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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