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Capital Markets Weekly: Multiple emerging-market sovereigns planning issuance

03 May 2019 Brian Lawson

Kenya reportedly is planning a sizeable dollar sale, with Oman described as preparing dollar financing. In addition, Saudi Arabia has suggested it may sell Euro-denominated debt later this year, with Philippines and South Korea also reportedly studying Euro-denominated deals. Markets also are awaiting additional supply from Greece, potentially next week. Meanwhile, there has been improved European junk bond supply, while Spanish - and other - banks have enjoyed strong demand, including healthy appetite for longer-dated securities.

According to Kenya's Finance Minister Henry Rotich, Kenya is preparing an international issue. He noted that Kenyan authorities "are prepared" to issue soon: part of the proceeds will redeem an outstanding five-year deal issued in 2014. According to Kenya's Standard Digital website, Kenya will seek at least KES160 billion (USD1.58 billion), after having raised roughly USD1 billion from a syndicated loan earlier in 2019 to refinance a smaller maturing facility.

On 28 April Saudi Arabian Finance Minister Mohammed Al Jadaan suggested the Kingdom would consider issuing Euro-denominated debt in 2019. International Financial Review also suggests that Philippines and Korea are "lining up" Euro-denominated issuance. Lastly, it also suggests that Oman is preparing a dollar-denominated sale. In February, Omani government officials indicated plans to raise USD2-3 billion.

European high yield markets are reviving. Six new junk deals were announced after Easter, including two for lower-rated borrowers, UK petrol station retailer EG Group and Spanish convenience food producer TelePizza, which are undertaking acquisition related financings with "weak documentation". EG Group has increased its package from EUR1.34 billion to EUR1.64 billion, adding a senior Euro tranche. TelePizza's deal is to fund KKR's USD493 million bid for a 71.4% stake in the company. It raised USD335 million of seven-year debt at 6.25%. Additionally, Irish telecommunications firm eir, the country's largest land and mobile telecom operator, increased a combined bond and loan package from EUR850 million to EUR1.15 billion, including a EUR750 million seven-year bond priced at 3.5%.

Cyprus reportedly will consider even longer maturities than the 30 years achieved recently. An official of its Public Debt Management Office stated that it has a "general objective" of extending its liability profile. Meanwhile another Greek bond is expected shortly given the favorable climate for Eurozone credits.

In the financial sector, Rabobank raised a EUR1 billion 12-year senior non-preferred deal, the longest (non-AT1) European bank issuance in 2019. It was followed by Yorkshire Building Society, which gained record interest of over EUR3.5 billion in demand for a EUR500 million no-grow covered bond. Banco Santander also issued covered bonds, selling EUR1.5 billion of 12-year mortgage-backed instruments with EUR2.5 billion of interest. Lastly, Banco Sabadell gained EUR4.2 billion of demand for its EUR1 billion sale, priced at 175 basis points over mid-swaps, 35 basis points inside guidance.

Our Take

IHS Markit views Kenya as having medium-level but worsening debt sustainability risk indicators. Along with other African countries, Kenya has accumulated debt in recent years, benefitting from increased risk appetite. However, this has increased debt vulnerability, in Kenya's case driven by elevated public-sector deficits. These peaked at 9.1% of GDP in 2016 but are forecast to remain at 7.7% of GDP in 2019 and 7.4% in 2020. Inevitably, this has grown Kenya's debt stock. Official data show that this rose from 38.2% of GDP in 2012 to 53.8% and 57.1% in 2016 and 2017 respectively, the latest periods published by the Bank of Kenya. Overall, our Kenyan Economist Ama Baidu-Forson cautioned this week that IHS Markit views Kenya as a country with adverse debt sustainability dynamics while Will Farmer, our Country Risk analyst flagged that Kenya recently had raised just USD400 million from China to assist railway development, versus a USD3 billion target.

Oman also faces challenges as the highest-yielding borrower from the Gulf region, with its returns surpassing those on Bahraini debt. It was downgraded by IHS Markit earlier this year amidst ongoing concerns over its sizeable fiscal deficits and growing debt stock, along with weaker projected oil prices. Although it has curtailed spending, bringing its deficit down from 21.1% of GDP in 2016 to an estimated 6.5% in 2018, public debt is on a rising trajectory, potentially reaching 60% of GDP by 2022. While its risks are elevated, and the country is viewed cautiously by most rating agencies, we are more encouraged by Oman's ability to curtail its imports, which fell 25% in the five years to 2018. Oman is also cushioned by its sovereign wealth fund assets, with useable resources estimated by our economists at around USD15-20 billion, helping it to maintain overall debt sustainability, a view shared by the IMF. Oman's efforts to issue will represent an important test: Bahrain's limited access to market funding in 2018 drove it towards subsequent negotiation of a GCC support package.

Growing sovereign interest, expanded high-yield volumes and extended duration for financial sector borrowers are all indicators of the favorable conditions prevailing in European debt markets. Positive sentiment reflects weakening European growth and the likelihood of a lengthy wait until the European Central bank moves to raise policy rates. While Greece has no need to borrow, it makes sense for it to cement its market standing and develop its yield curve while conditions remain strongly-receptive. It also can lower its debt-service costs by repaying relatively-expensive IMF borrowings.

Posted 03 May 2019 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, IHS Markit

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