Capital Markets Weekly: Mixed signals against background of US volatility

Against a volatile market background, this week's highlights include a Euro-denominated sale by Peru, another strong success for the EU's SURE facility, and a Korean e-commerce IPO on track to become the largest foreign flotation in New York since Alibaba's 2014 IPO. There has also been a respectable US debt calendar, including a jumbo secured financing by American Airlines.

Emerging markets

Following its USD4 billion dollar-denominated sale last week, Peru also raised EUR825 million of 12-year debt, the country's first Euro-denominated deal in five years. The deal was priced on 4 March at 115 basis points over mid-swaps versus guidance of 135 basis points.

The Ministry of Economy and Finance (MEF) noted that the coupon of 1.25% is the lowest on record for an international issue by Peru. It reported that the deal was over twice subscribed involving over 100 accounts.

Within limited EM supply, also from Peru, pharmacy chain InRetail Pharma sold a new USD600 million 3.25% seven-year deal to fund the repurchase of its existing USD400 million 5.375% 2023 bond.

Liberty Latin America raised USD410 million of eight-year debt at 4.375%, versus initial guidance of 4.5%. Proceeds will redeem existing loans and bond debt.

Oman's Bank Muscat sold USD500 million of five-year debt at 4.75%, with demand reportedly reaching USD1.6 billion.

ESG

The European Union arranged its second SURE (Support to mitigate Unemployment Risk in an Emergency) facility deal in 2021 (its fifth overall). It sold EUR9 billion of 15-year social bonds at 0.228% on 9 March, again enjoying heavy oversubscription, with final demand of EUR86 billion and 450 investors involved. Global Capital notes it plans to raise a further EUR13 billion before end-March.

Greek power utility PPC sold the first sub-investment grade sustainability-linked bond. PPC released price talk of 4-4.25% on 10 February, and increased the deal to EUR650 million, pricing at 3.875%.

The issue has a sustainability key performance indicator of a 40% reduction by December 2022 in Scope 1 CO2 emissions (fuel consumption of thermal power plants and emissions from self-consumption of electricity at those plants). Otherwise it triggers a 50-basis point upward adjustment in coupon.

Crédit Agricole Italia launched the first Italian Green covered bond. It sold EUR500 million of Match 2033 debt with a coupon of 0.01%, pricing at 9 basis points over mid-swaps versus guidance of 10 basis points. Pricing is reported by Global Capital website as the tightest for an Italian bank instrument for over a decade. Demand reached EUR750 million.

Other debt

While EM supply has abated given recent volatility, there have been some sizeable high-grade debt sales, including a USD3 billion two-part offering by JP Morgan.

Anthem, a US health care company, sold a multi-tranche offering on 8 March after its recent acquisition of MMM Holdings from InnovaCare. It sold USD3.5 billion in four tranches spanning two, five, ten and 30 years, skewed towards the longer maturities which accounted for USD2.25 billion. The four tranches were priced at 0.463%, 1.555%, 2.594% and 3.620% respectively.

It was accompanied by Teledyne, an industrial technology firm which sold USD3 billion of debt in five tranches spanning two, three, five, seven and ten-year debt, with coupons ranging from 0.65% to 2.75%. Proceeds are linked to the firm's pending acquisition of FLIR Systems.

Toy manufacturer Mattel, Inc. a sub-investment grade firm, also issued on 8 March, privately placing USD600 million each of five and eight-year notes with coupons of 3.375% and 3.75%. Proceeds will be used to redeem USD1.225 billion of 6.75% 2025 outstanding notes.

On 10 March American Airlines announced that it had increased a secured bond and loan package from USD7.5 billion to USD10 billion, a record for the sector. It priced USD3.5 billion of 5.5% 2026 notes and USD3 billion of eight-year liabilities, alongside a USD3.5 billion term loan facility, having initially targeted USD5 billion from the two bond portions. The package was reported by the Financial Times to have attracted demand of USD45 billion.

Equity

This week's supply is dominated by SoftBank-backed Korean electronic retailer Coupang. The company is selling 100 million shares (pre-greenshoe) on the New York Stock Exchange. Pricing was improved to USD30-32 per share from an initial indicated range of USD27-30 after a rally in technology shares on Nasdaq. The issue is the largest foreign IPO on the NYSE since Alibaba's USD25 billion flotation in 2014. The deal was priced at USD35 per share and closed first-day trading on 11 March at USD49.25 per share (a 40.7% gain), after having traded as high as USD69 per share.

Russian discount retailer Fix Price upsized its London Stock Exchange IPO and priced it at the top of its range. It sold 205.1 million GDRs (assuming exercise of the over-allocation facility) priced at USD9.75 per GDR, which equates to 24.1% of the company. Initially, it had targeted a USD1.5-1.7 billion sale.

According to Dealogic data cited by bne IntelliNews website, the deal is the largest Russian IPO in London since 2007, the largest IPO ever by a Russian retailer and the largest international IPO in London since 2017. Co-arranger VTB Capital reported that US investors accounted for an impressive 40% of demand, with UK buyers taking around one-third. Another interesting feature was the presence of four US bookrunners alongside VTB.

Vodafone is selling almost 25% of its European mast company subsidiary Vantage Towers. The Frankfurt-listed offering was priced at EUR22.5-29 per share. Two cornerstone buyers will take EUR950 million.

Convertible issuance also has been sizeable. In the week to 5 March, Airbnb sold USD2 billion of convertible debt, with Twitter placing USD1.25 billion. Beyond Meat increased a convertible deal from USD750 million to USD1 billion and Spotify also recently raised USD1.3 billion. All four firms issued with zero coupons and sizeable conversion premiums, which ranged from 47.5% for Beyond Meat to 70% for Spotify. According to Refinitiv data, convertible issuance reached almost USD34 billion in the first two months of 2021, a record.

The US IPO market had a mixed week to 5 March:

• The Renaissance Capital IPO index fell by 7.3%, taking it into negative territory for 2021 and underperforming the S+P500 index.
• Online healthcare insurer Oscar Health, the largest IPO in the week to 5 March, priced a USD1.4 billion deal above its indicated price range, but traded down 21% versus issue price by end-week.
• However, 39 SPAC deals were priced, another new record.

Our take

Market conditions have remained volatile, with an upward spike in US bond yields after the latest employment release on 5 March counterbalanced by a subsequent rally in technology stocks. On 11 March, both the DJIA and S+P500 US equity indices reached new highs.

A balanced view of the primary calendar suggests mixed conditions. Supply - notably in Emerging Market debt - has abated. In this context, Peru's investment grade ratings and strong market standing make it atypical of the wider asset class, in which supply has declined, but without indications of a "tantrum" driving secondary market yields sharply higher across a broad spectrum. Instead, the American Airlines and Mattel offerings indicate continuing large-scale demand for attractive riskier corporate assets.

EU's latest SURE deal also continued to enjoy very strong support and made another sizeable contribution to the growth of ESG supply.

PPC's sustainability-linked bond (SLB) showed potential positive development of the segment, representing the first junk-rated SLB sale in public bond markets, coming alongside growing banking sector provision of sustainability-linked loans in Europe.

Several equity indicators, notably the strong response to Coupang's IPO are also encouraging, along with the sizeable nature of the Fix Price Russian offering and the early full subscription of Vantage Towers, underpinned by large cornerstone support. Oscar Health's post-flotation performance was clearly adverse but is attributed to divergent views over its valuation model - with debate over whether a technology or healthcare/insurance pricing model is more appropriate.

Overall, the current financial environment clearly is now less predictable, but the current relative lull in activity does not represent full-scale market dislocation or a period of blanket risk aversion. Some impressive deals are being completed in both bond and equity markets. There has not been a general sizeable widening of secondary spreads, even if primary supply of emerging market debt appears reduced. Instead, as should have been expected once economic activity and commodity prices started to recover post-COVID, we appear in a period of greater uncertainty with more volatility and greater investor selectivity, but with markets still fundamentally underpinned by expansive monetary policy. Increased future US Treasury Bond supply reflecting the USD1.9 trillion expansion package is likely to draw cash-flow from other asset classes, increasing the likelihood of further volatility.

Posted 12 March 2021 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, IHS Markit