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Capital Markets Weekly: Markets further indicate recovery in risk appetite

28 January 2019 Brian Lawson

While there have been some modestly-negative indicators, such as downward adjustment to IMF growth forecasts, the overall picture this week has been one of recovering market sentiment.

Positive Debt Indicators

There's a long list of positive indicators this week. Spain's record EUR46.5 billion order book is this week's largest success. An overwhelming reception for Generali's subordinated debt showed improved risk appetite for Italy, as did a covered bond for troubled Italian lender MPS. There were multiple other positive indicators including Colombia's longer-dated issuance, the reopening of the Latin American corporate market, EDP's increased hybrid deal, two perpetual issues and an opportunistic Euro-denominated sale by Turkey.

Emerging Markets

Colombia placed a new 30 year bond at 5.22%, 215 basis points over US Treasuries, along with a USD500 million tap of an outstanding 2029 debt at 4.446% (170 basis points over Treasuries). Demand reached USD12.6 billion from some 300 investors. TermoCandelaria Power, a Colombian generation company, subsequently reopened the Latin American corporate market with a USD410 million 7.875% ten-year amortizing deal which attracted just under USD1 billion in demand. Turkey raised an opportunistic EUR1.25 billion six year deal at a 4.75% coupon versus initial guidance of 5%.

Other Debt

There were several other stand-out debt successes. Kingdom of Spain attracted a record order book of over EUR46.5 billion for its EUR10 billion syndicated benchmark ten-year deal. This priced at 1.46%, a narrow 12 basis-point yield premium to Spain's prior reference 10-year bond. Assicurazioni Generali attracted EUR6.5 billion in demand for a EUR500 million ten-year bullet subordinated bond priced at 3.875%, versus initial guidance of 4.625%, given the overwhelming demand. Italy's Banca Monte dei Paschi di Siena attracted EUR2.3 billion of demand for a five year EUR1 billion covered bond, priced at a 190 basis point spread versus low-200 basis point guidance.

Banco Comercial Portugues sold this year's first bank AT1 deal, placing EUR400 million of perpetual debt at 9.25% for the five-year period until initial call, versus guidance of 9.5%, after attracting EUR825 million in demand.

Energias de Portugal (EDP) sold 60.25 year hybrid debt, callable after 5.25 years. The BB/Ba2 rated deeply-subordinated deal was increased from EUR750 million to EUR1 billion, after gaining EUR2.9 billion of demand: pricing was tightened from 4.875% to 4.5%. The issue is in Green format, to finance wind and solar power projects. Accor also placed hybrid debt, gaining EUR2.6 billion of demand for a EUR500 million perpetual deal callable after 5.25 years.

Sub-investment grade activity also continues to build, with new supply now including CSC Holdings, an Altice vehicle, and Star Merger, relating to the USD6.9 billion buyout of Dun and Bradstreet.

Equity/ Equity Linked

Although the closure of the US administration has delayed primary IPO activity, the market for new share issues looks increasingly positive. By 18 January, the Renaissance IPO index had risen by 14% in 2019, versus a 6.5% gain for the S+P 500 Index.

This year's first significant US IPO is now under way. New Fortress Energy, an integrated gas to power company, plans to sell 22 million shares at USD17-19 per share: pricing is slated for 25 January. Four other deals also have been announced, of which the largest is for DiamondPeak Holdings, a special-purpose real estate company.

This follows the 15 January sale by battery and portable lighting firm Energizer Holdings of common stock and mandatory convertible preference shares worth some USD350 million. It also sold USD600 million of 7.75% 2027 debt.

In Europe, food delivery platform Takeaway.com, listed in Amsterdam, completed an accelerated book-build for EUR430 million of equity on 18 January, selling 8.35 million new shares at EUR51.50 each, equivalent to 19% of the company. The deal was increased from 6.5 million shares given strong demand. It also sold EUR250 million of convertible debt.

On 23 January, Swiss specialty chemical form Sika gained CHF6 billion of demand for a CHF1.3 billion (USD1.3 billion) mandatory convertible issue. This bears a 3.75% coupon and matures in 2022, converting automatically into equity.

Our Take

On 21 January, the Wall Street Journal noted that the US government shutdown is preventing the SEC from approving IPOs. To avoid this it suggested that new offerings may use a loophole whereby a transaction is deemed approved in the absence of adverse SEC action within a specified period. More fundamentally, we'd flag that favorable market performance, especially by recently-floated companies indicates the likelihood of a stronger primary equity calendar ahead.

Overall, markets have been risk-friendly so far in 2019. This has been particularly visible in the sovereign segment: Spain's record demand enabled it to emulate Italy's EUR10 billion sale last week. The massive oversubscription for Generali's subordinated debt highlights that investor appetite extends to riskier asset classes, with this and MPS's covered bond particularly confirming improved sentiment towards Italy. This week's calendar also includes a further Latin American sovereign success and two hybrid corporate deals as further risk-positive indicators.

Posted 28 January 2019 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, IHS Markit

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