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Capital Markets Weekly: Market activity revives but pending tapering decisions remain key

02 September 2021 Brian Lawson

Emerging markets

The Province of Buenos Aires announced on 30 August that 98% of its bondholders had accepted its latest debt restructuring proposals. This provided a qualifying majority for the planned restructuring of USD7.1 billion of debt, which will provide USD4.6 billion of debt relief by 2027, lowering coupons and tripling the province's average debt maturity according to Ámbito newspaper.

Reaching agreement almost ends a process that has lasted over a year and involved 21 extensions of the Province's proposed restructuring offers. Prior reports noted that USD1.9 billion of the Province's debt have collective action clauses with an 85% trigger, while USD5.2 billion have a two-thirds threshold for forced conversion of holdout investors.

Bloomberg and other reports note that the restructuring is incomplete, as the restructuring offer used a "redesignation" strategy to exclude holdout proportions of a USD250 2021 issue and a EUR95 million issue that had a high collective action clause threshold. The Province did not specify how many bonds were "redesignated", which funds have rejected restructuring, or how their stance will be resolved.

Chile's Empresa Nacional de Telecommunicaciones is looking to repurchase up to USD800 million of its 4.88% October 2024 issue at 105 basis points over comparable US Treasuries. If the tender falls short it will extend repurchases to its 4.75% August 2026 deal at a 125-basis point spread. The tender is to be funded with new senior debt.

India's Axis Bank marketed a US dollar denominated Additional Tier 1 deal, using a perpetual non-call five-year structure with guidance set at 4.4% to first call. The USD600 million deal priced at 4.1% with demand of USD1.8 billion. Axis Bank is privately owned and reported by IHS Markit's Banking Risk Service to have a 5% share of total sector assets. At end-June 2021, the bank reported a CET1 capital ratio of 15.38%, with a total capital ratio of 19.38%. The bank reported gross non-performing assets of 4.18%, versus 5.03% a year previously, with a net NPA ratio of 0.98%.

The Maldives is planning a further tap of its dollar-denominated sukuk issue. USD200 million initially was sold on 29 March with the deal grown through a USD100 million tap in April. As of 2 September, bookbuilding is being conducted at 10.5% guidance.

ESG

AC Energy, the energy subsidiary of the Philippines's Ayala Group, sold USD400 million of perpetual non-call 3.5-year debt, priced on 1 September at 4% versus 4.45% guidance after attracting USD1.88 billion of demand. The issue was in Green Bond format. Non-domestic Asian buyers subscribed 70% of the deal with 25% taken domestically, with asset managers purchasing 59%. India's Adani Green Energy placed a three-year Green bond at 4.375%, versus 4.7% area guidance. The USD750 million offering gained demand of USD3.7 billion, with broad global demand (48% Asia, 28% EMEA, 24% USA), primarily (93%) from asset managers.

The UK's Debt Management Office has announced that its debut Green gilt will be sold in the week of 20 September with a maturity of 31 July 2033. The offering will be syndicated (the UK's fourth syndicated sale in 2021-22 fiscal year). A second Green gilt will be sold in mid to late October.

Czech Gas Networks Investments sold a EUR500 million eight-year Green bond with a 0.45% coupon and 99.945% issue price. The company operates the country's largest gas distribution grid serving about 80% of the domestic market.

German specialty chemical firm Evonik arranged its hybrid deal in Green Bond format, its Green debut. The EUR500 million 60-year issue, first callable after five years, was priced at 1.375% late last week. Books exceeded EUR1.6 billion, and the issue priced 0.125% inside guidance of 1.5%. In parallel, the firm announced a tender to repurchase its existing EUR500 million 2.125% hybrid issue.

Other debt

After the summer lull, Greece and Germany reopened the market for syndicated sovereign issuance on 1 September, the former with notable success.

The Hellenic Republic placed EUR2.5 billion, comprising a EUR1.5 billion tap of its 0% 2026 issue at 0.02% and a EUR1 billion tap of its 1.875% 2051 deal at 1.675%. Demand reached EUR18.9 billion from over 300 investors, with EUR9.6 billion for the 30-year tranche. Greece's statement notes that the 30-year tranche provided a "landmark" indicator of credit improvement being the "first time Greece prices comfortably through Italian government bonds" (which were trading at 1.72%). Pricing was set at 38 and 135 basis points over mid-swaps, five and ten basis points inside guidance. The five-year tranche was dominated by UK buyers, allocated 48%, followed by domestic and French investors with 18% and 15%: 48% of allocations went to asset managers and 23% to banks. In the 30-year portion, UK, French and Greek buyers led demand, with 29%, 23% and 15%, with asset managers and banks taking 44% and 34% respectively. Greece has now raised EUR14 billion from five syndicated deals in 2021, with the new issue representing pre-funding designed to deepen its yield curve and capture funding on attractive terms.

Germany sold a EUR5 billion new 30-year Bund (with a further EUR500 million retained by the issuer), priced with a 0% coupon to yield 0.159%, reflecting its issue price of 95.204%.

On the same day, Allianz placed EUR1.25 billion of Restricted Tier 1 debt, planning a perpetual non-call 10.6 year issue at 2.6% to bolster its solvency ratios.

Supply already had revived on 31 August following the UK Bank Holiday (Monday 30 August) with eleven borrowers spanning the US dollar and Euro-denominated sectors. Within this supply, KBC Group arranged a Tier 2 subordinated deal, placing 750 million of 10-year debt at 0.625% coupon.

Late last week German property company Vonovia arranged this year's largest Euro-denominated corporate offering, selling EUR5 billion on 26 August in five tranches with maturities of two, 4.25, seven, 11 and 30 years. The package has an average life of 10.3 years with an average coupon of 0.49%. The two shortest tranches each have zero coupons, while the 30-year bond bears a 1.625% coupon, representing the firm's first issuance for this duration. In its statement, the company noted that aggregate demand was "just under EUR20 billion". Proceeds will be used to refinance bridge funding in connection with the planned business combination with Deutsche Wohnen.

Equity

Bank of India has raised an INR30 billion (USD410 million) qualified institutional placement. It priced the deal at INR62.89 per share, 6.7% below the prior day's closing level.

Implications and outlook

Supply has revived despite some residual seasonal factors (ahead of Labor Day) and the growing market focus on tapering by the Federal Reserve and European Central Bank, with the latter widely viewed as likely to take a slower adjustment path. Debt markets have remained receptive, with indicators of positive risk appetite including the strong response to Greece's syndicated deal, Vonovia's completion of the largest Euro-denominated corporate sale this year and the unusual sub-1% coupon achieved on KBC's Tier 2 sale.

During the week, an IMF representative cautioned that if a "taper tantrum" were to develop, this would prove particularly damaging for Emerging Markets. Chief Economist Gita Gopinath warned that emerging market countries are "getting hit in many different ways" as a consequence of the COVID-19 pandemic, and "just cannot afford … some sort of a tantrum of financial markets originating from the major central banks".

Counterbalancing this, IHS Markit assesses that major central banks remain highly sensitive to such risks, having learned from prior market dislocations. We assess that the extensive public debate on when and how to taper asset purchase programs in both the USA and EU is designed to give investors ample warning of the likely adjustment in policy, reducing the risk of market "shock". Recent issuance by countries such as Cote D'Ivoire and Benin has been well received, and Latin American spreads have not shown signs of spiking either. Moreover, near-term debt sustainability risk has been reduced by the IMF's SDA distribution, giving countries like Argentina new resources to service their liabilities at least in 2021. We expect policymakers to give repeated and ample warning of their plans and adjust policy in a cautious and staged manner. We would be surprised if the investor search for yield were to end abruptly after initial tapering announcements.

Posted 02 September 2021 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, IHS Markit

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