven-year zero coupon convertible bonds, priced at negative yields of -1.12% and -0.63% respectively if unconverted. The two tranches have conversion premiums of 47.5% and 52.5% respectively.

Spanish mobile communications company Cellnex is now roughly mid-way through a EUR4 billion rights issue. It is selling 101.4 million shares at EUR39.45 each, in a fifteen-day rights period from 22 July. The sale is being conducted at a 25% discount to the theoretical ex-rights price, accounting for dilution, on 22 July. The announcement initially led to an upward spike in the firm's share price to EUR 60.78 from the EUR56.14 at the time of announcement: subsequently it has eased (to EUR54.68 on 29 July), but remains comfortably above the subscription price. Key shareholders and management have committed to subscribe 19% of the new shares. Proceeds will be to reduce debt and fund continuing expansion: Cellnex raised EUR3.7 billion in new capital last year from heavily oversubscribed prior rights issues.

Our take

This week's calendar is lighter than recently, but as we move into August, we'd assess that this reflects the traditional market lull to reflect the summer vacation season in both Europe and the USA. With corporate issuance having been at record volumes, it is also likely that many companies already have covered their most urgent needs, although AT&T's balance sheet adjustments are likely to be replicated by many other firms.

With long-dated funding available at historically attractive rates - and the uncertainties over a potential second wave of COVID-19 - it seems risk positive and prudent for firms to reduce near-term debt service burdens and lock in long term funds at attractive rates.

The successful syndication by Australia and the UK's latest auction both continue to show strong demand for long-dated debt at low costs. This has been a consistent feature in recent months and remains a positive indicator for debt sustainability in developed markets.

Ching Hing Bank's AT1 deal is quite modest in size, but against the recent background of political change in Hong Kong - and the US reaction - it is a further indication supporting our recent assessment that QE measures are encouraging a wider and riskier range of banks to seek international funding, and to make more use of subordinated structures to raise capital.

Posted 30 July 2020 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, IHS Markit

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