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Capital Markets Weekly: Markets shrug off Iranian risks

09 January 2020 Brian Lawson

Overview
During the first main week of trading in 2020, bond market supply has been highly-active. Despite Iran-related regional instability, Israel raised a record USD3 billion sale attracting USD20 billion of demand, while in Europe, Ireland, Slovenia and Portugal have all issued successfully.

Emerging markets

Emerging market issuance in 2020 started brightly with seven Asian borrowers - including five Chinese property companies -launching bond issues on 6 January.

  • On 7 January, Indonesia sold EUR1 billion of seven-year debt at mid-swaps plus 103 basis points to yield 0.953%. Alongside this it also sold USD2 billion in 10 and 30-year dollar debt at 2.88% and 3.55% respectively. Indonesia's Finance Ministry has claimed that the two 10-year tranches were sold at the lowest yield levels achieved by the country.
  • Despite increased regional instability, Israel announced a two-tranche dollar bond, conducting US-based marketing for this on 6-7 January. On 8 January, Israel raised USD2 billion of 30-year debt at 3.375% and USD1 billion of 10-year liabilities at 2.5%.
  • The deal spreads of 115 and 68 basis points respectively are described as Israel's lowest margins to date.
  • Israel's Finance Ministry reported that the deal gained USD20 billion in demand, a record, with demand from 400 investors spanning 40 countries.
  • Sovereign wealth fund Bahrain Mumtalakat also has announced plans for marketing, ahead of a potential seven-year US dollar-denominated sukuk issue.
  • Several other EM issuers have announced deals and started marketing. These include Philippine conglomerate Aboitiz Equity Ventures, India's Future Retail, and Tower Bersama Infrastructure, an Indonesian telecom tower operator. Turkiye Sinai Kalkinma Bankasi is seeking a five-year dollar benchmark.

High-grade and other debt

European sovereign supply has been active:

  • On 7 January, Slovenia raised EUR 1.5 billion of ten-year debt at a coupon of 0.275%, 3.85% lower than the coupon on a bond maturing on 27 January.
  • The issue yielded 0.296%, with demand of EUR11 billion.
  • UK buyers took 28%, followed by German/Austrian investors with 14% and 13% taken domestically.
  • On 8 January, Ireland's National Treasury Management Agency raised EUR4 billion of May 2035 debt at 0.45%.
  • Total demand had reached EUR20 billion with over 200 accounts involved.
  • UK demand was strongest, representing 23% of the book, followed by Germany and the Nordics with 16% each, and France and Benelux with 11% each. Banks took 45% of the deal, and fund managers 25%.
  • On the same day, Portugal gained over EUR25 billion of demand from 350 accounts for a EUR4 billion October 2030 deal, priced at 0.499%, 33 basis points over mid-swaps versus initial guidance of 38 basis points.
  • 40.3% was allocated to fund managers, while banks took 30.8%.
  • Buyers from France/Italy/Spain took 24.6% of the deal, with the UK accounting for 20.6%. Domestic demand represented 12.3% of the book.

Following Lower Saxony's EUR1 billion ten-year "market opener", several other deals were completed in the week to 3 January:

  • Nationwide Building Society gained GBP2.1 billion in demand for a GBP1 billion five-year FRN, priced at 55 basis points over the Sonia rate, five basis points inside initial price guidance.
  • European Investment Bank attracted GBP2.7 billion in demand for a GBP1 billion July 2023 benchmark, which sponsoring banks claimed was a record for agency supply.
  • IADB obtained GBP620 million in interest for a tap of its GBP825 million December 2024 issue. The tap was expanded from a minimum GBP250 million to GBP500 million, with pricing kept at the initially-indicated 38 basis point spread over the September 2024 gilt.
  • KFW also completed a short-dated tap, adding EUR1 billion to its EUR 5 billion 2022 deal at mid-swaps minus 15 basis points.

On 6 January, KFW also announced a sterling July 2024 benchmark deal with price guidance of 35 basis points over gilts:

  • It gained demand of over GBP3.1 billion, a new record for the SSA segment in sterling.
  • The deal was sized at GBP1.5 billion, its largest sterling deal to date.
  • It followed this with a Euro-denominated benchmark: this was a five-year deal, which attracted an impressive EUR16 billion in demand.

European Investment Bank brought the SSA first dollar benchmark, a five-year deal with initial guidance of mid-swaps plus 11 basis points.

  • It priced USD4 billion at mid-swaps plus 9b.p.
  • It has also announced the first SSA deal referencing the new "safe rates", with a GBP1 billion five-year Sonia-linked FRN: initial price talk was set at 33 basis points margin.
  • Additionally, it has launched a ten-year EARN reference deal in Euros.

US corporate supply also has been active, including at least seven transactions for maturities of 30 years or longer.

A Bloomberg report claimed that on 7 January, a total of EUR27 billion of new debt was sold, the highest volume since 2017.

  • It listed two MREL-eligible bank deals, EUR1.25 billion each for BBVA and Crédit Agricole, within the total.
  • Global Capital website noted that 11 financial sector borrowers issued, with proceeds of EUR13.25 billion.
  • Within the total, dated subordinated offerings for BNP Paribas and Unicredit were each twice-subscribed.

Spain intends to issue Green debt this year. Pablo de Ramón-Laca, Head of Funding and Debt Management at Spain's Treasury, claimed "the time is now right for Spain to enter this blossoming market". An initial deal - potentially a EUR5 billion syndicated sale - is expected in the second half of 2020.

Implications and outlook

Early 2020 bond issuance has been highly active: markets have shown resilience in shrugging off developments relating to Iran. Heavy early issuance is a normal seasonal feature of the markets after the US/European holiday season with many borrowers starting a new funding cycle, and investors likewise having "new year" cash flows to invest.

All three European sovereign deals were clearly well-received. Slovenia's prompt market entry is likely to have reflected its upcoming debt redemption, but EU sovereign borrowers also are expected to move faster in 2020 to avoid funding around Brexit.

EIB and KFW are traditionally-regular heavy early issuers, seeking to make inroads to their sizeable funding requirements:

  • KFW has a 2020 financing goal of EUR75 billion, versus EUR80 billion in 2019
  • In mid-December, EIB announced a 2020 funding need of EUR60 billion, versus a 2019 programme of EUR50.3 billion.

Among the early trends, we would flag:

  • High activity levels in sterling, with borrowers looking to complete funding ahead of Brexit, but with investor flows looking resolute.
  • Long-dated issuance by US corporate borrowers: we have repeatedly forecast that borrowers will extend duration to benefit from historically-low rates.
  • Active FIG issuance of senior debt: in Europe, advancement of EU requirements for MREL liabilities eligible for bail-in during financial stress, will push banks to refinance during 2020.

Israel's deal was a clear success despite recent developments involving Iran and the country's need to hold a further general election in March after two inconclusive polls in 2019.

Indonesia's early entry to the international markets further reinforces already-positive trends in its external position during 2019, but also may reflect some budgetary pressure. On 3 January, Jakarta Globe reported Bank Indonesia releases that:

  • Capital flows into Indonesia totaled a net IDR224.2 trillion (USD16 billion) during 2019, including IDR168.6 trillion into state debt, and IDR50 trillion into equities.
  • Governor Perry Warjiyo stated that "foreign exchange reserves should increase as well", with these having reached USD 126.6 billion in November versus USD120.1 billion in January 2019.

On 7 January, Indonesia also reported a preliminary state budget deficit for 2019 of IDR353 trillion (USD25 billion), equating to 2.2% of GDP, versus 1.9% of GDP in 2018 and a 2019 target of 1.8%, attributing the shortfall to adverse trade developments, notably in coal and palm-oil exports.

Posted 09 January 2020 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, IHS Markit

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