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Capital Markets Weekly: Long-dated successes for Cyprus, Egypt and France highlight strong duration-based demand

24 February 2019 Brian Lawson

This week's main highlights were a successful three-tranche USD4 billion package for Egypt and Cyprus's sale of 15-year Euro-denominated debt, its longest maturity to date. Healthy duration-based demand also was indicated by the strong response to an Additional Tier 1 perpetual deal by ING, the second AT1 success in the last week, which was followed by further supply from Credit Agricole, and large-scale demand for France's EUR7 billion 30-year syndicated bond. Inclusion of EUR800 million 12 and 20-year tranches within a debt package for Siemens further reinforced this positive trend.

Egypt offered a three-tranche dollar package, comprising five, 10 and 30-year debt with initial guidance of 6.6%, 8% and 9.1% area respectively. On 20 February, it announced that demand had reached USD21.5 billion, and that it would issue USD750 million, USD1.75 billion and USD1.5 billion respectively for the three tranches, with these being priced at 6.2%, 7.6% and 8.7%. According to Deputy Finance Minister Ahmed Kouchouk, the yields achieved are "very good" for Egypt, with the bulk of demand being for the two longer-dated tranches.

The same source was cited by Bloomberg as stating that Egypt is planning to adjust its issuance strategy, moving through a "gradual shift" towards longer dated issuance. Kouchouk advised that Egypt aims to raise its average debt maturity to five years by 2022, roughly double its 2018 level. The process will include longer-dated domestic sales, a debut issue of green bonds this year, and new domestic instruments potentially including inflation-linked securities. Overall, he stated that Egypt plans to "diversify our debt instruments" and spread its "local and international investor base to enhance completion and secure the best yields".

Cyprus sold a 15 year deal on 19 February, gaining over EUR8 billion of demand for its longest deal to date. The issue was priced at 175 basis points over mid swaps, equating to a reoffer yield of 2.758%. The borrower specifically elected to keep the deal size at EUR1 billion despite its arrangers suggesting that up to EUR1.5 billion would be raised. Pricing was 25 basis points inside initial guidance.

France also joined the growing list of European sovereigns selling long-dated syndicated debt, gaining EUR33.5 billion of demand for a EUR7 billion 30-year sale. It priced the deal at 8 basis points over its outstanding 2048 OAT.

Our Take

The extended duration of issuance by both Cyprus and Egypt is risk positive, in that it reduces rollover risk and locks in term funding at relatively attractive rates for both countries.

Cyprus has been on an improving risk trajectory recently, regaining two investment grade ratings last year. IHS Markit anticipates further improvement, with our medium term sovereign risk rating enjoying a Positive Outlook. However, important challenges remain: the Cypriot economy is exposed to wider EU slowdown, and the country's banking system continues to face serious asset quality problems from highly-elevated if declining impairment. Overall, the latest deal is a positive step for Cyprus in reinforcing its market standing.

Egypt is also on an improving trend, reflecting the country's growing GDP growth assisted by the development of its natural gas resources, notably the supergiant Zohr field. Our economic summary for Egypt flags that confidence in the country has been boosted by its agreements with the IMF and supranational lenders for economic reform alongside the provision of concessionary finance. Further progress with such reforms, as suggested by Egypt's plans to modernize its domestic funding arrangements, is key to continued positive momentum. A move away from short-term bill finance to seek longer term domestic debt sales will be risk-positive, reducing the need to refinance continually, and curtailing rollover risk. Egypt's plans to diversify its funding sources, with Samurai finance on its 2019 agenda along with a Green bond, also look welcome.

Overall, the key "takeaway" from this week's developments is the healthy bid for longer duration instruments, including the resilience of the AT1 segment. The latter has now seen three deals since Banco Santander's non-call decision last week. With Santander itself having raised senior debt without any adverse investor reaction, fallout to its AT1 decision seems clearly limited.

A further positive feature of the market's recent receptivity and the multiple recent large-scale sovereign syndicated sales is that sovereign borrowers have made considerable headway in completing their funding programs. According to Unicredit data published by the Financial Times, Italy and Spain have covered 22% and 18% respectively of their 2019 requirements, with Austria, Belgium, Finland, Ireland and Portugal having obtained around one-third of their funding needs.

Given recent adverse IHS Markit PMI indicators in Europe, our recent EU growth forecasts have been adjusted downwards, a view shared by other major forecasters including the European Commission and the IMF. In turn, this indicates the likelihood of longer delay until the ECB moves to start the process of normalizing its rates, including a move of some policy rates from their current negative levels. Slower economic growth is likely to prove positive for bond market conditions in Europe, including the current "duration bid", but less encouraging for new equity issuance.

Posted 24 February 2019 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, IHS Markit

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