Capital Markets Weekly: Liability extension and search for yield continue post-Thanksgiving

So far this week - as of noon GMT on 4 December - there have been two perpetual debt issues and several other longer-dated offerings. For the first week after Thanksgiving, at a time of year when markets normally display seasonal slowdown, this week's calendar has shown that liability extension by borrowers and the search for yield by bond investors continue to support long-dated issuance.

Emerging markets

A Financial Times article suggested that frontier market international debt has trebled in volume over the past five years to USD200 billion:

• It claimed that the average frontier issuer now has hard-currency bond borrowings equivalent to half of its foreign exchange reserves.
• In GDP terms, the average frontier country's international debt stock equates to 7% of GDP, versus 3% in 2014.

Three Chinese borrowers have been among those bringing new supply this week:

• China State Construction International Holdings sold a USD500 million perpetual issue at 4%.
• Power generator China Huaneng Group has sold a three-tranche dollar package, raising USD1.5 billion in total.
• Bank of Communications Financial Leasing Co. raised a USD600 million five-year floating rate note, priced at the bottom of indicated guidance of 110 basis points plus/minus 2.5 b.p. over three-month LIBOR.

Within a relatively quiet week for Latin American issuers, Brazilian investment bank BTG Pactual sold USD500 million of five-year debt, its second benchmark sale this year.

• The deal was priced at 4.625%, or 308.4 basis points over US Treasuries, versus "high 4% area" initial price talk.
• Against the background of limited supply, Global Capital website suggests that mid-sized Brazilian lender Banco Daycoval and Bancolombia also are preparing issuance and should enjoy a favorable response.

Corporate and financial sector debt

Intesa Sanpaulo has become the first bank to undertake a Green Bond dedicated to the "circular economy".

• The five-year EUR750 million deal attracted demand of EUR3.5 billion, being priced at 0.75%.
• 75% of the deal was allocated to asset managers, with buyers from UK and Ireland taking 23%, followed by those from Germany and Austria with 18% and French investors with 17%.
• Proceeds will support loans under the bank's EUR% billion lending fund for the "circular economy", which seeks to "design out waste and pollution" by keeping "products and materials in use" with the overall goal of decoupling economic activity from resource consumption.

Long-end activity has revived quickly after Thanksgiving in both the Euro and US dollar sectors.

• Italgas marketed a 12-year deal on 2 December, with initial price guidance of mid-swaps +105 basis points. Pricing was quickly tightened to an 85-90 basis point margin with demand of EUR1.5 billion. The deal was sized at EUR500 million and priced with a 1% coupon. The company's statement highlights that the deal is its longest to date, with proceeds to be applied to redeeming outstanding debt due in 2022 and 2024.
• EDF also obtained long-dated funding, opening books on a 30-year deal at mid-swaps plus 185 basis points. Pricing was tightened to 165 basis points after demand reached EUR3.25 billion, with the deal sized at EUR1.25 billion.
• It was followed by Belgian insurer Ageas, which gained over EUR5 billion in demand for a EUR750 million Restricted Tier 1 deal first callable in June 2030.
• Also in Euros, Chubb raised EUR1 billion of five and ten-year debt, pricing the two equal tranches at coupons of 0.3% and 0.875%.
• Greek infrastructure group Ellaktor is testing demand with efforts to place a EUR600 million five- year Green Bond, designed to replace its existing debt which is largely based on bank facilities.

In US dollars, Dominion Energy raised a USD1 billion perpetual issue, first callable after five years, along with several dated long-dated issues.

Also in the market was power utility AEP Texas, a unit of American Electric Power, which sold USD450 million due in 2050 at 3.45%.

Insurer AXIS Capital raised USD425 million of junior subordinated debt due in 2040, first callable after 10 years, with a 4.9% coupon. Proceeds will be used for the redemption of outstanding 5.875% 2020 notes, and the early call of its 5.5% Preferred Shares.

AT&T also raised long-dated debt with USD1.265 billion of 2050 debt at 4.25%.

UK financial scoring company Experian also tapped the dollar sector, raising USD750 million at 115 basis points over comparable US Treasuries.

Implications and outlook

Post-Thanksgiving, markets have remained active and receptive, while borrowers continue to extend their liability profiles. The relatively heavy supply in both dollars and Euros for maturities of ten years and longer continues to indicate that investors remain "yield-hungry", focusing on those segments of the market where returns are greater. This has been a regular feature this year and one likely to extend into 2020, especially in Europe.

We give prominence to the Financial Times's commentary on debt build-up in frontier markets, which follows adverse IMF commentary on frontier market debt sustainability. Such risk assessment aligns with extensive IHS Markit analysis on the build-up of debt within African emerging markets, and the concern that in many cases this has not been matched by expansion in productive capacity and exports. Angola's recent bond market success indicated that such debt accumulation is not yet causing widespread investor concern and implies that the lure of high coupons is still more powerful than anxiety over deterioration in debt-sustainability indicators. As stated above, yield hunger is likely to remain a potent force in 2020, but we will look closely for indicators that investors are giving greater focus to underlying credit fundamentals as well, which would be shown by greater pricing sensitivity and/or reduced demand for emerging market borrowers with rapidly-growing debt stocks.

Lastly, Intesa's ESG transaction, focused on "circular finance", introduces another label to the already complex branding of environmentally-positive transactions, although it also qualified for inclusion under the broader "Green Bond" label. More effective re-use of resources is a widely-discussed strand within efforts to improve global environmental efficiency, so the deal should set a useful precedent. This would be shown by further issuance with other borrowers dedicating the use of proceeds to effective resource recycling and the reduction of waste. The eventual priorities established in the currently-ongoing Madrid Climate Summit also may indicate further momentum for this category within ESG funding.

Posted 05 December 2019 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, IHS Markit