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Capital Markets Weekly: Lebanon and Argentina under bond-market scrutiny
There was only limited negative reaction to the first-round victory for Argentina's Peronist opposition in last weekend's election but Lebanese debt continues to suffer, hurt by severe and worsening political instability alongside very weak economic fundamentals. Equity markets show mixed signals, with a sizeable Hong Kong flotation competed with heavy oversubscription but two other IPOs were withdrawn.
On 28 October, Argentina's EMBI spread widened 5.41% to a margin of 2262 basis points over US Treasuries following Argentina's presidential election. The return to Peronist government was met with high market uncertainty but "without panic" according to Ámbito newspaper, a view validated when spreads subsequently recovered.
By contrast, Lebanon's outstanding 2021 issue moved to yield 30.1% on 29 October after a severe warning from the head of the country's central bank and its Prime Minister Saad Hariri resigned.
Elsewhere, Uruguay has expressed interest in undertaking ESG rather than Green Bond finance. Herman Kamil, the country's Head of Sovereign Debt Management, has stated that there is "room for financial innovation" by sovereign borrowers taking a "more comprehensive view of ESG" structures, focusing on social alongside environmental issues. He suggested Uruguay will "think about if there is room for an ESG-linked bond" and study its potential structure and features including ESG indicators, while proposing that "multinationals have a role to play" in such development.
Cable Onda, a Panamanian cable company owned by Millicom, sold USD600 million of 10-year debt at 4.625%, versus initial guidance of 4.75%.
Empresa Eléctrica Cochrane, established to develop the coal-fired Cochrane power project in Chile's northern Antofagasta region and owned by AES Gener, has appointed banks for a dollar bond sale, reportedly for a 7.5-year term.
Also pending is Brazilian petrochemical firm Braskem, which has appointed banks for a dollar sale - expected to be for 10 and 30-year bonds - to fund a tender for three outstanding deals including its USD1 billion 5.75% 2021 issue.
Also from Ukraine, Naftogaz is planning a USD500 five or seven-year deal. It started marketing on 30 October.
Mamoura Diversified Global Holdings - formerly known as Mubadala - is marketing a three-part dollar deal offering five, ten and 30-year tranches at initial guidance of 120, 145 and 205 basis points over mid-swaps.
Media reports claim that Kenya's Finance Ministry has pledged to reduce its international borrowings and place more emphasis on obtaining concessional funding and boosting fiscal revenue. The country recently approved an increase in its debt ceiling to USD85.7 billion from the USD56 billion debt stock in June, which equated to 55% of GDP. At the time it expressed plans to raise a further USD4.1 billion in international bank and bond markets, triggering concerns of declining debt sustainability.
Credit Agricole is preparing a Panda issue (in China's domestic market) for late November. The sale of three-year bonds is expected to raise CNY2 billion (USD283 million). While modestly-sized, the issue would be the first such sale by a European bank.
LBBW raised its first AT1 deal, obtaining EUR750 million of subordinated perpetual debt first callable in April 2025. The issue was several times subscribed and priced at 4%.
Skandinaviska Enskilda Bank also sought AT1 debt, marketing an AT1 deal callable after 5.5 years at 5.375%, for which demand reached USD2.75 billion.
In the week to 25 October, US IPO activity revived with all eight slated deals being completed. Up to 25 October, six of the 17 deals completed during the month were priced below the range. Only one deal was priced above the mid-point of indicated pricing, with an average 9% discount to the midpoint. However, according to Renaissance Capital, cautious pricing has improved performance, with flotations since September showing an average 8% return.
Property investment company ESR has priced its Hong Kong IPO at HKD 16.80, the middle of its indicated range. According to Reuters the deal was multiply-subscribed and increased in size to USD1.6 billion from the initial target of USD1.45 billion.
Less positively, an IPO for JS Global Lifestyle, a household appliances manufacturer, which was targeting HKD3.62 billion (USD464 million) was withdrawn. It previously had indicated that it would price at the bottom of its indicated range of HKD5.55-7.25 per share. Reports suggest that while the deal formally was covered, the quality of demand was insufficient to proceed.
As a further adverse indicator, African Export-Import bank has delayed its plans for a London IPO, citing "unfavorable market conditions". It stated it will "continue to monitor the markets to find the appropriate window".
The next major IPO is for GFL Environmental, a Canadian firm that is the fourth largest diversified waste management company in North America. It plans the sale of 87.6 million shares at USD20-24 each, seeking a dual listing on NYSE and Toronto Stock Exchange. The deal can be expanded to 100.7 million shares. Proceeds will be split between repaying roughly USD800 million in debt and "general corporate purposes, including future acquisitions". The company's statement suggests the deal should close by 11 November, with media reports predicting pricing on 6/7 November.
Outlook and implications
Despite the focus on Lebanon and Argentina, there are no indicators of wider contamination across the Emerging Markets asset class, and supply has spanned multiple regions, with a positive undertone.
Our banking, country risk, and economics specialists share the view that Lebanon will face severe pressure against its currency peg and struggle to refinance maturing debt. Similar concern was shared by the market, with the 30% yield on short-dated dollar debt indicating expectations of debt rescheduling and possible write-down.
Such sentiment could improve quickly, if a new government is formed rapidly and especially if UAE and/or other Gulf states offer Lebanon official funding under a rescue package, as with Bahrain last year. Without this, we assess risks to lie heavily on the downside. Political and economic fundamentals are dire, and confidence in the banking system risks unravelling quickly.
In Argentina, dynamics are slightly more balanced but also involve substantial risks. A key factor will be the ability of the new government to achieve a debt restructuring deal with the IMF. With the latter having sizeable exposures, it has self-interest to avoid a "hard" default and could allow debt extension to ease near term debt service burdens. However, it is obliged to establish conditions consistent with longer-term fiscal stability and debt sustainability. We assess that the IMF's conditions for rescheduling could prove hard for Argentina's new government to accept.
As specified in our recent joint country risk and economic coverage, it is still unclear how Argentina's new Peronist administration will be staffed, and the policy orientation of its key ministers. Overall, we assess that Alberto Fernández will attempt follow his prior statements that Argentine debt restructuring should avoid formal haircuts, instead seeking debt extension and possible grace periods. This still implies scope for sizeable valuation loss versus where most investors purchased such securities but would be considerably less onerous than the "can't pay, won't pay" stance of the prior Peronist government. One clear positive is that recent liabilities do contain collective action clauses, avoiding the "holdout" problems on Argentina's defaulted 2001 liabilities.
Overall, with weak signals from the global economy, it's unsurprising that primary equity markets remain mixed. Continuing deal completions in the USA and the ESR success in Hong Kong are encouraging indicators: we are not surprised by delay of other offerings, although in Afreximbank's case this came only shortly after announcing its IPO plans.
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