Capital Markets Weekly: Italian syndication revives focus on price sensitivity, but demand remains strong

Emerging markets

In a light week for issuance, National Bank of Kuwait sold an Additional Tier 1 perpetual non-call six-year issue. The deal comes against the background of a standoff at sovereign level which has prevented Kuwait from raising international debt since 2017, given its parliament's rejection of proposals for a new debt law to authorize such issuance.

In its January 2021 presentation, the bank claims to be Kuwait's leading banking group in terms of assets, deposits and loans, with an over-30% share of assets. The bank reported strong 2020 capital adequacy and Tier 1 capital ratios of 18.4% and 16% respectively. Although its non-performing loan ratio rose to 1.72% (versus 1.1% in 2019) the loan loss coverage ratio remained at 220%. However, profitability declined sharply in 2020, with ROE of 7% versus 12.3% in 2019.

In parallel to the planned sale, NBK is running a tender for USD700 million of its outstanding 5.75% AT1 bonds issued in 2015, ahead of their first call date on 9 April 2021.

On 18 February, Reuters reported that NBK had sold USD700 million priced at 3.625% to initial call, versus initial guidance of 4% area.

Another clear success was achieved by Mexican petrochemicals firm Alpek. It sold USD600 million of 10-year debt priced at 3.28% or 200 basis points over comparable US Treasury bonds.

In a statement, the company described pricing as "the lowest in our history", noting that proceeds will be used for a tender for its 2022 outstanding issue, other debt repayments and general purposes. It flagged that the deal was "oversubscribed over 9 times" with "ample geographical(ly) diversity": 54% was allocated to North American buyers, 34% in Europe and 5% to Asia. Additionally, it claimed that the firm's recent ESG focus had led to "strong participation from ESG-dedicated funds".

ESG

In his budget speech on 16 February, Singapore's Finance Minister Heng Swee Keat announced plans for the government to issue Green Bonds to fund public infrastructure projects. He stated that SGD19 billion (USD14.3 billion) of projects potentially have been identified, including the Tuas Nexus integrated water and waste treatment facility. Government issuance was described as "an important enabler" for Green finance "deepening market liquidity…attracting green issuers, capital and investors" and strengthening Singapore's role as a "Green hub". Heng noted that the initiative would serve as a reference for SGD-denominated corporate debt sales, while boosting ESG activity in the wider region.

The initiative immediately followed Singapore announcing a "Green Plan" for Singapore over the next decade. This is sponsored by five ministries (Education, National Development, Sustainability and the Environment, Trade and Industry, and Transport) with multiple goals including more than doubling electric vehicle charging points, requiring all vehicles to run on cleaner energy by 2040, while tightening requirements for new vehicle registrations by 2030, reducing waste sent to landfill by 30%, "quadrupling solar energy deployment by 2025" and improving the sustainability standards of local buildings.

Other debt

Italy placed a new syndicated 10-year benchmark and a 30-year inflation linked issue linked to the Eurozone HICP index, this week's largest bond sale.

The 10-year issue was priced at 0.604% and sized at EUR10 billion. Italy also sold EUR4 billion of inflation-linked debt. Pricing for the ten-year portion is described by the Italian Treasury as "the lowest ever".

According to Treasury statements, the ten-year portion attracted final bids of EUR68.46 billion, with EUR16.82 billion for the long-dated portion.

As with Spain's 10-year syndicated sale in January, the final order book compares adversely with peak orders, which had reached EUR110 billion on the ten-year portion, surpassing the EUR108 billion record for Italian 10-year debt achieved in June 2020. Total demand reached EUR134 billion but declined at final pricing to EUR82 billion. This dynamic reflected the borrower and its advisers tightening pricing on both tranches, with the ten-year portion moving from an initial guidance level of 8 basis points above its prior 10-year reference bond to final pricing of a 4 basis points spread. The inflation linked tranche was priced at 22 basis points over the September 2041 index-linked bond, versus prior guidance of a 27-basis point spread.

San Marino marketed a EUR300 million three-year deal. It started at 3.75% area price guidance, tightening to 3.25-3.5% after gaining over EUR1 billion in demand, with the deal upsized to EUR340 million and priced at 3.25%.

Our take

Singapore's plan gives further momentum to ESG funding within Asia. It comes shortly after Hong Kong issued a USD2.5 billion Green Bond package of five, 10 and 30-year debt, with Chinese firms also moving to expand domestic Green issuance and its regulators working to better align issuing standards with international norms.

Singapore's program appears designed to help establish standards and benchmarks for both the local domestic and regional economies, also looking to position the location as a financial center for ESG issuance.

Coming shortly after Hong Kong's sizeable Green Bond sale in late January, Singapore's initiative is a further indicator of the growing Asian political focus being given to ESG issuance, with the region's major financial hubs effectively preparing to compete for prominence in arranging such finance.

Italy's latest syndicated sale has enjoyed a clearly impressive reception and was almost seven times subscribed despite large-scale withdrawals of orders after pricing was tightened. The deal appears to have benefitted from recent government formation under the leadership of ex-ECB President Mario Draghi. It comes again a favorable relative performance background: the differential between Italian and German 10-year bonds has fallen from over 275 basis points early in the COVID-19 pandemic to under 90 basis points ahead of the sale.

The one negative for Italy's latest offering is that the large-scale withdrawals show that Italy's order book was price sensitive. However, Spain's recent success with a heavily over-subscribed 50-year syndicated sale clearly suggested that price sensitivity in a specific issue - its January 10-year syndicated offering - has had minimal impact on the wider ongoing demand for its securities.

The issue of price sensitivity merits further consideration in our view.

At first sight, especially for borrowers with strained debt metrics, it is clearly desirable to maintain good relations with investors, to assist in maintaining ongoing demand for the sizeable amounts of debt they are likely to offer. This constraint should serve to discourage issuers from being over-aggressive in tightening pricing, with the risk that investors lose interest and withdraw. Clearly, if such events led to investors viewing an issuer as "greedy" - with its securities thus becoming less attractive on a more consistent basis - that would be harmful for underlying demand.

Counterbalancing this, once an issue is viewed as "hot" - with heavy oversubscription likely to lead to a scarcity in allocations (and sharp price appreciation for equity sales) - there is clear risk that investors will overstate their genuine demand in an effort to obtain a larger allocation, and that new subscribers will join the order book with a short-term speculative orientation.

Additionally, large official buyers and major fund managers tend to react adversely to being scaled back to allocation amounts they view as too small, viewing these as administratively burdensome to maintain within their portfolios.

Overall. even after large-scale withdrawal of orders, both Italy's new deal and Spain's prior ten-year benchmark were still multiply oversubscribed.

As such, it may be unfair to criticize the borrowers for seeking to benefit from the heavy levels of demand - especially if by reducing the total book, they then were better able to allocate significant amounts to their core investors, rather than risking scaling them back excessively. In this regard, the recent trend of seeking record order books at times contains counter-productive elements: closing order books rapidly with a smaller aggregate volume can achieve a less speculative, higher-caliber demand base.

Posted 19 February 2021 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, S&P Global Market Intelligence