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Capital Markets Weekly: Late 2020 highlights include successful Ukraine tap and strong equity calendar

17 December 2020 Brian Lawson

Emerging markets

On 14 December, Kyiv Post and Interfax agency reported that Ukraine had tapped its 2033 US dollar issue for an additional USD600 million, increased from USD500 million in response to strong demand. The reports claimed that the tap, conducted on 11 December, was over three times subscribed, with pricing tightened from 6.4% guidance to 6.2%. The USD2 billion original issue was placed in July at a 7.253% yield. Proceeds are for general budgetary purposes.

In an interview on 2 December, Prime Minister Denys Shmygal had suggested in an interview published by Korrespondent.net website that Ukraine planned to seek USD 1 billion from international markets to cover remaining 2020 budgetary needs, alongside domestic funding.

Irrespective of whether further funding is still needed, Ukraine's market performance has been improving. Its EMBI+ index - a measure of the spread of its reference bonds over comparable US treasuries - peaked at 1203 basis points on 27 March, having started 2020 at around 400 basis points: from levels in July, and again in late October, of around 700 basis points, its spread has fallen sharply in recent months and now stands at 464 basis points (close 15 December).

The latest deal followed the EU allocating EUR600 million of financial support to Ukraine last week after an extended delay, citing the country's renewed commitment to cooperate with the IMF as a justification for the disbursement. According to Unian website on 13 December, the assistance was in the form of a loan at 0.125% maturing in July 2035. Minister of Finance Serhiy Marchenko noted that this also would fund state budget expenditure. A second tranche of equal size remains pending, while National Bank governor Kyrylo Shenchenko recently stressed that "cooperation with the IMF remains the foundation for the recovery of the Ukrainian economy" and that funding from the IMF and international lenders was "critical to delivering scheduled fiscal expenditures", suggesting Ukrainian willingness to meet relevant conditionality.

Laos is reported by Global Capital to have mandated a bank to seek dollar financing from the international markets. The country was suggested earlier this year to be facing debt stress, given its limited foreign exchange reserves and upcoming schedule of debt maturities. However, it did manage to raise THB14 billion (USD460 million) in the Thai domestic market on 4 October, its seventh issuance in this location since 2013, with The Nation website reporting that total issuance over the period had reached THB46.59 billion (roughly US1.5 billion). It placed debt for maturities spanning three, five, seven, 10, 12 and 15 years, with coupons between 3.65% and 6.05%. Of the recent issuance, roughly half the proceeds were to repay maturing bond and loan liabilities with the remainder financing infrastructure investment.

If successful, it would be among the weakest-rated international issuers. Laos was downgraded this year by both Fitch and Moody's to mid-CCC rating levels. The former cited "deepening external liquidity pressures", noting that "foreign exchange buffers remain low", with COVID-19 related slowdown and worsening fiscal deficits "diminishing the ability…to meet its debt service obligations". These are described by Fitch as reaching around USD1.1 billion annually during 2021-24. In July, Moody's took similar steps citing "severe liquidity stress…aggravated by poor governance", which "points to a possibility of default in the near future". Laos has been reported to be considering seeking debt relief or rescheduling with its Chinese lenders. As such, it is a challenging credit and successful completion of an international deal would be risk positive.

Other debt

On 11 December, Ireland's 10-year bond reached a record low of -0.33%. During last week, the stock of debt at negative yields reached USD18.04 trillion, a new record, with this level rising by roughly USD1 trillion during the week, boosted in part by Spain's achievement of sub-zero 10-year yields.

Equity

Equity markets are ending the year on a very strong tone for new issuance.

In addition to the high-profile success of the large IPOs for DoorDash and Airbnb last week, three other deals including C3.ai made gains over 100% in first day trading: within 2020, Renaissance Capital reports that 20 firms have opened with such gains. Airbnb's 113% gain in first day trading is reported by Renaissance Capital to be the largest on record for a USD1 billion or larger IPO. In total, eight firms priced IPOs last week above their indicated ranges. As a further sign of market receptivity, 20 SPAC deals also were completed.

As a further indicator of market strength, Tesla completed the sale of USD5 billion of shares in an "at the market" offering in just two days. The sale was disclosed in a filing on 8 December and completed the following day, with the new shares completing settlement on 11 September.

Its success prompted Chinese electronic vehicle manufacturer Nio to announce on 11 December a 60 million underwritten secondary share sale of 60 million shares. Including a greenshoe facility of 9 million shares, proceeds could reach almost USD3 billion. Proceeds will be to fund R&D, including autonomous driving capacities, along with expansion of the firm's sale and distribution network. Nio's share price has risen by over 1000% during 2020, while Tesla's has risen from USD86 per share on 2 January to a peak (prior to the new offering) of just under USD650 per share.

The sector has been highly active: last week Xpeng also raised USD2.16 billion from an upsized sale, which could expand to USD2.48 billion after greenshoe. It placed 48 million American Depositary Receipts at USD45 each (a 7.6% discount to the share price prevailing on 8 December), with the deal upsized from 40 million ADS. Xpeng was floated on the NYSE just over three months ago, in a USD1.72 billion IPO: its share price has almost doubled since flotation.

In the week of 14-19 December, the main US IPO offering is from Wish, a San Francisco based firm that offers an e-commerce platform for discounted merchandise. It claims 100 million active users in over 100 countries linked to 500,000 merchants, claiming 234% growth in its range of merchants since 2019. It sought to place 46 million shares on Nasdaq at USD22-24 each, pricing at the top of its range. Other sizeable pending IPOs, including those of Roblox, an online gaming system and payment platform Affirm now appear to be waiting for 2021.

Implications and outlook

Within this week's lighter calendar, Ukraine's successful debt sale reinforced the recent improvement in its trading levels. A major concern had been the country's ability to access funding from official lenders after its IMF program's disbursement was stalled over reported failure to implement agreed anti-corruption legislation. The recent EU release has alleviated these concerns, as have recent official statements indicating the importance of the IMF and other official lenders to Ukraine.

If a bond transaction does emerge for Laos, this also would be risk positive, both as an indicator of demand for high-risk frontier markets and in preserving Laos's liquidity and ability to meet upcoming debt redemptions. Laos faces a degree of ongoing debt stress after borrowing heavily for infrastructure development, having been described by the Financial Times as likely to seek restructuring of its liabilities, notably with Chinese lenders.

Equity markets have ended the year in receptive mood, with the successful share issuance by electric vehicle manufacturers particularly impressive given the degree of rapid price appreciation in the segment this year. Tesla's sale was completed very rapidly and its rapid fund raising, alongside other offerings in the sector have indicated sizeable incremental demand even after dramatic price increases within 2020.

Wishing you a wonderful end to 2020, our Capital Markets post is slated for the week of 4-8 January.

Posted 17 December 2020 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, IHS Markit

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